Definition
The benchmark interest rate banks charge their most creditworthy customers.
Why it matters
Some AR lines are priced as prime plus a margin.
Where it shows up in a deal
Prime appears in the pricing section of an asset-based or bank-style receivables line, written as prime plus a margin on the drawn balance, often alongside an unused-line fee and a floor. Factoring facilities are not usually priced this way, which makes comparing a bank line with a factoring proposal an exercise in converting both into dollars.
What it affects
- Prime floats, so your cost changes without any amendment to the agreement.
- A floor clause means the rate can rise with prime but will not follow it all the way back down.
- Unused-line fees mean an oversized commitment costs money even when you do not draw it.
- Interest accrues on the drawn balance, so a line used lightly can be far cheaper than its headline rate implies.
A worked example
If prime is 7.50% and the margin is 3.00%, the drawn rate is 10.50%. On an average draw of $1,200,000 that is $126,000 a year. A 0.375% unused-line fee on the undrawn $800,000 of a $2,000,000 commitment adds $3,000, for $129,000 in total.
The common mistake
Related terms
- Asset-Based LendingA revolving credit line secured by receivables, inventory or equipment.
- Discount RateThe fee a factor charges, usually expressed per 30 days or per 10-day increment.
- Borrowing BaseThe maximum amount available under an asset-based line, calculated from eligible collateral.
- Term SheetA non-binding summary of proposed financing terms.
Questions about how prime rate affects your facility?
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