Prime plus what? How floating and fixed business loan rates are priced in Canada
How Canadian lenders price business loans from prime or a fixed cost of funds, what the spread reflects, and how to choose fixed or floating with the arithmetic shown.
A floating-rate business loan in Canada is almost always priced as the lender's prime rate plus a spread ("P + 1.75%"), so your rate changes every time the lender changes its prime. A fixed-rate loan locks a rate for a term, priced from what the lender pays for money over that term plus a spread. The spread is the part you negotiate; prime is not. Whether fixed or floating is cheaper depends on where prime goes during your loan, which nobody knows, so the practical question is how much payment movement your cash flow can absorb.
This guide belongs to the small business loan requirements and rates overview. All rates are illustrative.
What prime is and how it moves
Each Canadian bank sets its own prime rate. In practice the large banks move prime soon after the Bank of Canada changes its policy interest rate, which it announces on eight scheduled dates a year. Credit unions and caisses set their own prime too, usually in step with the banks. Your loan agreement will name whose prime applies and when changes take effect, often the day the lender announces them.
Prime is a reference rate, not the rate you pay. Two businesses at the same bank on the same day can be at P + 0.75% and P + 4%. The current prime of any lender is published on its website; the Bank of Canada publishes its policy rate decisions at bankofcanada.ca.
What goes into the spread
| Driver | Lower spread | Higher spread |
|---|---|---|
| Track record | Several years of profits | Under two years, losses or volatile results |
| Coverage | DSCR well above the minimum | Just at or below the minimum |
| Security | Real estate, new equipment with resale value | General security agreement only, intangible assets |
| Loan size | Larger loans spread fixed costs | Small loans carry high relative overhead |
| Relationship | Operating accounts, payroll, deposits with the lender | New customer with one product |
| Guarantees | CSBFP or BDC risk sharing, strong personal guarantors | No guarantee, weak guarantor net worth |
Under the Canada Small Business Financing Program the spread itself is capped: for a floating-rate term loan, the lender's prime plus 3%; for a fixed rate, the lender's single-family residential mortgage rate for the term plus 3%; and for a CSBFP line of credit, prime plus 5%. See the CSBFP guide.
How a prime change hits your payment
Take a $200,000 floating loan over seven years at an illustrative P + 2%, with prime at 5.45%, so 7.45% in total.
| Scenario | Rate | Blended monthly payment |
|---|---|---|
| Starting rate | 7.45% | about $3,063 |
| Prime up 1 point | 8.45% | about $3,162 |
| Prime down 1 point | 6.45% | about $2,965 |
A one-point move changes the payment by roughly $98–100 a month on this loan, about $1,200 a year. That is the size of the risk you take on with a floating loan. Run your own figures in the payment calculator.
Some floating loans keep the payment the same and change how much goes to principal when rates move, which stretches or shortens the payoff. Others recalculate the payment. If the loan uses fixed principal payments, the principal part never changes and only the interest part moves.
Fixed or floating: a decision checklist
Choose a fixed rate if most of these apply:
- Your margins are thin and a $100–200 rise in the monthly payment would hurt.
- The loan finances a long-lived asset with predictable income, such as a building or production line.
- You do not expect to repay early; fixed loans often carry a prepayment penalty.
- You need certainty for a bid, a lease or a budget.
Choose floating if most of these apply:
- You may repay early from a sale, a contract payment or a refinance; floating loans are usually open to prepayment with little or no penalty.
- Your cash flow can absorb rate swings.
- The fixed rate on offer is well above the current floating rate and you are comfortable with the gap.
Reading the rate clause
Before signing, find these in the commitment letter or loan agreement:
- Base rate named: whose prime, and when changes apply.
- Spread and whether the lender can change it, for example after a covenant breach or annual review.
- Compounding: monthly is common for business loans; the Interest Act requires the yearly rate to be stated.
- Default rate: many agreements add 2% or more on overdue amounts.
- Floor rate: some agreements set a minimum rate even if prime falls.
- Rate conversion: whether you can switch from floating to fixed during the term, and at what cost.
Frequently asked questions
Is prime the same at every bank?
Usually the large banks' prime rates are identical or very close, but they are set separately, and smaller lenders may differ. Your contract names the lender's own prime.
Can my spread change during the loan?
Only if the agreement allows it. Some agreements reprice on renewal or after a covenant breach, and operating lines are often reviewed annually.
Why is my line of credit spread higher than my term loan spread?
Lines of credit are usually secured by receivables and inventory that change daily and are often repayable on demand, so they carry more risk for the lender per dollar.
Should I wait for rates to fall before borrowing?
Waiting has its own cost if the project would earn or save money now. A floating loan lets you benefit if prime falls, at the price of bearing the risk if it rises.
Sources
- Bank of Canada — policy interest rate decisions and schedule
- Innovation, Science and Economic Development Canada — CSBFP rate caps
- Justice Laws Website — Interest Act
- BDC — explanations of loan pricing and repayment options
