Glossary
The benchmark rate banks use to price variable-rate loans.
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Short answer: The prime rate is the benchmark Canadian banks use to price variable-rate loans and lines of credit, and it generally moves with the Bank of Canada's policy rate. A line priced at prime plus 2% rises and falls whenever prime changes, so variable payments change too.
Key facts
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The benchmark rate banks use to price variable-rate loans.
Canadian banks set their prime rate, which generally moves with the Bank of Canada's policy rate. Variable loans are priced as prime plus a margin.
It affects the cost of variable-rate borrowing.
A line of credit at prime plus 2% moves when prime moves.
Many Canadian business lines and loans are priced off prime.
When rates rise, variable payments rise too. A reviewer sees the effect as larger loan debits on statements.
Owners sometimes treat a prime-based rate as fixed. It is not; it moves with the market.
If a large share of your borrowing is variable, test what happens to monthly payments if prime rises by one or two percentage points. A payment that is comfortable today may not be after several increases.
Variable rates also fall when prime falls, which is the trade-off against a fixed rate. Businesses with stable cash flow often accept variable rates; those with thin margins may prefer the certainty of fixed payments.
Advances and revenue-based facilities are not linked to prime: their cost is set at signing. That certainty is one reason some owners choose them for short needs even when bank rates are lower.
A Calgary contractor carries a $100,000 line of credit at prime plus 2%. If prime rises by one percentage point, annual interest on a fully drawn line rises by about $1,000, or roughly $83 a month. That is manageable. If the business also has a variable term loan and a variable equipment loan, the increases add up across all three. Listing every variable obligation and calculating the effect of a one-point and a two-point rise takes a few minutes and shows whether the business could absorb it or should fix part of its borrowing.
Key takeaway: Know which debts float with prime and test a one- and two-point rise. Fixed-cost options trade a higher price for certainty.
Reviewed by the Merchant Fund Express team on October 12, 2026. Official pages checked as of that date.
No. Advance costs are fixed at signing.
See the related guides and the comparison pages, or apply and ask.
No. It is educational information, and agreements vary.
Educational information only. It is not legal, tax or accounting advice.
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