Margin

In plain terms

Margin is the slice of an interest rate that belongs to the lender. On a variable-rate facility, your rate is usually quoted as a reference rate plus a margin — for example, "base rate plus 6%". The reference rate (most often the Bank of England base rate) moves with the wider economy; the margin is the lender's own price, set when you take the facility and normally fixed for its life.

So if base rate is 5.25% and your margin is 6%, you pay 11.25% a year. If base rate later rises to 5.75%, you pay 11.75% — the margin hasn't changed, but the reference rate has. The margin reflects the lender's view of risk, the cost of funding, and the work involved in servicing your account.

Why it matters to your business

The margin is the part of your rate you can actually influence and compare. Two lenders quoting against the same base rate will differ on margin, and that gap is the cleanest like-for-like comparison you can make. A stronger trading record, healthier cash flow and offered security all tend to pull the margin down, because they lower the lender's perceived risk.

Margin also tells you how your cost will behave if rates move. On a fixed-rate term loan the reference rate is effectively baked in, so the concept matters less. On a revolving facility or overdraft priced over base rate, understanding the margin helps you forecast interest accurately rather than being surprised when the headline rate shifts.

A worked example

Suppose a UK limited company is offered a £100,000 working-capital facility at "base rate plus 6.5%". With base rate at 5.25%, the all-in rate is 11.75%. Drawing the full £100,000 for a year would cost roughly £11,750 in interest before any fees.

A rival lender quotes the same facility at "base rate plus 4.5%" because the company has offered a debenture as security. That's an all-in rate of 9.75% — about £2,000 a year cheaper on the same drawing, purely because the margin is 2 percentage points lower. The reference rate is identical; the margin is what made the difference. (Figures are illustrative, not Credicorp rates.)

Margin and fees are not the same thing

It's worth separating margin from the other charges on a facility. Margin is an interest concept — it forms part of the annual rate. Arrangement or origination fees, non-utilisation fees and renewal fees sit outside the margin and are charged separately. A low margin paired with heavy upfront fees can cost more overall than a slightly higher margin with no fees, so always look at the total cost of the facility, not the margin alone. Our guide to business loans sets out how these pieces fit together.