In lending, a spread is the difference between a loan's interest rate and a benchmark rate (such as the Fed Funds Rate or SOFR). In credit markets, a credit spread is the yield difference between a corporate bond and a comparable Treasury. Spreads reflect the risk premium a borrower pays above the risk-free rate.
The term 'spread' has related but distinct meanings across different financial contexts: Lending spread: The markup over a benchmark rate that a lender charges to cover credit risk, operating cost, and profit. Example: if a business line of credit is priced at SOFR + 350 bps, the 350 bps (3.50%) is the spread. The benchmark (SOFR) floats with monetary policy; the spread is the lender's risk-specific add-on. The Federal Reserve's H.15 release tracks reference rates used in spread calculations (https://www.federalreserve.gov/releases/h15/). Credit spread: In bond markets, the yield difference between a corporate bond and a U.S. Treasury of the same maturity. Investment-grade corporate bonds trade at narrow spreads (50–200 bps over Treasuries). High-yield ('junk') bonds trade at wide spreads (300–1,000+ bps). When spreads widen, credit conditions are tightening — investors demand more compensation for credit risk. The Federal Reserve's FRED database tracks credit spreads including ICE BofA option-adjusted spreads at https://fred.stlouisfed.org/categories/32348. Bid-ask spread: In securities markets, the difference between the price a dealer will buy at (bid) and sell at (ask). A tight bid-ask spread signals a liquid, competitive market. A wide spread signals illiquidity or dealer risk-aversion — borrowers and buyers pay more, sellers receive less. For SMB borrowers, the practical spread that matters is the lending spread above index. When evaluating loan offers, comparing spread is more meaningful than comparing nominal rate — the benchmark component moves with the market, but the spread is the lender's credit decision about your risk profile.
SOFR (Secured Overnight Financing Rate) is the benchmark rate that replaced LIBOR for most US floating-rate commercial loans. 'Spread over SOFR' is your lender's risk-based markup added on top. If SOFR is 5.30% and your spread is 3.00%, your all-in rate is 8.30%. SOFR moves daily with monetary conditions; your spread is set contractually at loan closing and typically stays fixed for the loan term unless you trigger a repricing provision.
Spreads are negotiated based on credit quality (FICO, business credit score, DSCR, LTV), relationship depth, collateral, and guarantee strength. Stronger files earn tighter spreads — improving DSCR, adding collateral, or offering a stronger personal guarantee all reduce perceived risk. Competing offers from multiple lenders is the most reliable way to compress spreads, as lenders move on pricing when they see competitive pressure.
The Federal Reserve's FRED database (fred.stlouisfed.org) tracks ICE BofA investment-grade and high-yield option-adjusted spreads updated daily. Widening spreads historically precede tightening credit conditions and slower SMB loan availability. The Federal Reserve H.15 release at federalreserve.gov/releases/h15/ tracks key reference rates including Prime, Fed Funds, SOFR, and Treasury yields.