Spread vs yield on a business facility — what each one measures

Updated May 2026.

Two numbers come up in any conversation about a business credit line, and people use them like they mean the same thing: spread and yield. They don't. Spread is set the day the facility is signed and never moves. Yield depends on how much of the line gets drawn down, and it moves every time the borrower's draw moves. If you only remember one thing from this page: spread is a property of the contract, yield is a property of the usage.

Why this matters: a banker quoting a “3% spread” isn't telling you what the facility earns. A treasurer reading a 5.75% yield isn't telling you what the contract is worth. The two numbers measure different things, and confusing them produces confidently wrong takes about whether a line is profitable.

This page covers the pricing mechanics — what the two numbers are and how each one moves. The borrower-side dollar cost of carrying the line is on how overdraft interest is calculated. The lender-side dollar income on the same line is on what net interest income is on a credit line.

Spread is fixed; yield moves

Spread = lending rate − cost of funds.If the bank charges the borrower 8% and pays its depositors 5%, the spread is 3%. That number is fixed at signing. It doesn't change when the borrower draws more or pays down. It only changes if the contract repricers (a benchmark like SOFR moves) or the bank's funding cost shifts — and even then, only the rate piece moves; the margin the bank charges over the benchmark is still locked.

Yield-on-limit = total income from the facility ÷ the size of the facility, annualized. That number swings hard with utilization. At 0% drawn, the only income is the commitment fee on the undrawn portion — a few tens of basis points. At 100% drawn, the yield is essentially the lending rate. Between those, the math depends on the mix of interest income and commitment-fee income.

The trap: spread × utilization doesn't equal yield. Tempting shortcut, wrong answer. It misses the commitment fee on the undrawn portion (which doesn't go away as draw goes up — it shrinks but it still exists), and it conflates “rate on drawn” with “income on the limit.” The worked example below shows why.

A worked example you can verify

Take a $1,000,000 business overdraft. Lender charges 8% on drawn money and 0.50% on undrawn (the commitment fee). The bank's cost of funds is 5%. Tenor is one year, day-count Actual/360 (the US commercial default — produces about 1.4% more interest than the nominal rate suggests because 365 actual days ÷ 360 base = 1.014).

Spread is 3.00% across every draw level.8% lending minus 5% cost of funds. It doesn't move. Whether the borrower draws nothing or draws the whole line, the spread is the same three percentage points. That's the property-of-the-contract thing in action.

Yield-on-limit, on the other hand, looks like this:

• 0% drawn — only the commitment fee earns. Total income about $5,069 a year. Yield about 0.50%.
• 50% drawn ($500K) — interest of about $40,556 plus commitment of $2,535. Total $43,090. Yield about 4.25%.
• 70% drawn ($700K) — interest $56,778, commitment $1,521. Total $58,299. Yield about 5.75%.
• 100% drawn ($1M) — interest $81,111, no commitment fee left (nothing undrawn). Yield about 8.00%.

The spread held steady at 3% the whole time. The yield went from 0.50% to 8.00%. Same facility, same contract, same one year. The range comes entirely from utilization. You can verify these numbers directly on the business overdraft income calculator — drag the utilization slider and watch yield move while spread stays put.

Why spread × utilization isn't yield

The shortcut looks right. Spread is 3%, utilization is 70%, so yield should be 2.10%, right? Except actual yield was 5.75%. That's a 3.65 percentage-point miss. What went wrong?

Two things. First, spread is a rate-on-drawn number. It tells you what the bank earns per drawn dollar, after subtracting the bank's funding cost. Yield-on-limit is total income — interest AND fees — divided by the size of the line. That's a different denominator and a different numerator.

Second, the commitment fee earns on the undrawnportion. At 70% drawn, $300K is sitting unused, and the bank charges 0.50% a year on that. Small money — about $1,500 — but it's real income that the spread × utilization shortcut completely ignores.

One more thing the shortcut misses: at 70% drawn, the lender is earning the full lending rate (8%) on $700K, not the spread (3%). The spread is the bank's margin, what's left after paying for the funds. But the borrower pays the full lending rate on drawn dollars. To get from interest income to NII, you subtract the bank's funding cost — that's when spread enters. To get yield-on-limit, you divide total income (gross, before funding cost) by the limit. Different math, different question.

Which one matters when

Spread matters when you're comparing facilities. A bank choosing between extending a new line at 300 bps spread vs 325 bps spread is making a contract-quality decision. Utilization will vary borrower-by-borrower; spread is the controllable lever at signing. Same for a borrower comparing offers — the margin over benchmark, which becomes the spread once you subtract the bank's cost of funds, is what locks for the life of the deal.

Yield matters when you're measuring what a facility actually earned. Year-end review, portfolio reporting, return-on-capital math — those all care about yield, because yield captures the full picture including fees and how heavily the line was used. Spread alone undersells facilities that get drawn aggressively and oversells facilities that sit idle.

For the borrower the same split applies. The spread (or more accurately, the margin over benchmark you negotiated) is what you'll pay over the life of the line — the price of the contract. The effective cost — what you actually paid divided by what you actually borrowed — is the borrower-side analog to yield and depends on how heavily you drew. The cost calculator shows that effective number.

The thing most articles get wrong

A lot of explainer content uses spread and yield interchangeably, which is fine in casual conversation and dangerous in any context where someone's making a decision based on the number. Spread undersells the upside on a heavily-drawn facility (you're earning the lending rate on drawn dollars, not the spread). Yield oversells the comparability of facilities (a high-utilization line and a low-utilization line aren't making the same kind of contract decision).

Honest framing: spread is the price of the contract, yield is the performance of the deployment. Both are real, both are useful, and confusing them is the most common mistake in the genre.

Frequently asked questions

Sources and methodology

The math here is simple-interest accrual on a per-period basis, which is the standard for revolver-style facilities (overdrafts, lines of credit). Industry framing on day-count conventions (Actual/360 default, Actual/365 where it applies), commitment-fee accrual, and facility-fee structures comes from the OCC Comptroller's Handbook on Loan Portfolio Management. Benchmark-rate context (SOFR, Prime, Treasury yields) comes from the Federal Reserve H.15 Selected Interest Rates. All worked-example numbers come from the income calculator above and are verifiable by re-running the same inputs there.

What to do next

1. 01
   Run the income calculator

   Drag utilization and watch yield move while spread stays fixed. The fastest way to internalize the difference.

2. 02
   Run the cost calculator

   Borrower-side mirror of the same math — what you actually pay, plus the effective APR for the days you held the balance.

3. 03
   Learn how the borrower-side interest math works

   The daily-accrual formula, the day-count basis, and what shows up in the effective APR.

4. 04
   Learn how the lender models NII on a credit line

   Why utilization is the dominant lever, and how spread and NIM relate at the portfolio level.

5. 05
   See how the rate itself is built

   Base rate vs cost of funds pricing — why the same spread can produce different all-in rates depending on what the spread sits on top of.