Basis Point (bps)
A basis point (bps) is one one-hundredth of a percentage point (0.01%), used to express small changes in interest rates, loan spreads, and financial benchmarks.
Definition
A basis point (abbreviated bps, pronounced "bips") equals 0.01%, or one one-hundredth of a percentage point. Financial professionals use basis points instead of percentages to avoid ambiguity when discussing rate changes. For example, if a loan rate moves from 7.00% to 7.25%, that is a 25 basis point increase, not a 0.25% increase (which could be misinterpreted as 0.25% of 7.00%, or 0.0175%).
100 basis points = 1 percentage point. So when the Federal Reserve cuts the fed funds rate by 25 basis points, the rate drops by 0.25 percentage points.
Why It Matters
Basis points appear throughout commercial lending: loan pricing ("prime plus 275 basis points"), rate changes ("SOFR declined 2 bps"), and spread analysis ("the risk premium is 265 basis points above prime"). Understanding the unit is essential for comparing loan offers and interpreting rate commentary.
On a $500,000 commercial term loan, each basis point of interest costs roughly $50 per year. A 75 basis point rate reduction translates to roughly $3,750 in annual interest savings on that loan size. Small-sounding rate differences add up quickly on commercial loan balances.
Basis points also matter when comparing SBA loans against conventional options. SBA 7(a) loans carry guarantee fees quoted in basis points, and the spread between SBA pricing and conventional pricing often determines which channel saves a borrower more over the life of the loan.
Common Mistakes
Confusing basis points with percentages. "Rates rose 50 basis points" means rates rose 0.50 percentage points (e.g., from 6.75% to 7.25%), not 50%. This is the most common source of confusion.
Ignoring basis point differences across loan offers. A 50 basis point spread between two loan offers may seem minor, but on a $1M loan over 5 years it represents roughly $25,000 in total interest. Always calculate the dollar impact, not just the rate difference. A structured approach to evaluating loan offers should convert every basis point difference into annual and lifetime dollar amounts.
Assuming basis points are only relevant to interest rates. Basis points also express loan origination fees, guarantee fees, yield spreads, and changes in financial benchmarks like DSCR thresholds. When a lender quotes an origination fee of "150 basis points," that means 1.50% of the loan amount. On a $750,000 loan, that is $11,250 in upfront cost. Overlooking non-rate basis point costs can distort total cost-of-capital calculations.
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How many basis points are in 1%?
100 basis points equal 1 percentage point. So 1% = 100 bps, 0.5% = 50 bps, and 0.25% = 25 bps.
Why do lenders use basis points instead of percentages?
Precision and clarity. Saying "rates increased by 0.25%" is ambiguous: it could mean 0.25 percentage points (25 bps) or 0.25% of the current rate. Basis points eliminate this confusion. When a lender says "prime plus 275 bps," there is no ambiguity: the rate is prime + 2.75%.
How do I calculate the dollar cost of basis points on my loan?
Multiply your loan balance by the basis point value expressed as a decimal. Each basis point is 0.0001 (0.01%). For a $500,000 loan, one basis point equals $500,000 x 0.0001 = $50 per year. To estimate the impact of a rate difference, multiply the number of basis points by that per-bps cost. A 100 basis point difference on a $500,000 loan is roughly $5,000 per year in additional interest. For precise lifetime cost comparisons across multiple offers, factor in amortization structure and loan term, since basis point costs compound differently depending on how principal is repaid.
What is the difference between basis points and percentage points?
A percentage point is the arithmetic difference between two percentages. A basis point is one one-hundredth of a percentage point. If a rate moves from 6.00% to 6.50%, that is a 50 basis point increase, or equivalently a 0.50 percentage point increase. The distinction matters because "0.50% increase" could be interpreted as a relative change (0.50% of 6.00% = 0.03 percentage points), while "50 basis points" is always absolute. In commercial lending, basis points are the standard unit for quoting spreads above benchmarks like prime or SOFR.
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