Funding Costs
Loan departments at banks do not get their funding directly from external sources but instead request the required funding from the bank’s treasury department. Treasury will quote a rate that it will charge for the funds provided. The term of the loan will also affect pricing. In general terms the longer the term of the loan the higher the rate that banks will require. Many loans are priced against yields from equivalent bonds on the yield curve. Banks are exposed to the risk that borrowers may repay their loans early. This prepayment risk may be priced in a number of ways.
Short-term loans are inherently lower risk. Banks with shorter-term exposure can reduce that exposure at an early stage of a company showing symptoms of financial distress.