VC & PE Glossary
What Is SOFR?
Updated
Definition
SOFR — the Secured Overnight Financing Rate — is a broad U.S. benchmark interest rate based on overnight Treasury repurchase transactions, used to price floating-rate loans and debt after the LIBOR transition.
Useful for: Founders, Investors
SOFR (Secured Overnight Financing Rate) is the dominant U.S. dollar reference rate for floating-rate credit — including many venture debt and working capital facilities.
How it works
SOFR reflects overnight cost of borrowing cash secured by Treasuries. Loan agreements quote interest as SOFR + spread, often using term SOFR or compounded averages over a period. Floors set minimum rates; caps limit increases in some deals.
LIBOR phased out for most USD settings; legacy docs needed amendment to SOFR or alternative rates. LIBOR transition clauses address fallback if benchmarks disappear.
When SOFR rises, interest expense on drawn debt rises — a quiet burn multiplier for leveraged startups.
Why it matters
- Founders: Read venture debt term sheets for SOFR definition, reset frequency, and floor — model +200 bps rate shock on runway.
- Investors: Portfolio monitoring includes covenant and interest coverage as rates move; refinancings may cluster when maturity walls hit in high-rate environments.
Common mistake
Ignoring floating-rate debt in burn models — SOFR moves can add meaningful monthly cash outflow at scale.
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Common questions
Short answers for founders, LPs, and operators