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.

Related ideas

• LIBOR transition
• Senior debt
• Base rate