---
title: "What Is SOFR?"
term: "SOFR"
description: "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."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/sofr
---

# What Is SOFR?

> 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.

**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](/glossary/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](/glossary/libor-transition)
- [Senior debt](/glossary/senior-debt)
- [Base rate](/glossary/base-rate)

## FAQ

### What is SOFR in simple terms?

It is the market's reference rate for short-term secured borrowing in the U.S. — like LIBOR's replacement — so a loan might charge SOFR plus 6% per year, resetting as SOFR moves.

### Why does SOFR matter?

Rising SOFR increases interest expense on floating debt, tightening runway. Loan docs specify SOFR tenor, floors, and fallback language — founders should model rate sensitivity.


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Source: https://venturecapitaltracker.com/glossary/sofr