SOFR (Secured Overnight Financing Rate)

How SOFR Works in Business Lending

SOFR is calculated daily by the Federal Reserve Bank of New York using actual transaction data from the U.S. Treasury repurchase agreement (repo) market — one of the deepest and most liquid markets in the world. Because it is grounded in real, collateralized transactions rather than bank estimates, it is considered far more reliable and manipulation-resistant than LIBOR ever was. When a lender prices a variable-rate business loan using SOFR, they typically add a credit spread on top of the benchmark rate. For example, a loan might be priced at “SOFR plus 2.50%,” meaning if the 30-day average SOFR stands at 5.30%, your effective rate would be 7.80%. Lenders commonly use Term SOFR — a forward-looking version published in 1-month, 3-month, 6-month, and 12-month tenors — to make payment schedules more predictable for borrowers. Per the Federal Reserve’s 2023 Small Business Credit Survey, variable-rate loans now dominate a significant share of small business credit, making SOFR literacy an important financial skill for any business owner carrying debt.

SOFR affects different loan products in meaningfully different ways. SBA 7(a) loans with variable rates are now frequently tied to SOFR-based indexes, replacing the Prime Rate in some lender-specific structures, though Prime remains common in SBA lending. Traditional community banks and credit unions may offer hybrid structures — fixed for an initial period, then floating based on Term SOFR — particularly on commercial real estate and equipment loans. Online lenders and fintech platforms typically build SOFR adjustments directly into their automated pricing engines, recalculating rates monthly or quarterly. CDFIs (Community Development Financial Institutions), which serve underbanked businesses, may use SOFR floors — a minimum rate threshold, often set at 1.00% to 1.50% — to protect their lending margins in low-rate environments while keeping loans affordable for borrowers. Understanding which SOFR tenor your loan references, and how often it resets, is critical to managing cash flow predictability.

What Business Owners Should Do About SOFR

If you currently hold or are applying for a variable-rate business loan, your first step is to review your loan agreement and identify the exact rate index referenced. Ask your lender or loan officer specifically whether your rate is tied to Term SOFR, Daily Simple SOFR, or SOFR Averages, and confirm the reset frequency — monthly resets create more volatility than quarterly or annual ones. Request a rate cap or interest rate ceiling clause if your lender offers it, particularly on loans above USD 250,000. If you converted from a LIBOR-based loan, confirm that the transition included a proper credit spread adjustment — typically 0.11% to 0.26% depending on the tenor — as recommended by the Alternative Reference Rates Committee (ARRC). Keep an eye on Federal Reserve policy announcements, because SOFR moves closely with the federal funds rate target. Businesses with high outstanding variable-rate balances should model out worst-case rate scenarios and stress-test their monthly debt service coverage before taking on additional borrowing.

Navigating SOFR-based loan structures on your own can be complicated, especially when comparing offers from multiple lenders who may use different SOFR tenors, spread adjustments, and reset schedules. We connect you with lenders — we do not lend — which means our role is to match your specific borrowing profile, industry, and risk tolerance with lenders whose SOFR-based products fit your needs. Whether you are looking at a community bank term loan, an SBA-backed credit facility, or a CDFI working capital line, we help you compare the true all-in cost of each offer so you can make a confident, informed decision.