Two term sheets arrive. One quotes Prime plus 1.00%, the other SOFR plus 3.00%. The second looks worse and is usually cheaper, and a borrower comparing the margins is comparing two numbers that were never on the same scale.
What is the difference between SOFR and prime?
They are different index rates. SOFR, the Secured Overnight Financing Rate, is published by the Federal Reserve Bank of New York and reflects the cost of borrowing cash overnight collateralised by Treasury securities. It is a transaction-based market rate.
The prime rate is a reference rate published by banks. By long-standing convention it sits a fixed spread above the upper bound of the federal funds target range, and it moves when that range moves.
Because prime already contains that built-in spread, a margin quoted over prime and a margin quoted over SOFR are not comparable. The prime quote has several points of it baked into the index.
How do you actually compare two quotes?
Convert both to the same base. Take the current published level of each index, add the quoted margin, and compare the all-in rates. That is the only valid comparison, and it takes thirty seconds.
| Quote | Index level (illustrative) | Margin | All-in |
|---|---|---|---|
| Prime + 1.00% | 6.50% | 1.00% | 7.50% |
| Term SOFR + 3.00% | 3.50% | 3.00% | 6.50% |
The index levels above are an illustration, not current market data. Look up today’s published SOFR and today’s prime rate before running the comparison on a real term sheet, because both move.
The structural point survives whatever the levels are: the margin over SOFR will almost always look larger than the margin over prime, for the same loan, at the same price. Judging a lender by the margin alone rewards the one quoting off the higher index.
What is term SOFR, and why does the flavour matter?
SOFR is an overnight rate, so lending conventions had to build forward-looking versions of it. Three appear in credit agreements.
- Daily simple SOFR, compounded or averaged over the interest period and known only at the end of it.
- Term SOFR, a forward-looking rate for one, three, or six months, known at the start of the period. This is what most middle-market credit agreements use, because borrowers want to know the payment in advance.
- SOFR averages, published over 30, 90, or 180 days.
Which one your agreement uses affects the timing of repricing rather than the price. Ask, and make sure the term you elect matches your planning horizon.
What is a credit spread adjustment?
In agreements that transitioned from LIBOR, a small fixed adjustment is often added because SOFR is a secured rate and LIBOR carried bank credit risk, so SOFR generally prints below where LIBOR did. The adjustment sits between the index and the margin, and it is real money.
If a term sheet quotes SOFR plus a margin, ask whether a credit spread adjustment applies on top, and include it in the all-in comparison.
What does a floor do?
A floor sets a minimum for the index. A 1.00% SOFR floor means the loan prices as if SOFR were at least 1.00%, no matter how low the published rate goes.
Floors are not a detail. In a falling-rate environment they are the reason your rate stops falling while the market keeps moving, and they are negotiable at term sheet stage and effectively fixed afterwards. Check whether the quote includes one, and at what level.
Which index reprices faster?
Prime moves in steps, when banks change it following a policy move. SOFR moves continuously, and your rate resets at the end of each interest period, so a three-month term SOFR loan reprices four times a year regardless of what happens in between.
The practical implication is about volatility rather than direction. A borrower who needs payment certainty within a quarter is better served by a longer interest period or a fixed rate than by arguing about the index.
Does the index matter for term debt?
Less than borrowers expect. Long-dated term debt is generally priced off the long end of the curve rather than off overnight rates, which is why a policy move can change the cost of a revolver without changing the cost of a five-year term loan at all. That disconnect was one of the themes in the August 2026 macro lens.
What should you ask a lender?
Four questions. Which index and which tenor? Is there a credit spread adjustment? Is there a floor, and at what level? What is the all-in rate today, at today’s published index?
Then compare that all-in number against the other term sheet’s all-in number, and negotiate the pieces separately. The fee structure and the covenant package frequently matter more than a quarter point of margin, and both are covered in term sheet anatomy.
The short version
Prime and SOFR are different indices with different built-in spreads, so comparing margins compares nothing. Convert both quotes to an all-in rate at today’s published index levels, then check the floor, the tenor, and any credit spread adjustment, because those three change the cost more than the margin usually does.