Let's say I have a business that has a revolving outstanding balance throughout the month that ranges from $12 Million to $20 Million throughout the month, depending on when people pay. It's constantly turning over with a lot of Monthly Net 10 terms.

I'm trying to figure out what the cost of money might be. I've tried to research SOFR rates / loans but can't find enough details on them to make sense of it all.

Say a bank wants to back this through a revolving loan of some sort / line of credit maybe? - - how does it work in this situation and what might a good rate as of today be - - what is the equivalent yearly APR, so I could then figure out the daily rate.

Your credit agreement will spell out how interest is calculated on a daily basis. Take a look at it.

Sofr is base rate that replaces libor. There might be a credit spread adjustment that is your credit agreement or promissory note that you signed with the bank.

Am I reading SOFR rates correctly at about 1.5%? And if they add 2%…. right now a loan with this kind of rate might be at around 3.5%?

Is this a fair comparison to a yearly rate on standard loans, knowing the rate fluctuates on SOFR?

If it's a 2% spread and base is 1.5, then it's 3.5 for that period (annualized). Some lines of credit will accrue daily interest at daily applicable rates (possibly 10 different rates charged throughout the month), others reset the rate monthly or on a longer cycle.

Thank you for chiming in.

Do the rates I'm using sound "reasonable" based on todays rates and our scenario?

I do run a business with this kind of money flow, but right now we've outsourced the billing/collections to a third party. I'm trying to figure out what their cost of money is and what might it be for us if we took it over.

SOFR + 2 isn't crazy high for an unsecured line. Not knowing specifics (asset level on the bank, collateral, business financials, etc) hard to say much more.

mosdefn14 said:

---

SOFR + 2 isn't crazy high for an unsecured line. Not knowing specifics (asset level on the bank, collateral, business financials, etc) hard to say much more.

---

If it matters, we do insure our A/R and pay about 8 bps for that.

I am in commercial real estate finance so I can't speak to the exact terms of your corporate line. However, Your docs will specify how each period is calculated and what index they are using. In our world, the index rate is reset one time each month.

You will want to know if it is Term SOFR or 30 day AVG SOFR they are using. Most banks are using 30 day avg, but make sure you know this. Term is forward looking and 30 Day Avg is in arrears. Right now they are about 70bps apart due to volatility. So if using 30 day avg, your overall rate is cheaper today but it will catch up to where term is as your loan continues to float. It will all wash out over a period of time as SOFR comes back down because 30 day avg will lag behind Term on the way down.

If you look at the SOFR curve, it is projected to peak around 3.5% early 2023 and remain around 3% for 2024 before it comes down. So make sure you factor that in as you project your borrowing costs over your term.

aggiegolfer07 said:

---

I am in commercial real estate finance so I can't speak to the exact terms of your corporate line. However, Your docs will specify how each period is calculated and what index they are using. In our world, the index rate is reset one time each month.

You will want to know if it is Term SOFR or 30 day AVG SOFR they are using. Most banks are using 30 day avg, but make sure you know this. Term is forward looking and 30 Day Avg is in arrears. Right now they are about 70bps apart due to volatility. So if using 30 day avg, your overall rate is cheaper today but it will catch up to where term is as your loan continues to float. It will all wash out over a period of time as SOFR comes back down because 30 day avg will lag behind Term on the way down.

If you look at the SOFR curve, it is projected to peak around 3.5% early 2023 and remain around 3% for 2024 before it comes down. So make sure you factor that in as you project your borrowing costs over your term.

---

Can you post a link to the SOFR curve? We have been wrestling with the gap between Term SOFR & average SOFR recently. We looked SOFR up and saw rates arounf 1.52, but lenders were telling us its 2.2 (around your 70 bp spread).

I'm a commercial banker. SOFR + 200 is fairly low.

There are a bunch of factors which play into pricing:
- type of business
- history of business (financial and length of time )
- who are the receivables from
- leverage
- payment terms requested
- personal guarantee from owners
- etc.

If all of that is average you're looking at SOFR (30 day avg) + 250-300.

Edit: I have clients that range from SOFR + 175 to SOFR + 500. All dependent on factors above and others

I'm happy to provide guidance if you'd like to send me a PM or provide contact info.

Buck Turgidson said:

---

aggiegolfer07 said:

---

I am in commercial real estate finance so I can't speak to the exact terms of your corporate line. However, Your docs will specify how each period is calculated and what index they are using. In our world, the index rate is reset one time each month.

You will want to know if it is Term SOFR or 30 day AVG SOFR they are using. Most banks are using 30 day avg, but make sure you know this. Term is forward looking and 30 Day Avg is in arrears. Right now they are about 70bps apart due to volatility. So if using 30 day avg, your overall rate is cheaper today but it will catch up to where term is as your loan continues to float. It will all wash out over a period of time as SOFR comes back down because 30 day avg will lag behind Term on the way down.

If you look at the SOFR curve, it is projected to peak around 3.5% early 2023 and remain around 3% for 2024 before it comes down. So make sure you factor that in as you project your borrowing costs over your term.

---

Can you post a link to the SOFR curve? We have been wrestling with the gap between Term SOFR & average SOFR recently. We looked SOFR up and saw rates arounf 1.52, but lenders were telling us its 2.2 (around your 70 bp spread).

---

What kind of adder are they putting on top of 2.2 SOFR?

SOFR + 250 bp for a large construction loan to build an apartment complex.

Thanks for the info

cgh1999 said:

---

I'm a commercial banker. SOFR + 200 is fairly low.

There are a bunch of factors which play into pricing:
- type of business
- history of business (financial and length of time )
- who are the receivables from
- leverage
- payment terms requested
- personal guarantee from owners
- etc.

If all of that is average you're looking at SOFR (30 day avg) + 250-300.

Edit: I have clients that range from SOFR + 175 to SOFR + 500. All dependent on factors above and others

I'm happy to provide guidance if you'd like to send me a PM or provide contact info.

---

Yep. SOFR + 200 is solid at these numbers. My company is sitting at SOFR +125, but that's a secured ABL revolving line and we have an extremely strong balance sheet, $500 million of revenue, and strong earnings history.

Buck Compton said:

---

cgh1999 said:

---

I'm a commercial banker. SOFR + 200 is fairly low.

There are a bunch of factors which play into pricing:
- type of business
- history of business (financial and length of time )
- who are the receivables from
- leverage
- payment terms requested
- personal guarantee from owners
- etc.

If all of that is average you're looking at SOFR (30 day avg) + 250-300.

Edit: I have clients that range from SOFR + 175 to SOFR + 500. All dependent on factors above and others

I'm happy to provide guidance if you'd like to send me a PM or provide contact info.

---

Yep. SOFR + 200 is solid at these numbers. My company is sitting at SOFR +125, but that's a secured ABL revolving line and we have an extremely strong balance sheet, $500 million of revenue, and strong earnings history.

---

If you're full ABL, your effective rate is probably a bit higher with fees, but that is a very solid company if you're getting that spread

Here you go.

https://www.chathamfinancial.com/technology/us-forward-curves

On your comment about rate today, you are looking at 30 Day Avg, but your lender is quoting Term SOFR. When they were first introduced, they were on top of each other around 5bps. The volatility has caused the gap to widen since one is forward looking and the other is backward looking.

The thought is they will be in the same place again once volatility settles. On the "back end" we will see a similar gap but in reverse with Term SOFR declining and 30 Day Avg slower to decline. So over a total hold period, you should essentially see the same average blended rate over the full term. "In theory"

• Term SOFR is forward looking (forecast). Bloomberg symbol is "TSFR1M" and the administrator is The CME Group.
• SOFR-30-DAY AVG is backward looking (in arrears), so it should theoretically catch up. The Bloomberg symbol is "SOFR30A". It is updated daily by the NY Fed.

Here is the best website to track both. 1 month Term SOFR is the most common index used. It is on far left. 30 Day Average is on far right and is used by many banks and the agencies.

https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html

Thanks for the link!

cgh1999 said:

---

Buck Compton said:

---

cgh1999 said:

---

I'm a commercial banker. SOFR + 200 is fairly low.

There are a bunch of factors which play into pricing:
- type of business
- history of business (financial and length of time )
- who are the receivables from
- leverage
- payment terms requested
- personal guarantee from owners
- etc.

If all of that is average you're looking at SOFR (30 day avg) + 250-300.

Edit: I have clients that range from SOFR + 175 to SOFR + 500. All dependent on factors above and others

I'm happy to provide guidance if you'd like to send me a PM or provide contact info.

---

Yep. SOFR + 200 is solid at these numbers. My company is sitting at SOFR +125, but that's a secured ABL revolving line and we have an extremely strong balance sheet, $500 million of revenue, and strong earnings history.

---

If you're full ABL, your effective rate is probably a bit higher with fees, but that is a very solid company if you're getting that spread

---

Yep, full ABL. Initiation fees were there at the beginning and unused fees are there monthly (25 bps flat on unused line). They get our monthly treasury fees at a decent volume, too.

All credit on this goes to the last guy in my position. He may not have had a strategic bone in his body but he sure was on top of our capital structure.

Our inventory moves quickly so it's easy to lend against. The bank is probably looking more at long-term growth as we expect our needs to double in the next 3-4 years. Solid middle market company but by no means a big dog yet.

Buck Turgidson said:

---

SOFR + 250 bp for a large construction loan to build an apartment complex.

---

Borrower/legal side here: This is about in line with what I've been seeing the past month for ~$50-75mm multifamily construction loans. Term or Daily SOFR + 2-2.5% spread for a 48 month term with 1-year extension option.