Base rate vs cost of funds pricing — how your facility rate is built

Updated May 2026.

Two facility letters can quote the same spread and produce different all-in rates. The reason lives in the base — Prime, SOFR, an internal base lending rate, or a bank's internal cost-of-funds curve — that the spread sits on top of. Reading the rate clause carefully means reading both pieces, not just the margin. A “Prime + 150 bps” line and a “SOFR + 300 bps” line can land within a few tenths of a point of each other or several points apart, depending on where the bases are sitting.

This is a translation guide for borrowers reading the rate clause on a facility letter. It covers the common bases, how floors interact with them, and why the same nominal spread can produce different real costs. For the dollar mechanics on a specific draw, the cost calculator and the how overdraft interest is calculated guide handle day-count and accrual; this page is about how the rate is built before it ever hits a calculator.

The two pieces of every facility rate

Almost every commercial facility rate is constructed the same way: a benchmark or base rate, plus a contractually-fixed margin. The base moves with market or bank-policy changes; the margin stays constant unless the credit agreement explicitly allows it to reset (rare on bilateral facilities, more common in syndicated-deal pricing grids tied to leverage ratios).

The base (or benchmark, or reference rate).A published or contractually-defined number — Prime, term SOFR, the bank's base lending rate, an internal cost-of-funds curve. The borrower does not negotiate its value; the base is whatever the contractual reference says it is on the reset date.
The margin (or spread).The bank's contractually-fixed add-on. Set at facility origination and does not move with rates, unless the agreement says otherwise. Reflects credit quality, facility structure, relationship economics, and competition. For more on why the spread is a contract property rather than a usage property, see the spread vs. yield guide.

A working frame: the base is what the market or the bank decides; the margin is what your relationship and credit profile decide. You usually negotiate the margin directly; you compare, define, or sometimes negotiate the base mechanics — which benchmark, which tenor, whether a floor applies, and how FTP is determined and disclosed.

The common bases you may see

A short field guide to the bases that show up in commercial facility letters. Confirm the specific contractual reference against your agreement — the abbreviation matters less than the exact published or internal series the contract points to.

Prime Rate (Wall Street Journal Prime).A published rate compiled from the prime lending rates of large US banks. Moves in step with the Federal Reserve's short-term policy rate in most environments. Common on small-business and middle-market facilities, especially relationship-priced ones.
Term SOFR (1-month, 3-month, 6-month). Forward-looking versions of the Secured Overnight Financing Rate, published by CME. Term SOFR replaced LIBOR as the standard floating-rate reference for US commercial lending post-2023. Most floating-rate commercial facilities in the US today reference 1-month or 3-month term SOFR.
Base Lending Rate (BLR). Internal bank-published lending rate, common at some regional and international banks. May or may not move in lockstep with Prime or SOFR — the bank decides when and by how much, often tied to broader monetary policy but not always with the same timing.
Internal cost-of-funds curve / FTP.A bank's internal Funds Transfer Pricing curve, constructed from its deposit mix, wholesale-funding costs, liquidity requirements, and other inputs. Proprietary and not externally published; a borrower priced off FTP + spread generally will not be able to verify the base against any outside benchmark, though the credit agreement typically specifies how it is determined.
Legacy LIBOR references. Some older facility agreements may still reference USD LIBOR via fallback language. The remaining USD LIBOR panels ended after June 30, 2023, and legacy contracts now rely on fallback language or replacement benchmarks — including the LIBOR Act framework that maps tough legacy contracts to a SOFR-based successor. If your facility document still mentions LIBOR, the actual rate being used today is almost certainly the agreed-upon successor.

Cost of funds + spread — the lender's pricing view

Cost-of-funds pricing is the same arithmetic as base-plus-spread, just expressed from the bank's side. Instead of pricing off a published reference rate, the lender prices off its own funding cost (the FTP curve) and adds a margin to cover credit risk, capital, overhead, and target return. From the borrower's side it looks similar — a number plus a spread — but the number is the bank's, not the market's.

The practical implication for borrowers: a facility priced off FTP is harder to benchmark externally. A 3.00% spread over an internal FTP curve and a 3.00% spread over published SOFR are not the same economic margin — the FTP curve generally has a funding-spread component baked in, while a market reference rate does not. Whether the resulting all-in rate is higher or lower depends on the bank's funding economics and the rate environment. For the lender side of how this gets modeled, the lender income calculator exposes both pricing modes via a toggle, and the bank-economics x-ray covers the cost side that shapes the FTP curve in the first place.

Floors — and when they bind

A base-rate floor is a contractual minimum on the base. If the published or referenced rate falls below the floor, the contractual base resets to the floor and the borrower pays floor plus spread instead of base plus spread. Many post-2020 commercial facilities shipped with explicit floors on SOFR or their reference base, often introduced when overnight rates were near zero and lenders wanted to protect against a sub-zero environment.

Whether a floor is binding right now depends on where the base actually sits. In a higher-rate environment, the floor may be inactive — the published base is well above the floor, and the contract behaves as base plus spread. In a falling-rate environment, a previously inactive floor can become binding, and the borrower's all-in rate stops falling even though the market rate continues to drop. Worth checking on the facility letter, and worth knowing during a negotiation: an inactive floor is sometimes easier for a credit committee to concede than other rate-side items.

Why two “+ 250 bps” quotes can land at different rates

The headline that does the most damage when borrowers compare facility quotes is the spread, taken in isolation. Two banks quoting +250 bps can produce all-in rates that differ by meaningful amounts. Three reasons that show up most often.

Different bases. Prime + 250 bps and SOFR + 250 bps are not the same all-in rate, because Prime and SOFR are not the same number. The gap depends on the rate environment; in most environments Prime sits above term SOFR by a notable margin.
Different tenors of the same base. 1-month term SOFR and 6-month term SOFR are slightly different published numbers, and one will reset more often than the other. In a moving rate environment the choice of tenor can change the effective all-in rate over a quarter.
Floors active on one but not the other. A quote with an inactive floor behaves as base plus spread; a quote with a binding floor behaves as floor plus spread. Same spread, different actual base.

The practical move when comparing quotes: compute the all-in rate at the current value of each base, and ask the bank to quote the same illustrative example on each pricing alternative if the term sheet offers a choice. The dollar-cost comparison on a specific draw lives on the cost calculator; the all-in math itself starts with reading the rate clause correctly.

Frequently asked questions

What is the difference between 1-month and 3-month SOFR?

Both sit within the same Secured Overnight Financing Rate framework but cover different forward-looking periods. CME Term SOFR is a forward-looking estimate for 1-, 3-, 6-, or 12-month tenors, calculated from SOFR derivatives markets (primarily SOFR futures) rather than from a backward-looking average of realized overnight rates. Most commercial facilities choose 1-month or 3-month term SOFR; 3-month produces a slightly smoother rate but resets less often. The choice usually does not affect the headline spread, but in a rapidly-moving rate environment the shorter-tenor base may move more quickly. Confirm which SOFR tenor is contractually referenced in your facility agreement.

What does FTP mean on a term sheet, and why doesn't it match a published rate?

FTP is short for Funds Transfer Pricing — the bank's internal mechanism for assigning a funding cost to each loan or asset on its balance sheet. The FTP curve is constructed internally from the bank's deposit mix, wholesale funding costs, liquidity-coverage requirements, and other inputs; it is proprietary and not published the way Prime or SOFR is. If your facility prices off FTP + spread, you generally will not be able to verify the FTP component against an outside benchmark — but the credit agreement should specify how FTP is determined and disclosed when it moves.

Why is my Prime + 1.5% facility cheaper than another company's SOFR + 3% one?

Because the bases are different rates. The all-in rate is base plus spread; a smaller spread on top of a larger base can still cost more than a larger spread on top of a smaller base, and vice versa. Prime typically sits above 1- or 3-month SOFR — the gap depends on the rate environment, but the two are not interchangeable benchmarks. When comparing two facility quotes, always compute the all-in rate at the current value of each base, not the spread in isolation.

Sources and methodology

Category-level framing on commercial-lending pricing conventions follows the OCC Comptroller's Handbook on Loan Portfolio Management. Published rates and reference series are tracked through the Federal Reserve H.15 Selected Interest Rates release. Term SOFR settings are published by CME Group. This page is informational only — confirm the specific base, tenor, spread, and floor against your facility agreement; FTP-based pricing in particular is bank-specific and not externally benchmarked. See the editorial policy for how we source numbers.