Quick overview

A term sheet is the roadmap lenders use to summarize an offer and the items that will appear in the final loan documents. Most term sheets are non‑binding except for select clauses (e.g., confidentiality, exclusivity, or expense reimbursement). Treat a term sheet as the starting negotiation document — not the final contract. (See SBA guidance on loan terms: https://www.sba.gov)

Line‑by‑line: common items and what they mean

  • Loan amount: The principal the lender is willing to provide. Confirm whether the amount is a single advance or a commitment with draws.
  • Purpose: States what the proceeds may be used for (e.g., equipment, working capital, acquisition). Using proceeds outside the stated purpose can trigger defaults.
  • Interest rate: Can be fixed or variable. Variable rates are usually tied to a reference rate (e.g., prime, SOFR) plus a spread. Ask for the index and how often it resets.
  • Annual Percentage Rate (APR): Where provided, APR combines interest and certain fees to show an annualized cost. APR helps compare offers but may not include all bank charges.
  • Fees and costs: Lists origination fees, underwriting fees, commitment fees, syndication fees, legal and closing costs, and any ongoing facility fees. Add these into your total cost model.
  • Amortization and repayment schedule: Describes monthly or quarterly payments, balloon payments, and whether there is a grace period. Short amortization with a long balloon increases refinancing risk.
  • Term / maturity date: When the loan principal is due. Confirm whether maturity is based on calendar date or final payment schedule.
  • Collateral / security: Specifies assets that secure the loan (inventory, equipment, real estate, accounts receivable). Note the perfected lien type (first lien, second lien) and cross‑collateralization clauses.
  • Guarantees: Lists who must personally guarantee the loan (owners, shareholders) and whether guarantees are limited or full recourse.
  • Covenants: Affirmative (what you must do, e.g., maintain insurance, deliver financials) and negative (what you must not do, e.g., no additional debt, restricted dividends). Covenants are a frequent negotiating point because they control future flexibility.
  • Financial reporting: Frequency and format of financial statements, tax returns, and compliance certificates. Tight reporting requirements increase administrative burden.
  • Conditions precedent (closing conditions): Items that must be satisfied before funding — e.g., evidence of insurance, UCC searches, corporate resolutions, or legal opinions.
  • Events of default and remedies: What constitutes a default (payment missed, covenant breach, insolvency) and the lender’s remedies (acceleration, foreclosure). Understand cure periods and waiver mechanics.
  • Prepayment, breakage, and yield protection: Whether you can prepay and if prepayment fees or make‑whole calculations apply. Prepayment penalties can be a major hidden cost.
  • Draw schedule / disbursement terms: For construction or asset purchases, the schedule explains how and when funds are released and what inspections or lien waivers are required.
  • Use of proceeds and escrow requirements: Some term sheets require loaned funds to be held in escrow or used through controlled disbursement accounts.

Short examples (illustrative)

  • Example A: $250,000 term loan, 6% fixed, 60‑month amortization, equipment as collateral. Predictable payments; lender takes equipment lien.
  • Example B: $1,000,000 revolver with SOFR + 350 bps, 1% commitment fee, quarterly covenants on debt service coverage ratio. Useful for working capital but requires ongoing covenant compliance.

Negotiation priorities and practical tips (from my practice)

  1. Total cost: Build a pro forma that adds interest plus all fees and prepayment costs to compare offers apples‑to‑apples. (Consumer Financial Protection Bureau: https://www.consumerfinance.gov)
  2. Cov-lite vs. covenant‑heavy: If your business is stable, push for fewer ongoing covenants or higher thresholds. If cash flow is variable, ask for springing covenants or seasonal testing dates.
  3. Collateral scope: Narrow collateral descriptions where possible. Avoid broad liens that reach after‑acquired property unless necessary.
  4. Prepayment flexibility: Negotiate lower or no prepayment penalties to preserve refinancing options.
  5. Financial reporting: Limit frequency and scope to what the lender reasonably needs—monthly P&L and quarterly statements are common for small businesses.
  6. Carve‑outs and exceptions: Seek carve‑outs for customary business operations (e.g., trade accounts, routine capital expenditures) so day‑to‑day activity isn’t restricted.

Red flags to watch for

  • Excessive cross‑collateralization that ties unrelated assets to the loan.
  • Vague covenant language (e.g., “material adverse change”) without objective tests.
  • Undisclosed fees or back‑loaded charges buried in the fees section.
  • Short cure periods or immediate acceleration on minor breaches.

How to review a term sheet — practical checklist

  1. Verify the economic terms (amount, rate/index, fees, amortization).
  2. Map covenants and reporting obligations to your cash‑flow calendar.
  3. Confirm collateral and guarantee scope, and order a UCC search if needed.
  4. Ask which clauses are binding now (confidentiality or exclusivity) and which are non‑binding.
  5. Get counsel: have your attorney review legal language and your CPA model the financial impact before signing anything.

Useful internal resources

Bottom line

A term sheet translates a lender’s offer into actionable deal points. Read every line: the economics matter, but so do covenants, collateral scope, and default remedies. Use the term sheet to negotiate clearer, narrower language that preserves operational flexibility and reduces hidden costs.

Professional disclaimer: This article is educational and not legal or tax advice. For transaction‑specific guidance, consult a licensed attorney and a CPA familiar with commercial lending.

Sources and further reading

(Information current as of 2025.)