How to read a business loan term sheet

What is a term sheet and is it binding?

A term sheet, also called a commitment letter or offer letter, sets out the loan the lender proposes to make. For most business loans it is not binding on the lender until final documents are signed, and it usually says so. Some banks issue a binding commitment letter after full underwriting, often with a commitment fee.

Treat it as the negotiation stage. Once you sign the loan agreement, the terms are fixed and expensive to change. Read every line, ask about anything you do not understand, and get changes in writing on a revised term sheet. The glossary entry has the short definition, and what happens after you submit shows where it sits in the process.

What do amount, rate, term and amortization mean?

The amount is the gross loan; the net you receive is the amount minus fees taken at closing. The rate is fixed or variable; if variable, the sheet names the index (usually prime), the spread, how often it resets, and any floor or cap. The term is how long until the loan must be repaid in full.

Amortization is how the payment is calculated, and it can differ from the term. A loan with a five year term and a 20 year amortization has low payments for five years and then a balloon, the whole remaining balance, due at the end. Amortization explains the math, and the business loan calculator shows the payment for any combination.

Which fees should you look for?

Look for every fee and add them up. Common ones are an origination or packaging fee (1% to 5%, taken from proceeds), an SBA guarantee fee on larger 7(a) loans, closing costs, documentation fees, draw fees on lines of credit, and late fees.

Two fees deserve special attention. A prepayment penalty, or a clause that charges all remaining interest if you repay early, can cost thousands if you refinance. And any fee payable before funding to the lender or a broker is a warning sign; legitimate costs before funding are third party items like an appraisal, paid to the provider. How brokers get paid explains which fees are normal and which are junk.

What do the collateral and guarantee sections commit you to?

The collateral section lists what the lender can take if you default. A blanket UCC lien covers all business assets, and it can block future borrowing because other lenders will see it. Specific collateral names a piece of equipment, a property or your receivables.

The guarantee section names who is personally responsible. Almost every business loan under $1 million requires a personal guarantee from every owner of 20% or more. Check whether the guarantee is unlimited or capped, and whether it is joint and several, which means any one guarantor can be pursued for the whole debt. Personal guarantees covers how to limit one.

What are covenants, and which ones can you keep?

Covenants are promises you make for the life of the loan. Financial covenants set numbers you must maintain, most often a minimum debt service coverage ratio (typically 1.20 to 1.25). Reporting covenants require you to send financial statements and tax returns on a schedule. Negative covenants restrict what you can do without consent: take on more debt, sell assets, change ownership or pay large distributions.

Ask whether you can keep each one in a bad quarter, because breaking a covenant lets the lender call the loan or raise the rate. Use the DSCR calculator to see how much room you have.

How do you compare two term sheets?

Put them side by side on the same five lines: net amount received, APR including fees, total payback over the term, monthly or daily payment, and what you are pledging. Then compare the clauses: prepayment terms, covenants, conditions before funding (called stips by online lenders), and whether the lien is blanket or specific.

Getting two or more term sheets is the point of applying once to many lenders. On this site your application reaches lenders in every category, and offers come back to one place. If you use an AI assistant through our MCP server, it can lay the offers out on these lines for you; see the agents hub.