A term sheet is usually two to four pages. It is also the document that determines what your capital actually costs, what you’re allowed to do while you have it, and what happens on the worst day of the relationship. Most borrowers read the rate, check the amount, and skim the rest. The rest is where the deal lives.
Here’s what each section is doing.
Facility amount and type
The headline number, and the structure behind it. A term loan is drawn once and amortized. A revolving line can be drawn, repaid, and redrawn. A delayed-draw term loan is committed now and funded later against milestones. An asset-based revolver is sized not by a fixed commitment but by a formula against collateral, which means the stated maximum is a ceiling, not a promise.
Read this alongside the borrowing-base section. On an ABL, those two clauses together determine what you can actually access, and they rarely produce the headline number.
Pricing
Usually expressed as a benchmark plus a spread, for example, SOFR + 6.50%. Watch for:
- Floors. A benchmark floor sets a minimum, so if rates fall, your cost doesn’t fall with them.
- Pricing grids. Your spread steps up or down based on a leverage or coverage test. Grids are good news when performance improves and expensive when it doesn’t.
- Default rate. The rate that applies after an event of default, typically the contract rate plus 2–5%. It is rarely negotiated and frequently ignored until it matters.
If you’re comparing structures priced in different conventions, a rate against a factor rate against a fee-based product, convert everything to a comparable annualized cost before deciding. The difference between a factor rate and an APR is the single most common place borrowers misjudge what they’re signing.
Fees
The fees are where quoted cost and actual cost separate:
- Origination / closing fee, a percentage of the facility, paid up front, often netted out of funding.
- Unused line fee, charged on the undrawn portion of a revolver. Committing to more than you need has a price.
- Collateral monitoring / field exam fees, recurring on asset-based structures, sometimes several times a year.
- Prepayment or exit fees, what it costs to leave. A facility you intend to refinance in eighteen months should be evaluated primarily on this line.
- Minimum interest / utilization requirements, a floor on what you’ll pay regardless of usage.
Borrowing base
On any asset-secured facility, this is the formula that decides your real availability: advance rates applied to eligible collateral, minus reserves. The word doing the work is eligible. Expect exclusions for aged receivables (typically over 90 days), affiliate accounts, foreign obligors, contra accounts, and anything over a concentration cap. Reserves, for dilution, disputes, taxes, or rent, come off the top.
Two facilities with identical headline sizes and identical advance rates can produce very different availability once eligibility and reserves are applied. Always ask for a sample borrowing-base calculation on your actual collateral.
Covenants
The ongoing tests. Maintenance covenants are measured on a schedule (usually quarterly) and must be satisfied continuously, typically a leverage ceiling, a coverage floor, or both. Incurrence covenants only apply when you take an action, like adding debt or making a distribution.
The numbers matter, but so does the definition attached to them. A fixed-charge coverage test can produce very different results depending on whether it captures maintenance capex, cash taxes, distributions, and scheduled amortization. Model your own coverage ratios using the term sheet’s definitions, not the standard ones, and check your headroom at signing.
Reporting requirements
Monthly financials, borrowing-base certificates, AR and AP agings, annual reviewed or audited statements, sometimes covenant compliance certificates. This section is a real operating cost. If you don’t currently close your books monthly within the required window, that’s a system you need to build before closing, not after your first missed deadline.
Guarantees and security
What secures the facility and who stands behind it. Expect a first-priority lien on the collateral, and in the middle market, expect a personal guarantee, full, limited, or a validity guarantee. These are not interchangeable, and the difference is significant enough that it’s worth understanding exactly what you’re signing before you sign it.
Conditions precedent
What must be true before funding: satisfactory field exam, lien searches, appraisals, landlord waivers, payoff letters, insurance with lender endorsements, legal opinions. Each item is a potential delay. On a timed transaction, walk this list against your calendar before agreeing to a closing date.
Events of default and remedies
The failure conditions and what the lender may do about them. Payment default, covenant breach, material adverse change, cross-default to other obligations, change of control. Look specifically for cure rights (can you fix a breach, and how long do you have?) and any equity cure provision (can an injection of capital cure a financial covenant, and how often?). The presence or absence of a cure right frequently matters more than the covenant level itself.
Expiration and exclusivity
Term sheets expire, and many contain an exclusivity or no-shop period preventing you from negotiating with other lenders while diligence runs. Signing one narrows your options, which is fine if it’s the right facility, and expensive if you signed it to keep a process moving.
The practical read
Work the document in this order: borrowing base, then fees, then covenants and their definitions, then default and cure provisions, then the rate. The rate is the number everyone negotiates and usually the smallest lever in the document.
Run your own file first
Have a term sheet in hand and want a read on what it actually costs and where the pressure points are? Send it over or run the assessment to see where your file sits before you sign.
Educational only. Nothing here is an offer of credit, a commitment to lend, or advice on any specific transaction.