A term sheet is the lender's summary of the deal it is prepared to make: amount, rate, term, payment, fees, collateral, guarantees and conditions. Read it line by line, circle five numbers (what you net, the rate, the payment, total fees and the cost to exit), and confirm the final agreement matches it before you sign. Most of what matters is on one or two pages, and your broker should walk you through every line.
This guide reads one term sheet in depth. To line up several offers against each other, use how to compare loan offers your broker brings.
Term sheet, offer summary, disclosure
Owners get three kinds of documents, often together:
- Term sheet or proposal letter. The lender's outline of the deal, usually nonbinding and subject to final underwriting.
- Commitment letter. A firmer approval with conditions to close. More common on bank and SBA loans.
- State disclosure. A standard form some states require. In New York the Commercial Finance Disclosure Law requires the amount financed, finance charge, APR, loan terms and total repayment on offers up to $2.5 million, according to the National Law Review. Virginia requires sales-based financing providers to disclose the amount after withheld fees, the finance charge, total repayment, estimated number of payments, other fees including prepayment fees, collateral, and whether the provider pays a broker and how much.
Ask your broker for all three where they exist. The disclosure is the best cross check on the term sheet.
A worked term sheet: $250,000 equipment loan
Here is a term sheet a broker might bring back for a contractor buying two excavators.
| Line | Term |
|---|---|
| Borrower | Ridgeview Excavating LLC |
| Guarantors | Both owners, 60% and 40%, unlimited personal guarantee |
| Amount | $250,000 |
| Purpose | Purchase of two excavators per vendor quote |
| Rate | 9.50% fixed |
| Term | 60 months |
| Payment | $5,250.47 monthly |
| Origination fee | 1.00% ($2,500), paid at closing |
| Documentation fee | $395 |
| Collateral | First lien on the financed equipment |
| Prepayment | 3% of balance in year one, 2% in year two, 1% in year three, none after |
| Covenants | Annual business tax returns within 30 days of filing |
| Conditions | Insurance naming lender as loss payee, vendor invoice, satisfactory site inspection |
| Expiration | 14 days from issue date |
Line by line
Borrower and guarantors. Check the legal name matches your formation documents. Then look at guarantees. Unlimited and joint means each owner can be pursued for the whole balance. Some lenders accept a guarantee limited to each owner's share, or limited to a dollar amount. That is worth asking about.
Amount and purpose. On equipment deals the money usually goes straight to the vendor. If you need soft costs covered (delivery, installation, attachments), make sure the purpose line says so.
Rate. Fixed or variable? If variable, find the index (prime, SOFR), the margin and any floor. A floor means your rate never falls below that level even if the index does.
Term and payment. At 9.5% over 60 months the payment is $5,250.47. Sixty payments total $315,027.92, so interest is $65,027.92. Check the payment fits comfortably inside your monthly cash flow, not just barely.
Fees. Add every fee: here $2,500 plus $395. Total cost of the money is $65,027.92 plus $2,895, or $67,922.92. Look for fees that appear only in the agreement, such as UCC filing, inspection or "processing" fees.
Collateral. A lien on the financed equipment only is fair. A blanket lien on all business assets is much broader and affects your next loan. If the term sheet says "all assets", ask why.
Prepayment. Paying off this loan in month 10 with $210,000 outstanding would cost $6,300 at 3%. For comparison, SBA 7(a) loans can only charge a prepayment fee on terms of 15 years or longer, and only when you prepay 25% or more in the first three years, at 5%, 3% and 1% by year. A conventional lender writes its own rules, so read this line carefully.
Covenants. Reporting covenants like annual returns are standard. Financial covenants, such as a minimum debt service coverage ratio of 1.25, mean you can default without missing a payment. Ask how often they are tested and whether there is a cure period.
Conditions. These are the items standing between the term sheet and funding. Start on them the day you accept.
Expiration. Fourteen days is generous. Note the date.
The five numbers to circle
| Number | Where to find it | In the example |
|---|---|---|
| What you net | Amount minus fees withheld | $250,000 to the vendor, $2,895 paid by you |
| Rate | Rate line, plus index and floor | 9.50% fixed |
| Payment | Payment line | $5,250.47 monthly |
| Total fees | Fee lines plus the agreement | $2,895 |
| Cost to exit | Prepayment line | Up to 3% in year one |
Write these five on the front page. If the final agreement shows a different figure for any of them, stop and ask your broker why before signing.
Reading a merchant cash advance summary
An advance is a purchase of future receivables, not a loan, so the terms use different words. Here is a typical summary for a $60,000 advance.
| Line | Term |
|---|---|
| Purchase price | $60,000 |
| Factor rate | 1.35 |
| Purchased amount | $81,000 |
| Origination fee | $1,800, withheld at funding |
| Net funded | $58,200 |
| Specified percentage | 10% of receipts |
| Estimated payment | $450 each business day |
| Estimated number of payments | 180 |
| Reconciliation | On request, monthly |
| Early payoff | Discount if paid within 90 days |
| Stacking | No other advances without consent |
| Guarantee | Personal guarantee of performance |
Purchase price, factor and purchased amount. $60,000 times 1.35 is $81,000. You repay $81,000 for $58,200 in your account, a cost of $22,800. See the true cost of a merchant cash advance.
Specified percentage and estimated payment. The funder buys 10% of your receipts. The $450 a day is an estimate based on about $4,500 of daily receipts. If sales fall, a true advance should take less.
Reconciliation. This is the clause that makes the payment follow your sales. Check how you request it, how often, and how fast the funder must adjust. If the summary has fixed debits and no workable reconciliation, ask your broker why.
Early payoff. Many advances charge the full purchased amount no matter when you pay. A discount for early payoff is valuable and worth asking for in writing.
Stacking and default. Read what counts as a default. Taking another advance, changing bank accounts or blocking a debit often does.
Confession of judgment. Some advance contracts include one, which lets the funder get a court judgment without a lawsuit. New York limited their use against out-of-state borrowers in a law signed August 30, 2019. If you see one, ask your broker for a funder without it.
Fees outside the contract amount. In its 2020 complaint against Yellowstone Capital, the FTC alleged that fees deducted from funds were not included in the contract amount and totaled hundreds and even thousands of dollars. Ask your broker to confirm in writing every dollar withheld at funding.
What is negotiable
| Term | How often it moves | What to ask |
|---|---|---|
| Fees | Often | Remove or reduce documentation and processing fees |
| Prepayment | Often | Shorter penalty period, or an early payoff discount on an advance |
| Guarantee | Sometimes | Limited to ownership share or a dollar cap |
| Collateral | Sometimes | Specific assets instead of a blanket lien |
| Covenants | Sometimes | Looser ratio, annual testing, a cure period |
| Rate or factor | Less often | Bring a competing offer |
| Expiration | Usually | A few extra days to review |
Ask your broker to send any requested changes to the lender in one email, in priority order. One clean request moves faster than five small ones. For the full negotiation playbook, read negotiating prepayment and early payoff terms.
Before you sign
Ask your broker to confirm, in writing, that the final agreement matches the term sheet on all five circled numbers, and to show you the lender's own disclosure. Verified entries on the register show fees in writing, and every entry carries a register number and last checked date. Search the register for term loan brokers who will walk you through every line.
Questions owners ask
Is a term sheet binding?
Usually not. Most term sheets say they are subject to final underwriting and documentation. The loan agreement is what binds you, so check it matches the term sheet.
What is the most overlooked line on a term sheet?
The cost to exit: prepayment penalties on loans, and whether an advance offers any discount for paying early. It decides what refinancing will cost later.
Can I negotiate after I receive a term sheet?
Yes. Fees, prepayment terms, guarantee scope and covenants are often movable at this stage. Rate moves less, unless you have a competing offer.
Sources
- National Law Review, Compliance guidelines for the New York Commercial Finance Disclosure Law
- Code of Virginia, Title 6.2, Chapter 22.1, Sales-Based Financing
- SBA 7(a) Loans, Do SBA 7(a) loans have prepayment penalties?
- New York State Senate, Governor signs Hoylman and Dinowitz legislation to close loophole exploited by predatory lenders
- FTC, FTC alleges merchant cash advance provider overcharged small businesses