What is a Loan Term Sheet and What Are the Most Important Terms for My Business?

Suppose your company is seeking a loan from a bank and passes the initial due diligence stage. In that case, the bank will present an introductory offer in a few documents, including a term sheet. Put simply, a term sheet outlines the bank’s proposed key terms in the eventual loan agreement. This article will outline the purpose of a term sheet and what the implications are for your business. 

Loan Term Sheets

As the name suggests, you can think of a term sheet as an outline of the proposed key terms that will be contained in the loan agreement. In practice, you are likely to find a term sheet attached to a short letter called the commitment letter or the mandate letter. By presenting you with a term sheet, the bank is indicating a general commitment to lend to you on the proposed terms contained in the term sheet. 

Additionally, by outlining all the most essential terms of the loan agreement, the bank can move into the final stages of the due diligence process. In this sense, the term sheet clears the way for you and the bank to iron out the more granular details in the loan agreement. By signing the term sheet, you are indicating a general commitment to complete the transaction. 

What Are the Terms in a Term Sheet? 

The kind of terms you will find in a term sheet depends on the kind of business loan you wish to obtain. Generally, a term sheet will specify the date the term sheet was issued and who the borrower and lender are. 

It will also list other provisions, such as:

• the amount the bank is prepared to lend or the facility amount;
• any fees the bank will charge the borrower to complete or service the loan;
• the interest rate, including if it will be a fixed rate or floating (e.g., pegged to the Bank of England’s base rate); and
• the purpose of the loan, such as to finance the acquisition of another business.

Some other terms that are likely to be in the term sheet include:

• the payment schedule, which is when you will make payments; 
• what sort of security the bank will take in your company’s property; 
• the conditions precedent, which are the specific conditions that have to be met before the loan will take effect;
• promises your business or the lender will make called representations or undertakings; 
• certain obligations your business must abide by throughout the life of the loan called covenants;
• circumstances that qualify as events of default; 
• rights of the bank to sell or transfer the loan to another party; and 
• the governing law of the loan agreement.

Do Term Sheets Have Legal Effect?

Unlike the loan agreement, term sheets are not usually legally binding documents. This means that neither you nor the lender is obligated by any of the summarised terms in the term sheet.

Nevertheless, term sheets have practical implications for your business. First, you will not be able to determine your legal obligations solely by reading the term sheet. The term sheet may indicate that your business must maintain a certain amount of cash throughout the loan. However, what amount of cash and the measure of liquidity will not be spelt out in the term sheet. 

Secondly, if the bank later decides to amend a term in the term sheet, you will not be able to claim they have breached any agreement. Likewise, you would be free to walk away from the negotiations if you are unsatisfied with any provision in the facility agreement. 

Key Takeaways 

After a lender has undertaken some preliminary investigations of your company, they may present you with a term sheet. A term sheet sets the general terms the bank is prepared to lend to your company. Since term sheets are not legally enforceable, either party is free to negotiate amendments after the term sheet has been signed. Likewise, the term sheet does not obligate the lender to lend. Ultimately, term sheets help you and your lender complete the final stages of the due diligence process. 

If you need help understanding your loan term sheet, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

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