Term Sheet

Purpose of a term sheet

A term sheet (sometimes called a heads of terms or credit offer letter) lets both parties agree the commercial framework before incurring the legal costs of drafting a full facility agreement. It covers the key financial and structural terms: loan amount, interest rate basis, term, repayment profile, security required, and conditions precedent.

Issuing a term sheet signals that a lender's credit committee has given a positive recommendation, though it is not a formal commitment to lend. Conditions precedent — such as satisfactory valuation, verification of accounts, or receipt of a specific document — must still be satisfied before funds are advanced.

Key sections to review

Directors should pay close attention to the following sections: the definition of the interest rate (fixed, variable, or referenced to a base rate plus margin); the fee schedule, including arrangement, exit, and commitment fees; the security package and ranking; and any financial covenants the business must maintain throughout the loan term.

Covenants such as minimum debt service cover ratio, maximum leverage, or restrictions on further borrowing can constrain the business operationally. Understanding these before signing is essential; renegotiating covenant terms at the term-sheet stage is far simpler than seeking a waiver after the loan is drawn. Rates shown on term sheets are indicative, not a contractual offer.

What happens after the term sheet is accepted

Accepting a term sheet typically triggers the legal documentation phase. The lender's solicitors draft the facility agreement and security documents; the borrower appoints their own solicitor to review and negotiate. Valuations, company searches, and AML checks run in parallel.

The process from accepted term sheet to drawdown typically takes three to eight weeks depending on security complexity, solicitor availability, and whether planning or title issues arise on property. See also: underwriting, secured loan.

Negotiating the term sheet

A term sheet is an opening position, not a take-it-or-leave-it document. Borrowers regularly negotiate arrangement fees, covenant headroom, early repayment terms, and the scope of the security package. Introducing a competing term sheet from another lender, where obtained, provides additional leverage.

However, material changes requested late — after valuation costs have been incurred — may be declined or come at a cost. Raise key concerns early, ideally before the term sheet is formally issued.