Reading a Lender Term Sheet: What to Negotiate and What to Accept
By the time a lender issues a term sheet, the deal is mostly decided. The borrower has shared financials, the lender has run preliminary underwriting, and both sides have agreed in principle that there is a deal to do. The term sheet is the document that captures that agreement and starts the formal underwriting process. It is not legally binding, but it is the moment with the most leverage for the borrower. Most of the items below are negotiable; almost none of them will be after closing.
Term Sheet vs Commitment Letter: The Distinction That Matters
A term sheet is an indicative summary of proposed terms, typically subject to credit approval, third-party reports, and final documentation. A commitment letter is the lender formal commitment to lend, subject to specified conditions. The two are sometimes used loosely. Always confirm in writing what document you are looking at and what is and is not binding.
The Economic Terms: Rate, Fees, Amortization, Term
Read the rate carefully. Is it fixed for the full term or for a period (say, 5 years on a 25-year amortization)? Is it indexed to SOFR, Treasury, or Prime? What is the spread, and what is the floor? Fees include origination, application, commitment, lender legal, and any rate-lock cost. Amortization (often longer than the term) determines the balloon balance at maturity. Each of these is a negotiating lever.
The Structural Terms: Recourse, Guarantees, Reserves
The structural items often matter more than the rate. Full recourse vs limited vs non-recourse changes the borrower personal exposure dramatically. Who signs as guarantor, with what carve-outs. Whether a debt service reserve account is required and how large. Whether the loan is cross-collateralized with other facilities. Property reserves for taxes, insurance, replacements, and tenant improvements.
The Walk-Away Clauses: Diligence, Approval, MAC
Most term sheets are conditional on satisfactory third-party reports (appraisal, environmental, property condition), final credit committee approval, and the absence of a material adverse change. These are reasonable conditions, but their scope is negotiable. Push back on overly broad language that lets the lender walk for almost any reason.
Where Most Borrowers Leave Money on the Table
Three places. (1) Prepayment terms, which become very expensive if not negotiated upfront. (2) Reserve sizing and release mechanics, which lock up capital for years. (3) Carve-outs to personal guarantees, especially the line between bad-boy carve-outs (fraud, environmental, bankruptcy) and full recourse triggers. The borrower has the most leverage in the week between term sheet issuance and term sheet acceptance. After that, the leverage shifts.
Educational content only, not advice. KQT Advisors, LLC is a commercial loan broker; we are not a lender, attorney, accountant, financial advisor, or fiduciary. We do not originate loans or make lending decisions. The information in this article is provided strictly for general informational and educational purposes and reflects our understanding at the time of writing. It is not, and must not be construed as, financial, tax, legal, accounting, investment, or any other professional advice, and creates no advisor-client relationship. Loan programs, rates, terms, eligibility requirements, fees, and approval criteria are set by individual lenders, the SBA, and other parties and are subject to change at any time without notice. Examples are illustrative only and not guarantees of outcome. Nothing here is a commitment to lend, an offer of credit, or a representation that any specific structure will be available to or appropriate for any borrower. Always consult your own qualified financial, tax, and legal advisors before acting on any information in this article. To the maximum extent permitted by law, KQT Advisors, LLC and its principals, employees, agents, and affiliates disclaim all liability for any direct, indirect, consequential, or incidental loss or damage arising out of any use of, reliance on, or inability to use the information in this article.