How to Read a Commercial Loan Term Sheet

A term sheet is the first document that spells out the real deal — not the marketing pitch, not the verbal conversation with your loan officer, but the actual numbers and conditions the lender is proposing. Most business owners skim it, sign it, and only really read the fine print for the first time when something in it becomes a problem. That's backwards. This is the document to slow down on.

What a Term Sheet Is — and Isn't

A term sheet (sometimes called a commitment letter or letter of intent, depending on the lender) summarizes the proposed terms of a loan before final legal documents are drafted. Most term sheets are explicitly non-binding on the material business terms — rate, amount, structure — but they often contain a handful of provisions that are binding the moment you sign: confidentiality, exclusivity (agreeing not to shop the deal elsewhere for a period), and reimbursement of the lender's due diligence costs even if the deal falls through.

The Core Terms to Check First

• Loan amount. Confirm it matches what you actually requested — term sheets sometimes come back lower than expected, with the reduction buried rather than called out.
• Rate type and index. Fixed or variable. If variable, what index (Prime, SOFR) and what spread over it. A "Prime + 1.5%" loan and a "Prime + 3.5%" loan look similar on a term sheet if you're not checking the spread carefully.
• Amortization period vs. maturity/term. These are frequently different, and the gap between them is what creates a balloon payment. A 25-year amortization with a 5-year maturity means the loan is due in full in 5 years, even though the payment is calculated as if you had 25.
• Collateral and lien position. What's being pledged, and whether the lender wants first position or is willing to sit behind an existing lender.

Fees Hiding in the Fine Print

The headline rate is rarely the whole cost of the loan. Term sheets bury real money in a handful of standard fee lines — check for every one of these:

• Origination fee. A percentage of the loan amount, charged at closing.
• Commitment fee. Charged to hold the terms while the loan is being finalized — sometimes credited back at closing, sometimes not.
• Unused line fee. On a line of credit, a fee charged on the undrawn portion — meaning you pay something even for the credit you don't use.
• Prepayment penalty / yield maintenance. Some loans charge a real penalty for paying off early, especially fixed-rate commercial real estate loans. Yield maintenance formulas in particular can be expensive — always ask for a plain-language example of what it would cost at a specific point in the term, not just the formula.
• Legal and third-party costs. Appraisal, environmental report, title work, and the lender's attorney fees are usually passed to the borrower regardless of whether the loan closes.

The Covenants Section

Term sheets typically list financial covenants (minimum DSCR, maximum leverage) and reporting covenants (what financials you'll submit, and how often) at a high level — full detail comes in the loan agreement. Still, flag anything at the term sheet stage that looks tight relative to your actual numbers today. It's far easier to negotiate a covenant threshold before you've verbally agreed to the deal than after.

Conditions Precedent — What Has to Happen Before Closing

This section lists everything that must be satisfied before the lender will actually fund: a clean appraisal, an environmental report (Phase I, and Phase II if the first one flags anything), proof of insurance, updated financials, UCC lien searches coming back clean, and sometimes a satisfactory site visit. Read this list early — it tells you exactly what's going to slow the deal down, and lets you get ahead of the slowest items (appraisals and environmental reports especially) instead of discovering them late in the process.

Red Flags Worth Negotiating

• A "material adverse change" clause with no specificity — vague language that lets the lender walk away from the committed terms based on broad discretion, without a defined trigger.
• Cross-default provisions that tie this loan to every other loan or lease you have, meaning a default anywhere in your financial life defaults this loan too.
• An unusually long exclusivity period that locks you out of shopping the deal elsewhere while the lender takes their time.
• A guarantee structure that's broader than expected — see our guide to personal guarantees for what to check there specifically.

None of this is a reason to be adversarial with your lender — most terms are standard and non-negotiable, and pushing back on everything wastes goodwill you'll want later. But a handful of items on every term sheet genuinely are negotiable, and the only way to know which is which is to read the whole document closely before you sign, ideally with your CPA or an attorney reviewing anything that isn't standard boilerplate.