Glossary
Term Sheet
A term sheet is a summary of the principal terms of a proposed financing or investment, such as amount, pricing, structure, collateral, covenants and conditions. It is used to align the parties before definitive documents are drafted and is generally non-binding except for provisions like confidentiality, exclusivity and expense reimbursement.
How it is used in underwriting
In lending, a term sheet follows initial underwriting and states the loan amount, interest rate or spread, fees, term, amortization, prepayment terms, collateral, guaranties, financial covenants, reserves and closing conditions. The lender's credit approval process then confirms or modifies those terms. In equity investing, a term sheet covers valuation, security type, liquidation preferences, board seats and protective provisions. Underwriters treat a term sheet as the bridge between analysis and documentation: every number in it should be supported by the credit or investment memo, and any assumption that drove the terms should be listed as a condition.
A common misunderstanding is treating a lender's term sheet as a commitment. Most term sheets are subject to full underwriting, third-party reports, credit committee approval and documentation, so terms can change if diligence reveals issues. A commitment letter, issued later, is more binding. Borrowers comparing term sheets should look beyond rate to fees, recourse, reserves, cash management triggers, prepayment costs and covenant definitions, which can matter more over the life of the loan. Equity term sheets similarly hide significant economics in liquidation preferences and anti-dilution provisions.
Frequently asked questions
Is a term sheet binding?
Generally, a term sheet is not binding on its main economic terms, and the parties can walk away before definitive documents are signed. Specific provisions such as confidentiality, exclusivity, expense reimbursement and governing law are commonly made binding. A lender's later commitment letter is typically more binding than its term sheet.
What is included in a loan term sheet?
A loan term sheet usually includes the borrower, loan amount, purpose, interest rate, fees, term, amortization, prepayment terms, collateral, guaranties, financial covenants, reserves, reporting requirements and closing conditions such as appraisal, environmental reports and credit approval. It may also include a deposit for third-party costs.
What happens after a term sheet is signed?
After signing, the lender or investor completes full diligence and underwriting, orders third-party reports, obtains credit or investment committee approval and drafts definitive documents. Terms may be adjusted if findings differ from initial assumptions. Closing occurs once documents are signed and all conditions are satisfied.
Related terms
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