Business Loan Term Sheet Sample

A business loan term sheet is a crucial document outlining the key terms and conditions of a loan agreement between a lender and a borrower. It serves as a preliminary agreement that details the specifics of the loan, which will later be formalized in a more comprehensive loan agreement. Below is a detailed sample term sheet to illustrate the essential components and provide a clear understanding of what to expect in a business loan agreement.

1. Loan Amount and Disbursement

• Loan Amount: The total amount of the loan to be provided by the lender.
• Disbursement Schedule: The timeline and conditions under which the loan amount will be disbursed to the borrower.

2. Interest Rate

• Rate Type: Whether the interest rate is fixed or variable.
• Rate Details: Specific percentage rate applied and any conditions affecting rate changes.

3. Repayment Terms

• Repayment Period: The duration over which the loan will be repaid.
• Repayment Schedule: Details on the frequency of payments (monthly, quarterly, etc.).
• Prepayment Conditions: Any penalties or conditions for repaying the loan early.

4. Collateral

• Type of Collateral: Assets or property pledged as security for the loan.
• Valuation: The method for valuing the collateral and the required insurance or maintenance.

5. Covenants

• Financial Covenants: Requirements regarding financial performance or ratios that the borrower must maintain.
• Operational Covenants: Restrictions or obligations related to the borrower's operations.

6. Fees and Expenses

• Upfront Fees: Any fees charged at the beginning of the loan.
• Ongoing Fees: Fees that may apply during the loan term, such as servicing fees.

7. Default and Remedies

• Events of Default: Conditions under which the borrower would be considered in default.
• Remedies: Actions the lender can take if the borrower defaults, including acceleration of the loan and collateral seizure.

8. Governing Law and Jurisdiction

• Governing Law: The legal jurisdiction under which the loan agreement will be interpreted.
• Dispute Resolution: Mechanisms for resolving disputes arising from the loan agreement.

Sample Term Sheet

Loan Amount: $500,000
Disbursement Schedule: $250,000 upon signing, $250,000 upon meeting operational milestones
Interest Rate: 5% fixed annual interest rate
Repayment Period: 5 years
Repayment Schedule: Monthly payments
Prepayment Conditions: No penalty for early repayment
Collateral: Business assets, including equipment and inventory
Valuation: Collateral valued at $600,000, insured against loss
Financial Covenants: Maintain a debt-to-equity ratio below 1.5:1
Operational Covenants: Maintain business operations without significant changes
Upfront Fees: 1% of the loan amount
Ongoing Fees: $500 annual servicing fee
Events of Default: Missed payments, breach of covenants
Remedies: Acceleration of loan, repossession of collateral
Governing Law: State of New York
Dispute Resolution: Arbitration in New York

Conclusion

A business loan term sheet is essential for both lenders and borrowers to clearly understand the terms and conditions of a loan before entering into a binding agreement. It helps in setting expectations and ensures that both parties are on the same page regarding the loan's structure and obligations. Reviewing and negotiating the term sheet carefully can help avoid misunderstandings and provide a solid foundation for a successful borrowing experience.