Commercial Loan Term Sheet

A commercial loan term sheet outlines the basic terms and conditions under which a lender is willing to provide a loan to a borrower. This document is essential for both parties to ensure a clear understanding of the loan's key features before the final loan agreement is drafted. The term sheet serves as a preliminary agreement, summarizing the principal terms of the loan, which can include the loan amount, interest rates, repayment terms, and covenants.

Key Components of a Commercial Loan Term Sheet

1. Loan Amount and Purpose
   The term sheet specifies the total amount of the loan and the purpose for which it is being used. This can include working capital, equipment purchases, real estate acquisition, or other business needs.

2. Interest Rate
   The term sheet details the interest rate applicable to the loan. This may be a fixed rate, where the interest rate remains constant throughout the term of the loan, or a variable rate, where the rate fluctuates based on an underlying index or benchmark.

3. Repayment Terms
   This section outlines the schedule and method of repayment. It includes the frequency of payments (e.g., monthly, quarterly), the duration of the loan, and the amortization schedule, which details how payments are applied towards principal and interest.

4. Fees and Costs
   Commercial loans often involve various fees, including origination fees, processing fees, and prepayment penalties. The term sheet specifies these costs and their impact on the total cost of the loan.

5. Collateral Requirements
   Many commercial loans require collateral to secure the loan. The term sheet identifies the assets pledged as collateral, which may include real estate, equipment, or inventory.

6. Covenants
   Covenants are conditions that the borrower must comply with during the term of the loan. These can be financial covenants, such as maintaining certain financial ratios, or operational covenants, such as restrictions on additional borrowing.

7. Default and Remedies
   The term sheet describes what constitutes a default and the remedies available to the lender in case of default. This includes the steps the lender can take to recover the loan amount and any associated costs.

8. Governing Law
   This section specifies the legal jurisdiction under which the loan agreement will be governed. It is crucial for resolving any legal disputes that may arise during the term of the loan.

Example Term Sheet

To illustrate, here is a simplified example of a commercial loan term sheet:

• Loan Amount: $500,000
• Purpose: Equipment Purchase
• Interest Rate: 5% Fixed
• Repayment Terms: 60 months, monthly payments
• Fees: Origination Fee - $2,500; Prepayment Penalty - 2% of outstanding balance
• Collateral: Equipment
• Covenants: Maintain debt service coverage ratio of 1.25x
• Default: Non-payment, insolvency
• Governing Law: New York State

Conclusion

A commercial loan term sheet is a crucial document in the loan process. It ensures that both parties have a mutual understanding of the loan terms and provides a foundation for drafting the final loan agreement. By clearly outlining the loan amount, interest rates, repayment terms, and other key components, the term sheet helps prevent misunderstandings and sets the stage for a successful borrowing relationship.