Key Focus Areas For Negotiating Commercial Loan Term Sheets

When considering taking out a commercial loan for your business, the term sheet is a pivotal document. The term sheet outlines the principal terms and conditions under which the financial institution is willing to extend the loan. Ensuring that the terms are favorable and align with your business goals is vital to the loan documentation process and limiting your sunk time and costs.

Here are the primary areas you should concentrate on:

Loan Amount & Purpose

• Amount: Ensure the loan amount matches your needs without overborrowing.
• Purpose: Specify the exact purpose, such as asset purchase, working capital, etc. Some loans may have restricted usage – some with very significant restrictions.

Interest Rate

• Fixed vs. Variable: Determine if the interest rate is fixed or variable. Variable rates can change over time based on benchmark rates.
• Margin: If variable, understand the margin above the benchmark rate you’ll be paying.

Repayment Terms

• Amortization Schedule: Understand the repayment schedule, especially if there’s a balloon payment at the end.
• Prepayment: Check if there are penalties for early repayment or any flexibility in repayment structure.

Fees

• Origination Fee: This is the cost to set up the loan.
• Late Payment & Other Fees: Understand the consequences of missing a payment or any other administrative fees.

Loan Term

• Duration: How long is the loan for? Short-term loans might have higher payments but often have lower interest rates compared to long-term loans.

Collateral & Security

• Assets: Determine what assets, if any, are required as collateral.
• Personal Guarantees: Some lenders might require business owners to guarantee the loan personally, which means personal assets could be at risk.

Covenants

• Affirmative Covenants: Actions the borrower must take, such as maintaining insurance.
• Negative Covenants: Actions the borrower is restricted from taking, like taking on additional debt.

Conditions Precedent

• Requirements: Identify any actions or conditions that must be satisfied before the loan is disbursed.

Takeaway:

Negotiating a term sheet can feel daunting, but it’s an essential step to ensure the loan aligns with your business needs and doesn’t expose you to undue risks.

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