Welch Capital Partners' "Toolbox for Entrepreneurs - Term Sheet Definitions" offers a concise guide for entrepreneurs reviewing a bank's term sheet. It covers critical elements such as loan amounts, interest rates, fees, repayment terms, and collateral requirements, emphasizing the importance of understanding each term and its implications. The guide also advises business owners to seek clarification, compare offers, consult professionals, and negotiate terms to ensure the loan meets their business needs effectively.
Term Sheet Definitions
Received a Term Sheet from a Bank? Not sure what to look for? Here’s the basics of what you need to know.
Loan Amount
- Ensure the amount meets your business needs.
Interest Rate
- Review the interest rate type (fixed or variable).
- Check the rate itself and how it compares to market rates.
- Understand the basis for any variable rates (e.g., SOFR, Prime Rate).
Fees and Costs
- Look for origination fees, application fees, closing costs, and any other hidden charges.
- Understand prepayment penalties, if any.
Repayment Terms
- Examine the repayment schedule (monthly, quarterly, etc.).
- Check the term length of the loan.
- Understand any balloon payments or specific terms for repayment.
Collateral Requirements
- Identify the assets being used as collateral.
- Understand the lender's valuation of these assets.
- Be aware of the consequences of failing to maintain collateral value.
Covenants
- Affirmative Covenants: Actions you must take
(e.g., maintaining insurance, submitting financial statements). - Negative Covenants: Restrictions on your actions
(e.g., incurring additional debt, selling assets). - Understand the implications and ensure your business can comply.
Conditions Precedent
- Review conditions that must be met before funds are disbursed.
- These may include due diligence, appraisals, or other requirements.
Default and Remedies
- Know what constitutes a default under the loan.
- Understand the lender's rights and remedies in case of default.
Guarantees
- Check if personal or additional guarantees are required.
- Understand the extent and duration of these guarantees.
Purpose of the Loan
- Ensure the loan purpose aligns with your business plan and needs.
- The term sheet should clearly state how the loan proceeds can be used.
Steps to Take
- Seek Clarification:
- If any terms are unclear, ask the lender for explanations.
- Compare Offers:
- If possible, compare term sheets from multiple lenders to get the best deal.
- Consult Professionals:
- Consider involving a financial advisor or legal counsel to review the term sheet.
- Negotiate Terms:
- Some terms may be negotiable. Discuss any unfavorable terms with the lender.
Please contact Peter Nesbitt to learn more about our toolbox for entrepreneurs.
Welch Capital Partners' "Toolbox for Entrepreneurs - Term Sheet Definitions" offers a concise guide for entrepreneurs reviewing a bank's term sheet. It covers critical elements such as loan amounts, interest rates, fees, repayment terms, and collateral requirements, emphasizing the importance of understanding each term and its implications. The guide also advises business owners to seek clarification, compare offers, consult professionals, and negotiate terms to ensure the loan meets their business needs effectively.
Term Sheet Definitions
Received a Term Sheet from a Bank? Not sure what to look for? Here’s the basics of what you need to know.
Loan Amount
- Ensure the amount meets your business needs.
Interest Rate
- Review the interest rate type (fixed or variable).
- Check the rate itself and how it compares to market rates.
- Understand the basis for any variable rates (e.g., SOFR, Prime Rate).
Fees and Costs
- Look for origination fees, application fees, closing costs, and any other hidden charges.
- Understand prepayment penalties, if any.
Repayment Terms
- Examine the repayment schedule (monthly, quarterly, etc.).
- Check the term length of the loan.
- Understand any balloon payments or specific terms for repayment.
Collateral Requirements
- Identify the assets being used as collateral.
- Understand the lender's valuation of these assets.
- Be aware of the consequences of failing to maintain collateral value.
Covenants
- Affirmative Covenants: Actions you must take
(e.g., maintaining insurance, submitting financial statements). - Negative Covenants: Restrictions on your actions
(e.g., incurring additional debt, selling assets). - Understand the implications and ensure your business can comply.
Conditions Precedent
- Review conditions that must be met before funds are disbursed.
- These may include due diligence, appraisals, or other requirements.
Default and Remedies
- Know what constitutes a default under the loan.
- Understand the lender's rights and remedies in case of default.
Guarantees
- Check if personal or additional guarantees are required.
- Understand the extent and duration of these guarantees.
Purpose of the Loan
- Ensure the loan purpose aligns with your business plan and needs.
- The term sheet should clearly state how the loan proceeds can be used.
Steps to Take
- Seek Clarification:
- If any terms are unclear, ask the lender for explanations.
- Compare Offers:
- If possible, compare term sheets from multiple lenders to get the best deal.
- Consult Professionals:
- Consider involving a financial advisor or legal counsel to review the term sheet.
- Negotiate Terms:
- Some terms may be negotiable. Discuss any unfavorable terms with the lender.
Please contact Peter Nesbitt to learn more about our toolbox for entrepreneurs.
