A loan term sheet is the offer document that summarizes all material terms before final docs. Reading it carefully — and asking questions before signing — is the single highest-leverage thing a borrower can do during the loan process. The same loan from two lenders can have meaningfully different terms hidden in the same standard-looking template.
Loan amount, term, amortization
Loan amount is straightforward. Term is the period until the loan is fully due. Amortization is how the principal is repaid over time. A common gotcha: a 5-year term with 25-year amortization means a balloon payment at year 5 — the borrower must refinance or pay off a large lump sum at maturity.
Rate structure
Fixed vs. variable. If variable, the index (commonly Prime, SOFR, or — historically — LIBOR) and the spread above the index. Watch for floors (minimum rate even if the index drops) and caps (maximum rate). Fixed-for-life is rare on commercial loans; fixed-for-period (5, 7, 10 years) with reset is more common.
Fees
Origination fee (1%–5% is common), packaging fee (sometimes), SBA guaranty fee (on SBA loans), legal fees (charged through to the borrower in most commercial deals), and prepayment penalties. SBA 7(a) prepayment penalties apply only to loans with terms of 15 years or longer and only in years 1–3.
Collateral and guarantees
What's pledged as collateral, where the lien is filed, and whether the lien is specific or blanket. Personal guarantees: who signs, joint and several or several, and any spousal-consent requirements (community-property states).
Covenants
Financial covenants: minimum DSCR, minimum tangible net worth, maximum leverage. Affirmative covenants: provide annual financials, maintain insurance, file taxes on time. Negative covenants: don't take on additional debt without consent, don't make distributions above a defined level. Covenant breaches can trigger default even if payments are current.
Default and acceleration
Events of default (missed payment, covenant breach, material adverse change, insolvency) and the remedies (acceleration, set-off rights, lien enforcement). Material-adverse-change clauses are written broadly; ask the lender to define what they consider material.
Conditions precedent
Things the borrower must deliver before funding: clean UCC searches, hazard insurance, life insurance assignment (sometimes), updated financials, executed key-person agreements. The list can be long; getting it early prevents close-day delays.
Sources
Editorial note: This article is general information about how small-business lending products work. It is not financial, legal, or tax advice for any specific borrower. Loan terms, eligibility, and rates vary by lender, borrower profile, and current market conditions, and the specific facts of your business will determine which products and structures actually fit. Consult a CPA, attorney, or SBA-approved lender before making decisions that affect your business.