Term Sheets and Commitment Letters – Not the Same, But Both Important
Term sheets and commitment letters are often used interchangeably, but they serve two purposes. The term sheet will lay out preliminarily what the lender will provide in the way of financing and also outlines your obligations. The commitment letter is the next step where the lender says they are comfortable with lending you the money and are ready to close. Below are more details on each.
The term sheet is the lender’s overview of what will be included in your financing package. Below are typical items that will be provided:
- Borrower information
- Size of financing
- Interest Rate
- Term
- Prepayment option/penalty
- Assumptions that need verified
- Covenants (i.e., what you can and can’t do during the lan)
- Closing deliverables; and
- Required guarantees and security interests
Of course, the lender will want to verify everything, which is why a term sheet is just a preliminary and non-binding commitment.
A commitment letter is the next step in the process where the lender has approved the loan and is ready to close. There will typically be disclaimers that are inserted (e.g., if the business closes or something that materially changes the conditions required to close the loan). However, once you receive the commitment letter, the odds are high that you will go to closing.
Next week, we will review the loan agreement in more detail and highlight some of the key provisions.
Other items of interest
- Webinar | Five Ways to Help Small Businesses Fight Inflation (nfib.com) (6/20 @ 12pm)
- 2024 ERTC Options: The Good, the Bad and the Ugly (stambaughness.com)
- Webinar | Managing a Multi-State Business: A Strategic Guide to Compliance & Growth (stambaughness.com) (6/27 @2pm)
- Business Succession Planning Webinar (dakgroup.com) (thanks to Steve Raymond for sharing)
- 3 Mistakes to Avoid When Selling Your Business – DAK (dakgroup.com)
- IRS Updates on ERC Fraud Programs | Tax Insights | EisnerAmper (thanks to Carey Gertler for sharing)
As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.
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