Negotiating Terms

Start with the book you plan to build, not the term sheet in front of you. A facility is a set of rules about which assets you can fund, how much cash you get against them, what you must report, and what happens when things go wrong. If those rules do not match the loans you intend to originate over your planning horizon, you will spend the facility's life asking for waivers or funding assets with your own cash.

So before you negotiate, write down the book. What will you originate, in what mix, at what average size, term and credit profile? Where will you expand next: a new state, a new channel, a longer tenor, a new product? Then read the term sheet as a filter over that plan and ask what share of the loans you expect to make would actually qualify.

Eligibility: the clause that decides everything else

Eligibility criteria define which receivables the facility will fund. Advance rates and pricing must be read alongside these tests; obligations such as reporting and unused fees can still apply when assets do not qualify.

These criteria are long and boring, and that is where the problems hide. Common lines cover obligor location, minimum and maximum loan size, term, interest rate, days past due at purchase, documentation completeness, whether the obligor is an employee or affiliate, and whether the receivable was originated under the approved credit policy in effect at the time.

Read every line against your loan tape and count the exclusions. The following is a fictional illustration; all figures in it are invented for teaching. Suppose you produce a tape of 4,000 receivables with $10m of balances. The draft eligibility schedule excludes loans above $75,000, excludes obligors in two states you have just entered, and requires a signed electronic disclosure your platform only started capturing eight months ago. Run those three filters and $1.4m of your current book falls out. Two of the three exclusions are about your operations rather than the credit, which gives you something concrete to offer: a defined process fix, on a stated timeline, in exchange for a narrower carve-out.

Push hardest on terms that block your growth plan rather than your current book. Also negotiate the mechanism for change. Ask whether new products, new states or credit policy amendments require a full amendment with legal cost and consent from every provider, or whether the agreement sets out a defined approval process. A workable change process can be worth more over the life of the facility than a slightly broader day-one schedule.

Concentration limits

Concentration limits cap how much of the collateral pool can share a single characteristic: one obligor, one state, one credit grade, one channel, one vintage month. Assets above a cap are not necessarily excluded outright. In many structures the excess is deducted from the borrowing base, so it sits on your balance sheet unfunded.

The negotiation here is about your realistic distribution rather than your aspirational one. If half your volume comes from one partner channel and the draft caps single-channel exposure at 30%, you have a structural problem on day one. Model your expected pool against each proposed cap and show the provider where you breach and why. A data-backed argument about why your concentration is not a correlation problem travels further than asking for a rounder number.

Watch how limits interact. Caps can overlap on the same receivables, and a tight state cap plus a tight channel cap can bind at once if your best channel is regional. Whether overlapping excesses are deducted once, netted, or stacked is a question of how the borrowing base formula is drafted, not an automatic double deduction. Ask for the calculation worked through on your own pool before you agree the levels.

Advance rate and the borrowing base

The advance rate is the percentage of eligible collateral the provider will lend against. In a separate fictional warehouse example in US dollars, at an 80% advance rate on $9m of eligible collateral, the facility supports $7.2m of debt. Your equity requirement is not that $1.8m gap alone — it is the full purchase balance of the assets you fund less the debt the facility actually provides, so ineligible receivables you still choose to originate are funded entirely by you. That $7.2m is also a permitted debt ceiling, not new cash: undrawn availability is the ceiling less what you already have outstanding.

The borrowing base is the formula that turns your collateral pool into a borrowing limit. How often it is recalculated and certified — monthly, weekly, or on each draw — is set by the agreement, so confirm the testing frequency rather than assuming it.

Agreements commonly deduct reserves as well. A dilution reserve covers non-credit reductions in receivable balances: returns, refunds, discounts, billing adjustments and disputed amounts. That is a different exposure from credit default loss, and the two are usually sized separately. Yield or interest reserves cover carrying costs; servicing-transfer reserves cover the cost of moving servicing if your platform fails. Each reserve needs a defined base. A reserve expressed as a percentage of eligible collateral behaves differently from one expressed as a percentage of the advance, or of outstanding debt, or as a fixed dollar amount.

That matters for comparisons. An 85% advance rate with 5 percentage points of reserves measured on the same eligible-collateral base nets to exactly 80%. If the reserves sit on a different base, the effective advance rate can come out lower or higher than 80% — the direction depends on the base and the arithmetic, so work it out rather than assuming a different base is worse. Get the full formula in writing early and compute the effective advance rate yourself on your own numbers.

The borrowing base bites when eligibility deteriorates. Continuing the same fictional figures: eligible collateral falls from $9m to $8m while drawn debt is still $7.2m. At an 80% advance rate the limit drops to $6.4m and you are $800k over. Whether you cure by posting cash, contributing eligible receivables, or repaying, and how many days you have, depends on what the agreement says. Negotiate the cure period and permitted cure methods with as much attention as the advance rate, because the advance rate determines supported borrowing and a shortfall can force an unplanned cash contribution.

A drop in eligibility is not the same as realized credit loss. Receivables can become ineligible because they aged past a delinquency threshold, a document went missing, or a concentration bucket filled. Some of those come back.

Commitment size versus what you can actually draw

The commitment is the maximum the provider is obliged to lend, subject to conditions. It is not cash sitting in an account. On the fictional figures, with a $12m commitment, $9m of eligible collateral and an 80% advance rate, your permitted debt is $7.2m regardless of what the cover page says.

Accordions are a common source of confusion. A $3m accordion on top of a $12m commitment reads like $15m. Where the accordion is uncommitted, it is $12m unless and until a provider actually commits the additional amount; a committed accordion works differently, so read which one you have. Whether an uncommitted accordion attracts any fee is a contractual question, so ask directly whether the accordion is committed or best-efforts, who has approval rights, and what it costs.

Size the commitment against your funding plan. An oversized commitment can cost unused fees on capacity you never draw. On the fictional teaching numbers, a $12m commitment with $7.2m drawn generates $24k of fee in the year at a 0.5% rate on the undrawn amount. Halve the collateral while keeping the same commitment and that fee rises to $42k on a much smaller income base. Undersizing costs too, since a mid-life upsize means new legal work and may attract new arrangement fees, depending on what the documents provide. Whether a fee applies at all, and on what base, is set by the document — note that a commitment fee and an unused fee are not interchangeable terms: a commitment fee may be charged on the full commitment, while an unused fee is charged on the undrawn portion. Check which basis your draft uses. The mechanics are covered in facility fees and all-in cost.

Economics: what you actually pay

The economic package is more than the spread. Negotiate the components together, since a concession on margin can be recovered in fees.

Pricing may be floating or fixed. Where it floats, the base rate, reset frequency, any floor, and the day-count convention are all contractual, and a floor above the current base rate is a real cost. Arrangement or structuring fees are commonly charged as a percentage of a stated amount and paid at closing, but confirm the base and timing in your own draft. Unused or commitment fees accrue where the agreement provides for them, on the base it specifies. Servicing and administration fees may go to you, to a third party, or to the provider's back office, and you need to know which.

Then the situational ones: prepayment or exit fees, breakage where a draw is repaid off-cycle, amendment fees, default rate step-ups, and abort costs if the deal dies after legal work has started. Ask for every fee, its base, its rate and its payment timing in one schedule, and check that no two lines charge you twice for the same thing under different names.

Two utilisation mechanics get conflated. A minimum draw requirement obliges you to borrow a set amount or percentage. A minimum interest provision charges you as though you had borrowed a floor amount whether or not you did. They can appear separately or together, and combined with a large commitment and a slow origination ramp either can cost more than the fee it replaced.

For a full first-year build showing how these components interact against income, the warehouse worked example runs the arithmetic end to end, including the downside cases.

Information duties

Reporting obligations look administrative and turn out to be operational. A borrowing base certificate, a loan-level tape in a specified format, a servicer report, a delinquency and loss roll, a covenant compliance certificate, audited annuals within a stated number of days, and notice of specified events. Each has a deadline and a signatory.

Negotiate frequency and format against what your systems produce today. If you can generate a clean tape monthly but the draft calls for weekly, get the frequency changed or get a ramp period while you build. Negotiate the definitions too. A delinquency measured on a contractual basis and one measured on a recency basis can differ materially on the same pool, and you want the definition your systems already compute. What you should be able to produce before you start is set out in what you need.

Missed reporting can be a default in its own right, independent of asset performance. Check whether it is in your draft.

Covenants, triggers and consequences

Covenants come in a few flavours. Financial covenants at the originator or parent level: minimum tangible net worth, minimum liquidity, sometimes a leverage test. Portfolio performance triggers at the pool level: cumulative net loss, delinquency ratios, dilution, weighted average yield. Operational covenants: keep servicing systems running, maintain licenses, notify on key-person departures.

The negotiation is about three things: the metric, the level, and the consequence.

On the metric, argue for tests you can compute and that reflect how your assets behave. On the level, build headroom against a realistic stress rather than your base case.

On the consequence, do not assume a fixed ladder. Cash trapping, a switch from revolving to amortising, and an event of default are distinct contractual outcomes, and which breach produces which is drafted deal by deal. Some agreements route a first breach to cash trapping; others go straight to amortisation. Map each trigger to its stated consequence and read the actual cross-references rather than the summary.

Ask for cure rights explicitly: how long you have, what counts as a cure, whether an equity contribution cures a financial covenant, and how many times you can use it. A cap on cure frequency is worth negotiating alongside the right itself.

Understand the amortisation switch precisely. When the facility stops revolving, collections that previously funded new purchases repay debt instead, and new purchases may lose access to this source of financing. Know exactly which events flip it.

Guarantees, recourse and where counsel decides

Recourse is where you need your own lawyer, not a summary. The question is what the provider can reach if assets underperform: only the collateral in the special purpose vehicle (SPV), or also the operating company, or also you personally.

Structures vary, and the extent of any separation between an SPV and its parent depends on the documents, the jurisdiction, and how the entities actually operate day to day. In many US structures the SPV is a separate legal entity with its own governance and separateness covenants, but whether that produces any particular insolvency or consolidation outcome is a legal question for counsel on your specific facts. Do not treat a limited-recourse label as settling it.

Separate performance guarantees from credit guarantees in your own head. A parent guarantee of servicing obligations is a different exposure from a guarantee of asset losses, though both appear under the same heading on a term sheet.

Event-of-default and bad-boy carve-outs vary widely in drafting. Some are loss-specific, exposing the guarantor only to damages caused by the specified conduct; others convert limited recourse into full recourse on the entire debt. Read which one you have, and treat scope as a point for you and your counsel to work through.

Accounting treatment is the same story. Whether assets funded through a facility stay on your consolidated balance sheet is a question for your accountants against the specific structure, not something to infer from a term sheet.

Exit

Negotiate the exit before you sign the entry. What is the stated maturity, and is there a renewal mechanic or a fresh negotiation? What notice do you need to terminate early, and what does it cost? If you repay in full and walk away, does an exit fee apply, and does it step down over time? What happens to the collateral: can you buy it back, is there a right of first refusal on a portfolio sale, and can the provider block a refinancing?

A facility you cannot leave prices itself into every subsequent negotiation, because your next provider knows you are constrained.

Ranking your asks

You will be told that certain terms cannot move. Some of that is true for a given provider at a given moment, and providers differ in what they will flex.

The practical approach is to rank your asks. Pick the three or four terms that genuinely constrain your plan — usually a mix of eligibility, a concentration cap, a cure right and one economic term — and concede visibly elsewhere. Bring data to the ones you care about: a request to raise a state concentration cap supported by twelve months of performance by state is a different conversation from asking for a rounder number.

One sequencing point. A term sheet is a roadmap. Whether any part of it binds — exclusivity, confidentiality, expense reimbursement, or anything else — depends on how it is drafted and the governing law, so have counsel tell you which provisions bind you before you sign. What ultimately governs is the executed facility documentation, so verify that every term you negotiated survived into the final agreement rather than assuming the term sheet carried through.

Then take the package to close. The path from term sheet through conditions precedent to first draw is in getting to close, and the mechanics of turning a draw into cash are in how facility funding works.

The document you sign is the operating manual for your business for as long as the facility runs. Read it that way.