Term Sheet Negotiation

Two offers carrying the same margin can leave you with different borrowing capacity on day one, which is why availability is the first thing to model and price is the second. The arithmetic needs nothing more than your own tape and the offered eligibility criteria, and it frequently changes which offer looks better.

Which parts of a term sheet are meant to bind you

Most term sheets combine a commercial outline expressed as an indication with a small number of clauses drafted to bind: exclusivity, confidentiality, expense arrangements, governing law and dispute resolution. Whether any given clause binds, and to what effect, depends on how it is drafted and on the governing law, so have counsel read the whole document before signature rather than only the parts that look commercial. The paragraphs that look administrative are frequently the operative ones.

Read the expense clause with particular attention, and ask explicitly whether it is intended to survive a process that does not close. Where it does, a failed diligence exercise can still produce invoices for provider legal costs, field examinations and third-party reviews. Get the answer in the drafting rather than in an email.

Compare availability, not headline advance rates

Run every offer against your actual book rather than against a hypothetical pool. The advance rate is only one input, and it is applied to eligible collateral rather than to everything you own.

Offer B has the higher advance rate and the smaller reserve, and still supports USD 0.3m less borrowing, because its eligibility definition excludes an extra USD 1m of the same receivables. Assume for this comparison that you have no debt outstanding under either facility, so the borrowing base figure is the total permitted debt rather than remaining headroom. With debt already drawn, availability would be that figure less the outstanding balance. Whichever offer prices tighter, the difference in permitted debt is a number you can put next to the pricing difference and compare directly.

The reserve in this example is a deduction inside the borrowing base calculation. It reduces how much you may borrow. That is not automatically the same thing as cash you must hold in a blocked account, which is a separate mechanic. Term sheets use the word reserve for both, so ask which one is meant, and whether the facility contemplates both.

The two mechanics interact in ways worth understanding before you sign. If a new or increased availability reserve takes your permitted debt below your outstanding balance, you may have to repay the difference in cash, so a borrowing base deduction can produce a cash requirement after all. A funded cash reserve does require cash, but it can often be funded from facility proceeds rather than from your own equity, depending on how the documents are drafted. Ask how each reserve is expected to be funded rather than assuming the answer.

Undrawn commitment is not the same as availability

A commitment sets a ceiling. The borrowing base sets what that ceiling permits today. Draw conditions determine whether you can access it this week. In the Offer A column above, a USD 10m commitment supports USD 7.0m of borrowing against the current pool, and only if notice periods, representations, absence of default and any funding conditions are satisfied at the time of the request.

This matters when you are planning growth. A larger commitment creates future capacity conditional on originating enough qualifying collateral to support it, rather than money you can draw now. If the facility carries an unused fee, an oversized commitment generates cost today for capacity you cannot yet use. Model the eligible balance you expect month by month over the next year, then size the commitment against the peak of that line plus a buffer.

Eligibility and concentration language does the real work

Ask for the full eligibility criteria at term sheet stage rather than waiting for a first draft of the credit agreement. Then run them against your book line by line, which is exactly how the availability comparison above was produced. If a provider will not share detailed criteria at this stage, ask when it will, and factor the answer into your timetable.

Concentration limits deserve the same treatment. Ask whether an excess above a cap makes only the excess ineligible or removes the entire exposure, because the difference can be several hundred thousand dollars on a mid-sized pool with no change in credit quality. Ask which dimensions are capped: obligor, geography, product, channel, vintage, tenor. Then check your own book against each cap today and against your forecast in twelve months, since caps that are comfortable now can bind precisely when your growth plan depends on them.

Price the whole cost, not the margin

Build a single schedule that captures every cost the facility generates, then compare offers on that schedule rather than on the quoted margin.

Beyond the margin and the reference rate, the categories worth checking include upfront and structuring amounts, unused fees, agency and administration charges, legal costs for both sides, audit or field examination costs, backup servicing where it is required, account bank charges, and the internal headcount needed to produce the reporting package. Not all of these apply to every facility, and a backup servicer is an arrangement providers sometimes require rather than a standard feature. Work from the offered term sheet rather than from a generic list. The mechanics and typical categories are set out in facility fees. Two offers that look ten basis points apart on margin can be further apart once this schedule is complete.

Discretion clauses decide how the facility feels to run

Senior secured facilities typically reserve judgement to the provider over some combination of eligibility determinations, reserve setting, collateral valuation and amendment approval, though which judgements appear and how they are framed varies between facilities. What matters is the standard applied and the time it takes.

Ask whether discretion is expressed as sole discretion, reasonable discretion, or by reference to a stated standard or objective test. Ask what approval level an amendment requires and how the provider has handled comparable requests, without asking for names or confidential detail. Ask whether determinations carry a response period. A provider whose amendments take an unpredictable number of weeks is expensive in a way no term sheet line item captures, particularly if your product roadmap involves new asset types within the facility term.

Exclusivity, expiry and what you give up by signing

Exclusivity can be material, because it removes your alternatives during the period when leverage matters most. Negotiate the duration, negotiate carve-outs for conversations already underway, and negotiate what happens if diligence extends past the stated expiry date.

Do not sign exclusivity before you have run the availability test in Exhibit 1. Discovering that eligibility excludes a fifth of your book while you are contractually prevented from talking to anyone else is a poor position to negotiate from.

Carry the term sheet into documentation

Defined terms in the term sheet should reappear in the credit agreement with the same meaning. In practice they drift, because different drafters work from different precedents. Terms can of course change by agreement between signature and documentation, and that is legitimate. What matters is that changes are deliberate and recorded rather than absorbed silently. Build a comparison table listing each commercial term you agreed, the term sheet wording, and where it appears in the first draft. Raise every difference, including the ones that look like tidying, since a redefinition of eligible receivable can be worth more than the margin you spent three calls negotiating. How the whole document set fits together is set out in legal documentation, and the negotiation dynamics behind these clauses are covered in negotiating terms.