Documentation
Term sheet anatomy
Term sheet anatomy
A term sheet is the first binding expression of the deal you’re about to sign. Most originators read it as a list of numbers. Read it instead as a document that establishes the economic structure of your business for the next 2–5 years, identifies the 5–7 provisions that determine 90% of your outcomes, and flags provisions that seem standard but embed significant risk.
Section 1: what a term sheet is (and isn’t)
The non-binding myth
Most term sheets include a “non-binding” legend. In practice, once you’ve signed and begun diligence, the effective cost of walking away is:
- 2–6 weeks of management time
- $25K–$100K in legal fees already spent
- Loss of 3–4 months of deal process
- Reputational cost with the counterparty and their network
Important: A “non-binding” term sheet is not free to exit. Once you’ve shared data, given management time, and engaged legal counsel, the practical cost of walking away is $50K–$150K and 2–3 months of delay. Sign a term sheet only when you intend to proceed.
What it does establish
A signed term sheet establishes:
- The principal economic terms (advance rate, spread, fees, covenants)
- The basic structural framework (facility size, revolving period, eligible collateral definition)
- The relative bargaining position: what you agreed to at term sheet is your starting point in documentation. Anything you want to change in docs is a concession, not a correction.
Structure of a typical ABF term sheet
A warehouse term sheet typically runs 8–15 pages and contains these sections:
- Transaction summary
- Facility structure and mechanics
- Pricing and economics
- Advance rates and eligibility
- Triggers and performance covenants
- Financial covenants (originator)
- Reporting and operational requirements
- Events of default
- Other terms (assignment, governing law, exclusivity)
- Process terms (diligence, closing conditions, termination)
- Fees payable to capital provider
- Signature block
Section 2: section-by-section walkthrough
2.1 Transaction summary
What it contains: The “box” at the top — borrower/seller, SPV name, facility type, commitment amount, term, closing date.
What to check:
Commitment structure: Distinguish between “maximum commitment” (the ceiling) and “initial commitment” (what they’re actually committing on day one). Some term sheets show $100M but start at $50M with accordion expansion rights.
SPV formation: Some capital providers require a freshly formed SPV; others will lend to an existing entity. SPV formation takes 2–4 weeks if it doesn’t exist.
Facility term: 364-day facilities (to avoid certain regulatory classifications) have different renewal mechanics than 2- or 3-year facilities. Know what you’re signing up for.
Caution: A 364-day term with no committed renewal right puts you in the position of renegotiating annually. Your leverage deteriorates each year as the capital provider’s information advantage grows.
2.2 Facility structure and mechanics
What it contains: Revolving vs. term, purchase mechanics (forward flow vs. borrowing base), maximum advance amount calculation, ramp-up provisions, clean-up call.
What to check:
Revolving period: How long can you continue adding new assets to the pool? A 2-year revolving period followed by a 1-year amortization period gives you 2 years of active funding, then wind-down. A 1-year revolving period on a 3-year facility is often shorter than originators expect.
Prefunding: Some facilities include a prefunding period where the capital provider funds up front and you deliver assets over the next 30–90 days. The catch: you typically pay interest on the full committed amount during prefunding.
Clean-up call: The right to terminate the facility when the pool balance drops below a threshold (typically 10–15% of original balance). Exercise it early in a wind-down to reduce ongoing admin costs.
Revolving vs. non-revolving economics:
Assume a $100M warehouse with:
- Revolving: you can draw/repay 3x over a 2-year period, effectively financing $300M in originations
- Non-revolving: you can only use the facility once, financing $100M total
The amortized cost of a non-revolving facility on $100M is materially higher per dollar financed. Most originators need revolving facilities.
2.3 Pricing and economics
What it contains: Interest rate (benchmark + spread), fee schedule, payment dates, interest calculation conventions.
What to check:
Benchmark: SOFR (most common) vs. Treasury rate vs. fixed rate. If SOFR, confirm: which tenor (daily, 1M, 3M)? What fallback if SOFR is discontinued? Is there a SOFR floor?
Spread: The credit spread above the benchmark. This is the most visible economic term but not the most important. See Section 3 for why advance rate matters more per dollar.
Interest calculation conventions: 30/360 vs. actual/365 vs. actual/360. On a $100M facility, the difference between 30/360 and actual/365 in a month with 31 days is approximately $85,000 annualized.
Fee schedule:
| Fee | Typical Range | Notes |
|---|---|---|
| Origination/structuring fee | 0.5%–1.5% of commitment | Paid at closing; negotiate amortization if deal doesn’t close |
| Unused fee | 0.25%–0.75% on undrawn | Applies to committed but undrawn balance |
| Annual admin fee | $50K–$200K | Fixed; doesn’t scale with portfolio size |
| Amendment fee | $25K–$75K per event | Factor into your planning |
| Extension fee | 0.25%–0.5% of commitment | Applies at each renewal/extension |
| Exit/prepayment fee | 0%–1% | Can apply if you prepay within an exclusivity period |
Illustrative pricing. See pricing disclaimer.
Important: The unused fee is a significant cost if your utilization is low. On a $100M facility with 60% utilization, a 0.5% unused fee costs $200K/year on the undrawn $40M. This is 20 bps of drag on your portfolio even before accounting for the interest cost.
2.4 Advance rates and eligibility criteria
What it contains: The advance rate definition, the eligibility criteria that determine which assets count, haircuts and concentration limits, and the borrowing base calculation.
This section determines your funding capacity more than any other.
Advance rate: The percentage of eligible collateral value the capital provider will fund. 80% advance means you fund 80 cents of every dollar of eligible collateral.
Eligibility criteria: Assets that fail eligibility criteria don’t count toward the borrowing base. Typical criteria for consumer loans:
| Criteria | Typical Threshold | What to Watch |
|---|---|---|
| Minimum credit score | FICO 650+ | Is this at origination or current? Loans that have declined post-origination may be excluded |
| Maximum loan age | 12–24 months | Older assets may be haircut or excluded |
| Geographic concentration | Max 20% per state | If you’re concentrated in CA or TX, this could bind |
| Delinquency status | 0x30 days | Even a single missed payment excludes the asset |
| Maximum single-obligor | 1–2% of pool | Not relevant for consumer; critical for commercial |
| Documentation complete | Yes/No | Missing a document = ineligible |
The eligibility trap: A term sheet that looks like 80% advance but has tight eligibility criteria might effectively fund only 65–70% of your origination volume. Model your actual expected eligible pool, not the theoretical maximum.
Worked example — eligibility haircut analysis:
$100M portfolio, 80% stated advance rate.
| Segment | Balance | Eligible? |
|---|---|---|
| 0x30 current, FICO 700+ | $72M | Yes |
| 0x30 current, FICO 650–699 | $18M | Yes |
| 30-59 DPD | $6M | No |
| 60+ DPD | $3M | No |
| Missing documentation | $1M | No |
| Eligible balance | $90M | |
| Advance at 80% | $72M | |
| Effective advance on total portfolio | 72% | (not 80%) |
The stated 80% advance becomes a 72% effective advance when eligibility criteria are applied. This is the number that matters for your business plan.
2.5 Triggers and performance covenants
What it contains: The delinquency triggers, loss triggers, OC test levels, spread coverage tests, and the consequences of breaching each.
Trigger hierarchy: Most deals have multiple trigger levels with escalating consequences.
| Level | Trigger Type | Consequence |
|---|---|---|
| Level 1 | Sweep trigger | Cash is trapped in the spread account instead of being released to the originator |
| Level 2 | Sequential trigger | Payments switch from pro rata to sequential (senior gets paid first, residual is locked up) |
| Level 3 | Early amortization event | New purchases cease; facility begins amortizing |
| Level 4 | Event of default/acceleration | Capital provider can direct immediate repayment |
The calibration question: Are these triggers set based on your actual historical performance? A trigger set at the average of your trailing 12 months will be tripped by normal volatility. The standard request: set triggers at historical peak plus a 150–200 bps buffer.
Sample trigger negotiation:
Capital provider term sheet: 30+ DQ trigger at 5.0%.
Originator counter: “Our 5-year average 30+ DQ is 4.2%, with a seasonal peak of 5.8% in January. A 5.0% trigger trips every January. We’d like 6.5% on the DQ trigger with a 90-day cure period.”
Resolution: 5.75% trigger with 45-day cure period.
Cure periods: The right to remedy a trigger breach within a defined window (30–90 days) before the breach becomes an event of default. Non-negotiable to include; debate the length.
OC test: The overcollateralization test measures whether the eligible pool value exceeds the outstanding notes by the required margin. Example: OC test requires the pool to be at least 125% of outstanding notes. If OC falls below 125%, excess spread is trapped until it recovers.
2.6 Financial covenants (originator-level)
What it contains: Minimum tangible net worth (TNW), minimum liquidity, maximum leverage ratio, minimum coverage ratio.
Tangible net worth (TNW): TNW = total equity minus goodwill and intangibles. The most common financial covenant.
What to negotiate:
- The baseline amount: set based on your current TNW with adequate headroom (target: 30–40% above minimum)
- Testing frequency: quarterly testing (not monthly) is standard
- Cure mechanism: can equity be injected to cure a breach?
- Treatment of mark-to-market adjustments: if you hold assets at fair value, unrealized losses can blow through your TNW covenant. Request an exclusion for unrealized fair value changes on retained interests.
Minimum liquidity: Typically requires the originator to maintain minimum cash and undrawn committed credit facilities. Set this at a level you can maintain without restricting operating flexibility.
Maximum leverage: Common for fintech/non-bank originators. Make sure this is calculated at the parent level, not including the SPV/facility debt.
What to run before signing:
Build a 24-month financial covenant model at the term sheet stage. Inputs: your projected P&L under base case and stress case, your projected equity, the covenant levels from the term sheet, and the consequence of breach at each quarter. If your model shows covenant headroom falling below 20% in any quarter under the stress case, you either need better covenant levels or more capital.
Note: Before signing any term sheet, build a 24-month covenant model. Every covenant needs to be forward-modeled under your stress case. If you don’t have 30–40% headroom in all covenants under the stress scenario, you will be renegotiating those covenants within 18 months.
2.7 Reporting and operational requirements
What it contains: Monthly reporting requirements, servicer reporting standards, data delivery format, compliance certifications, audit rights, annual audited financials.
What to check:
Monthly servicer report: What fields are required? What is the due date (typically 5–15 business days after month end)? What format (specific template vs. flexible)?
Compliance certificate: The originator certifies quarterly (or monthly) that all covenants are met. This is a legal certification. Ensure your reporting infrastructure can produce the required calculations before you close.
Audit rights: Capital providers typically have the right to audit your operations once per year, or more frequently if a trigger has been breached. Negotiate: (1) notice period before an audit (10–15 business days is standard), (2) cap on audit frequency (once per year, not more than twice even after a trigger), and (3) cost allocation (each party pays their own costs for scheduled audits).
Data delivery: Specify the format. A data requirement that says “loan-level tape in acceptable format” is ambiguous. Request a specific template appendix listing required fields.
2.8 Events of default
What it contains: The actions or inactions that constitute an event of default and give the capital provider acceleration rights.
The catch-all MAC clause: “Material Adverse Change” or “Material Adverse Effect” definitions are typically broad and often include language like “any material adverse change in the business, operations, financial condition, or prospects of the originator.”
The word “prospects” is dangerous — it allows the capital provider to declare a default based on forward-looking concerns, not just current facts. Push to remove “prospects” from the MAC definition or add a reasonableness qualifier.
Cross-default provisions: A default under another agreement triggers default here. Ensure there is a minimum threshold below which cross-default doesn’t apply. Cross-default should only trigger for material indebtedness above $[X]M, not for any breach of any contract.
Change of control: Define “control” carefully. A new VC investor buying a 25% stake should not constitute a change of control. Define control as 50%+ voting power.
2.9 Other terms
Exclusivity: Some capital providers require a 30–60 day exclusivity period during which you cannot discuss the deal with other capital providers. This is a significant ask on a non-binding document.
Counter-position: agree to exclusivity only after a fully executed commitment letter, not at term sheet stage. Or negotiate a shorter window (14–21 days) with automatic expiry if they don’t meet a documentation milestone.
Assignment: Standard language allows assignment with notice to you. Negotiate: no assignment to direct competitors, and notice period of at least 30 days before assignment.
Section 3: the five terms that determine 80% of your economics
In order of economic impact:
3.1 Advance rate
This is the single most important economic term. A 5-point advance rate difference (75% vs. 80%) on a $100M portfolio:
- Changes equity required by $5M ($25M vs. $20M)
- At 20% equity hurdle, changes annual equity cost by $1M
- Changes your effective leverage from 3x to 4x
This dwarfs any spread difference for most deals. Push hardest on advance rate.
Important: The advance rate matters more than the spread. On a $100M facility, a 3-point advance rate improvement (75% to 78%) reduces your equity requirement by $3M. At a 20% equity hurdle, that saves $600K/year — more than the saving from a 75 bps spread reduction on the same deal.
3.2 Spread
The second most important term. On a $100M facility at 80% advance ($80M drawn), a 50 bps spread difference costs $400,000/year.
Negotiating dynamics: spread is usually set based on comparables. Bring your own comp table. The capital provider’s spread quote is based on their view of the risk. Present your performance data and comp analysis to argue for a tighter spread.
3.3 Fee structure
A 0.5% origination fee on a $100M facility = $500,000 upfront. Amortized over a 3-year facility, that’s $167K/year. Less significant than advance rate or spread, but meaningful for cash flow management at closing.
The unused fee matters more than the origination fee for a high-growth originator who expects to draw down the facility quickly. At 90% utilization, a 0.5% unused fee on $10M = $50K/year. At 50% utilization, it’s $250K/year.
3.4 Covenant package
The covenants determine your operational freedom and what happens when you hit a rough patch. Focus on:
- TNW minimums (how much cushion do you have?)
- Trigger levels (are they calibrated to your actual performance patterns?)
- Reporting requirements (can you actually produce this on time?)
A tight covenant package at a slightly better spread is almost always the wrong trade.
3.5 Term and renewal rights
A 1-year facility with no committed renewal right puts you in a renegotiation annually. Prefer 2–3 year terms. If accepting a shorter term, negotiate for specific renewal conditions: “the capital provider shall offer renewal terms within 30 days of expiry unless [specific conditions are met].”
Section 4: red flags and non-standard provisions
4.1 Unilateral advance rate discretion
Typical language: “Capital Provider may adjust the Advance Rate at any time upon 5 business days’ written notice.”
Why it’s dangerous: This makes your borrowing base — and therefore your available capital — dependent entirely on the capital provider’s discretion. In a stress scenario, they can cut your advance rate with essentially no notice, forcing an immediate equity call.
Standard alternative: Advance rates should be contractually fixed, adjustable only by mutual written agreement or upon specified trigger events. Discretionary advance rate changes, if acceptable at all, should require 30–60 days’ notice and be limited in frequency (once per year).
4.2 Unlimited discretionary eligibility
Typical language: “An Eligible Loan shall be an asset that meets such criteria as the Capital Provider may determine from time to time, in its sole discretion.”
Why it’s dangerous: Allows the capital provider to retroactively exclude assets from the borrowing base without any contractual basis. Effectively gives them the ability to shrink the facility at will.
Standard alternative: Eligibility criteria must be fully specified in the term sheet and documents. Changes to eligibility criteria require borrower consent or follow a defined amendment process.
4.3 Broad MAC definition including “prospects”
Typical language: “Material Adverse Effect means any material adverse change in the business, assets, liabilities, operations, financial condition, prospects, or results of operations of the Originator.”
Why it’s dangerous: “Prospects” allows a default based on subjective forward-looking assessment. This is typically unenforceable in court, but defending against it costs time and money.
Standard alternative: MAC definition limited to current financial condition; prospective changes excluded. Add a reasonableness qualifier: “a Material Adverse Effect, as determined reasonably by the Capital Provider.”
4.4 Originator termination without cure
Typical language: “Capital Provider may terminate originator’s authority to purchase assets upon delivery of written notice.”
Why it’s dangerous: If the capital provider can cut off new purchases without cause and without a cure period, they effectively control your ability to grow.
Standard alternative: Termination of purchase authority should require either (1) breach of a specified covenant that has not been cured within the applicable cure period, or (2) mutual agreement.
4.5 Personal guarantee or springing guarantee
Typical language: “Originator’s principals shall provide a personal guarantee of the obligations of the originator under this Agreement, which guarantee shall spring to full recourse upon [various events].”
Why it’s dangerous: Personal guarantees are non-standard for institutional ABF facilities. Capital providers who require them are typically indicating a fundamental lack of comfort with the credit.
Standard alternative: If guarantees are required, limit to payment guarantee (not performance guarantee), cap the guarantee amount, and include a sunset provision tied to performance milestones.
4.6 Excessive information rights
Typical language: “Capital Provider shall have the right to access Originator’s systems, employees, and operations at any time upon 24 hours’ notice.”
Why it’s dangerous: Creates operational burden and potential for information misuse, especially concerning if the capital provider is also in the lending business and could observe your proprietary origination methodology.
Standard alternative: Audit rights once per year with 10 business days’ advance notice, plus additional access rights only upon occurrence of a trigger event.
Section 5: what’s negotiable vs. what’s fixed
Move freely — negotiate aggressively
- Advance rate (within 5 percentage points of initial offer)
- Spread (within 25–75 bps of initial offer with comparables)
- Trigger levels (critical — calibrate to your actual history)
- TNW covenant levels (negotiate to maintain 30–40% headroom)
- Cure periods (always try to get 45–90 days)
- Reporting deadlines (add 3–5 business days of flexibility)
- Fee structure (especially unused fee if you expect high utilization)
- Exclusivity period length
- Assignment restrictions
Move with difficulty — accept with modifications
- Overall facility structure (revolving vs. term)
- SPV requirement (almost always non-negotiable)
- Servicing standards and backup servicer requirement
- UCC perfection requirements
- Basic waterfall priority (senior debt before equity — that’s fixed)
Don’t waste time on
- Governing law (typically New York; don’t fight it)
- Basic covenants that align with your actual business practices
- Market standard trustee and backup servicer provisions
- Standard events of default (bankruptcy, payment default, misrepresentation)
- Credit enhancement requirements set by rating methodology (if rated)
Section 6: comparing multiple term sheets side by side
The comparison table
When you have two or more term sheets, build a comparison table before making any decision:
| Term | Provider A | Provider B | Provider C | Weight |
|---|---|---|---|---|
| Facility size | $100M | $75M | $100M | High |
| Advance rate | 78% | 80% | 75% | Critical |
| Spread | SOFR+250 | SOFR+275 | SOFR+225 | High |
| Origination fee | 1.0% | 0.75% | 1.25% | Medium |
| Unused fee | 0.5% | 0.375% | 0.5% | Medium |
| Revolver term | 2 years | 18 months | 3 years | High |
| TNW covenant | $5M | $4M | $6M | High |
| DQ trigger (30+) | 6.0% | 5.5% | 7.0% | Critical |
| Cure period | 60 days | 45 days | 90 days | Medium |
| Reporting deadline | T+10 BD | T+7 BD | T+12 BD | Medium |
Calculating all-in cost per sheet
Don’t compare term sheets on headline spread alone. Calculate all-in cost for each using the formula from (/playbooks/originator-economics).
Example comparison — Provider A vs. Provider B:
Provider A (SOFR+250, 78% advance) vs. Provider B (SOFR+275, 80% advance) on a $100M portfolio:
- Provider A: $78M drawn x 7.8% = $6.08M in interest + $22M equity x 20% = $4.4M → total $10.48M
- Provider B: $80M drawn x 8.05% = $6.44M in interest + $20M equity x 20% = $4.0M → total $10.44M
Provider B is cheaper all-in despite a higher spread, because the higher advance rate reduces the equity requirement.
Qualitative factors
The table captures economics. Add a separate assessment for:
- Capital provider’s track record with similar originators (ask for references)
- Capital provider’s fund lifecycle (deployment mode or harvest mode?)
- Relationship experience during diligence (organized, responsive, consistent?)
- Flexibility signaled during term sheet negotiation (did they engage constructively on your asks?)
- Institutional stability (size, tenure, fund vintage, key person risk on your coverage team)
Section 7: term sheet to commitment letter to mandate letter
Term sheet
Non-binding summary of economic terms. Neither party is committed. However, once you’ve engaged in due diligence based on the term sheet, both parties have invested enough to make walking away uncomfortable.
Cost to reverse: Low in money terms; high in time, reputation, and deal momentum.
Commitment letter
A more formal, often legally binding document that commits the capital provider to fund the deal (subject to standard conditions). You commit to deal exclusivity and typically pay a commitment fee (0.25%–0.5% of the facility).
Cost to reverse: Commitment fee forfeited; legal costs incurred. Meaningful financial exposure.
When to push for a commitment letter: If your deal needs board approval, regulatory clearance, or involves third parties who need certainty before proceeding.
Mandate letter
Used primarily in syndicated or placed transactions. Formally engages the underwriter or placement agent to structure and place the deal.
Key provisions to negotiate:
- Success fee vs. flat fee (if the deal doesn’t close, who bears the cost?)
- Exclusivity (can you pursue alternative transactions during the mandate period?)
- Minimum pricing or terms below which you can walk
- Termination provisions and associated costs
The binding problem: commitment letters that aren’t
Many “commitment letters” contain conditions precedent so broad as to be functionally non-binding:
- “Satisfactory completion of due diligence” (who determines satisfactory?)
- “No material adverse change” (same MAC problem as the term sheet)
- “Documentation satisfactory to Capital Provider’s counsel” (unlimited veto)
If you’re paying a commitment fee for a commitment, ensure the commitment is real. A commitment letter with unrestricted MAC and documentation conditions is just a term sheet with a fee attached.
Sample term sheet provision annotations
Advance rate provision
Typical language:
“The Advance Rate shall be [X]% of the Outstanding Eligible Pool Balance, as determined by the Capital Provider in its reasonable discretion, subject to adjustment in accordance with Section [X].”
Annotation: The phrase “as determined by the Capital Provider in its reasonable discretion” is non-standard and potentially problematic. A fixed advance rate should not require determination. Push to replace with: “The Advance Rate shall be [X]% of the Outstanding Eligible Pool Balance, calculated in accordance with the Borrowing Base Certificate.”
Delinquency trigger
Typical language:
“A Performance Event shall be deemed to have occurred if the Average Rolling Three-Month Delinquency Rate (30+ days past due) exceeds [X]% for two consecutive Determination Dates.”
Annotation: This is well-structured: rolling average reduces volatility, two consecutive determination dates provide a cure buffer, 30+ DQ is the standard measure. The only negotiation point is the threshold [X]%. Reference your historical peak DQ (including seasonal peaks) and add 150–200 bps as your target threshold.
MAE definition
Typical language:
“Material Adverse Effect means any event, condition, change, or development that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on (i) the business, assets, liabilities, operations, financial condition, or prospects of the Originator…”
Annotation: Remove “prospects” — this allows a forward-looking MAE call. Substitute “results of operations” instead. Consider adding a quantitative threshold: “material” should be defined as likely to result in costs or losses exceeding $[X] to the Capital Provider.
Related topics
- Sample Term Sheet (Annotated) — companion appendix with full sample document
- Transaction Agreements — picks up where this topic ends
- The Economics of ABF for Originators — provides the economic framework for evaluating terms
- Triggers, Tests, and Performance Events — deeper dive into triggers referenced in this topic
- Covenants — deeper dive into the covenant mechanics
- Negotiation Strategy — broader negotiation framework that builds on this topic