How do you negotiate a debt term sheet?
By deciding which terms matter before you compare offers, and by doing the negotiating while more than one lender is still at the table. A term sheet sets out the shape of the facility a lender proposes: amount, structure, pricing and fees, tenor and amortisation, covenants, security and the conditions to funding. Almost none of it binds, which is exactly why the negotiation happens now: a term conceded at this stage is conceded for the life of the facility, and a term left silent arrives later on the lender’s standard form. Three disciplines decide the outcome. Compare competing offers on the effective cost of the money your plan will draw, not on the headline margin. Negotiate the terms that bite (the definitions, the covenants, the prepayment terms, the scope of security) while competitive tension exists, and grant exclusivity late. Then police the long-form documents against the grid you agreed, because a term sheet stays won only if the drafting keeps it won.
Written for the borrower’s side of the table. This is general guidance, not advice on your specific facility. It deepens the shorter answers in our working guide.
A few pages that fix the shape of the facility before the lawyers start.
A term sheet (some lenders issue it as indicative terms or a heads of terms letter) runs to a handful of pages and covers the full commercial shape of the deal: the parties and the borrower group; the facility type, amount and purpose; the margin and the base rate it floats over; the fee schedule, from the arrangement fee and any original issue discount to commitment, prepayment and exit fees; the tenor and the amortisation profile; the financial covenants and the levels they are set at; the security package and any guarantees; the headline conditions precedent; and a short block of process terms covering exclusivity, cost cover and confidentiality. By market convention the document is expressed to be non-binding on its commercial terms. The process block is the exception: exclusivity, cost cover and confidentiality bind from signature, and those clauses are read as a contract rather than as a proposal.
Nor is a term sheet committed money. It is deal-team paper: a statement that the people covering you believe the transaction can clear their credit process on these terms. The binding step is credit committee, and terms priced keen to win a mandate can be repriced on the way through it, which is why an offer is weighed on the credibility of the team and the institution as much as on the numbers. The guides cover the difference between a term sheet and credit approval in short form; the practical rule is that until committee has cleared it, you hold an indication, and you plan the process so that more than one indication hardens at the same time.
Read the document as much for what it omits as for what it states. A short term sheet is not lender generosity: every term the sheet does not fix is a term the lender’s standard documents will fix later, in the lender’s favour and after your negotiating leverage has gone. The fuller the grid you negotiate now, the less there is to drift later, which is where this guide ends up.
Price moves least. The terms that decide what the debt is like to live with move most.
Borrowers arrive wanting to negotiate the margin, and the margin is the term with the least room in it. Pricing moves on credit quality and on competition, but inside a band set by the lender’s cost of capital and its read of the risk; a well-run process shaves it, and rarely transforms it. The fee stack has more give: arrangement fees, original issue discounts and prepayment terms are all tested by a competitive process, and they are commonly conceded before the margin is, because they are paid once and argued about less. Every line of that stack, and what each one costs on a real deal, is in our guide to the all-in cost of raising debt.
The covenant negotiation is two negotiations, and the second carries more money. The first is the levels: where the leverage and cover tests sit against your forecast, and whether the gap between the two is the 25 to 30% of headroom a sensible borrower holds. The second is the definitions the tests are measured on. The definition of EBITDA (which add-backs count, whether they are capped, how pro-forma adjustments for acquisitions are treated) moves more value than the level it feeds, because a tight definition quietly shrinks the headroom the level appeared to give. The same goes for testing frequency, cure rights and what counts as a default. How lenders size capacity against that same EBITDA is the subject of our guide to how much your business can borrow.
Prepayment and security are the two clusters borrowers under-negotiate. On fund debt, call protection (a non-call period, then a premium stepping down, say 3% in year one, 2% in year two, 1% in year three, then par) decides what leaving early costs, and its shape is negotiable: the length of the non-call, the pace of the step-down, and carve-outs so that a sale of the business does not pay the full premium. On security, the scope is the negotiation: which entities in the group give guarantees, which assets the charges reach, and whether the ask extends to a personal guarantee, which is one of the most negotiable terms on the sheet and the subject of our guide to personal guarantees. What rarely moves is the lender’s core leverage appetite and the principle of taking security at all. Push where the give is, not where it is not.
Bank term loans and RCFs
The pricing band is narrow and the give sits in structure. Amortisation is the negotiation that matters: straight-line over five years and part-amortising with a final balloon are different facilities in cash terms, and the profile can be shaped to the forecast if you ask. Prepayment is usually at par on a bank term loan, so spend no negotiating capital there. On a revolver, the commitment fee on the undrawn line runs at roughly 35% of the margin by Loan Market Association convention, and the cheaper negotiation is sizing the line to what you will use rather than arguing the percentage.
Unitranche and fund debt
The economics trade against each other: margin, arrangement fee, original issue discount and call protection are four faces of the same return target, so a keener number on one commonly reappears on another. All four are tested by competition. The distinctive negotiations are the EBITDA definition and its caps, the basket sizes for permitted acquisitions, distributions and additional debt, and the shape of the call protection. A fund’s leverage appetite is part of its mandate and moves less than borrowers hope; its documents move more. The instrument trade-off itself is priced in our guide to unitranche versus bank senior debt.
Asset-based facilities
Advance rates look like the headline and move least: receivables commonly fund at 80 to 90% of the eligible book across the market. The negotiation that changes availability is the definition of “eligible”: concentration caps, aged-debt cut-offs, reserves and the lender’s discretion to impose new ones. Two term sheets quoting the same advance rate can fund materially different amounts against the same book, which is why the comparison runs on modelled availability rather than on the rate, as our guide to asset-based lending sets out.
Price every offer as the effective cost of the money you will draw, run to the exit you expect.
A term sheet prices money in several places at once: a margin on what you draw, a commitment fee on what you do not, an arrangement fee and sometimes an original issue discount taken up front, and a prepayment cost if you leave early. Competing offers distribute their price across those lines differently, so comparing headline margins compares almost nothing. The honest lens converts each offer into one number: the effective annual cost of the money your plan will use, with the one-off costs spread over the hold you expect and the exit costs of that hold included. For context, UK mid-market debt floats over SONIA against a Bank Rate of 3.75%, held at the Bank of England’s June 2026 meeting. Bank of England, Bank Rate. Mid-market unitranche prices broadly at SONIA plus 550 to 800 basis points, an all-in of roughly 9.25% to 11.75% before fees. Deloitte Private Debt Deal Tracker.
Take a business with a funded need of £5m and two fund offers on the table. These figures are illustrative arithmetic at August 2026 rates, not a quote; the point is the method.
Offer A: a £5m facility against a £5m need
An all-in coupon of about 10.25% and an arrangement fee of 2.5%, £125,000, with no original issue discount. Interest is £512,500 a year. Spread the fee over a three-year expected hold, about £41,700 a year, and the effective cost of the funded £5m is roughly 11.1%.
Offer B: a keener margin on a £6m commitment
The margin is half a point keener, an all-in of about 9.75%, but the structure carries a £1m committed acquisition line you did not ask for. The arrangement fee is the same 2.5% but charged on the £6m commitment, £150,000; a 1% original issue discount withholds a further £50,000 from the drawn £5m; and the undrawn £1m carries a commitment fee of about 2.1% (35% of a 6% margin), £21,000 a year. Interest on the drawn £5m is £487,500. The year totals £487,500 plus £21,000 plus £66,700 of amortised upfront costs: about £575,200, an effective cost of roughly 11.5% on the £5m the plan uses.
The keener margin is the dearer money, by about 40 basis points a year on funded need. The same lens has to run to the exit: if you expect to sell or refinance inside the call protection, the step-down premium belongs in the comparison too, and it can swamp a margin difference on its own. None of this makes committed headroom a bad term. A line you will draw for a known acquisition is worth its fee; one inserted to enlarge the lender’s fee base is not, and this arithmetic is how you tell the two apart before you sign for either.
Your leverage peaks the day before you commit to one lender. Spend it there.
Every term above moves for the same reason: the lender believes it could lose the deal. Competitive tension is the lever under the whole negotiation, and it cannot be manufactured after the event. The working shape is two or three credible lenders run in parallel to firm, credit-backed term sheets, each knowing others are at the table and none knowing exactly what the others have offered. A lender that knows it is the only bidder concedes little, whatever the relationship; a lender that suspects it is running second concedes what it can. It is also why treating the incumbent’s first renewal offer as the market is the most expensive shortcut in mid-market borrowing.
Exclusivity is where the leverage ends, so it is granted last and granted narrow. The ask itself is legitimate: a lender about to spend on diligence and lawyers wants to know you will not shop its terms. The discipline is sequencing. Settle the contentious terms first (the EBITDA definition, the covenant package, the call protection, the basket sizes, any personal guarantee) so they are written into the sheet while competition exists. Push the preferred offer to credit approval so that what you hold is deliverable. Only then grant exclusivity, for a defined window with a longstop date, tied to the terms as signed so that it falls away if they are retraded. Where a work fee is asked for alongside it, push for a modest, capped sum credited against the arrangement fee at close.
Sequencing is also a calendar question. Competition takes weeks to stand up, because materials, meetings and credit processes have to run in parallel rather than in series. A borrower who starts early can hold two or three offers open at once; a borrower negotiating against a maturity date holds one offer and no leverage, and every lender in the room can count the days as well as you can. The runway this needs is set out in our guide to the refinancing timeline. And weigh deliverability as a term in its own right: a sharper sheet from a team that cannot carry its credit committee is a worse offer than a deliverable one a quarter point wider.
The long form tightens what the term sheet agreed, unless someone polices the drift.
A term sheet is a few pages; the facility agreement and security documents that follow commonly run past a hundred, and they are drafted by the lender’s counsel from the lender’s precedent. Everything the term sheet fixed, the long form must honour. Everything it left open, the precedent settles, and precedent is not neutral. The drift arrives in the definitions and the schedules rather than in the headline clauses: an EBITDA definition that acquires add-back caps, a cash sweep whose trigger tightens, a material adverse change clause doing quiet work, default and cross-default definitions that widen, permitted baskets that shrink, a conditions-precedent list that grows. Each change is small, defensible in isolation, and cumulative.
Policing it is process rather than heroics. Keep a terms grid from the signed sheet through to completion, and track every draft against it line by line, so a change to what was agreed is spotted as a change rather than absorbed as drafting. Brief your lawyers commercially as well as legally: which terms were fought for, which definitions the model depends on, where the tolerance is zero. Route commercial points back to the deal team you negotiated with rather than letting them settle between opposing counsel, because the deal team has a transaction to protect and the precedent does not. Before signing, run the covenant arithmetic under the documented definitions: headroom agreed on the term sheet is only real if the definition in the documents matches the model it was set against, and what that headroom is protecting you from is the subject of our guide to covenant breach.
Little of this is bad faith. The lender’s counsel drafts from the house standard because that is the instruction, and undefended points settle to the standard by default. Documentation is the negotiation continuing under another name, and the side holding the tracked grid is the side that wins it.
Sometimes the right negotiation is a short one.
Not every facility deserves a campaign. On a clean bilateral renewal at modest leverage, the market band for the terms is narrow, and a borrower who fights for the last few basis points can spend more in fees, time and goodwill than the points return. On a deal with a hard deadline (an acquisition with an exclusivity clock of its own), certainty and speed are terms too, and the deliverable offer in hand can be the best offer available even where a sharper one might exist somewhere in the market. And occasionally the incumbent, knowing the relationship is contestable, prices as if the contest had been run; when the offer in front of you is at the market and the need is standard, signing it quickly is the win rather than the concession.
The test is not whether you negotiated hard but whether you knew what the alternative cost. Pricing the alternative does not always need a full process: a light market check against two or three comparable structures is often enough to know whether the sheet in front of you sits at the market or well off it. We run that check for borrowers regularly, and part of the job is saying so when the answer is that the incumbent’s offer is fair and the right move is to take it.
We will read your term sheet and tell you where the give is.
If a sheet is in front of you, or a process is about to put one there, a first conversation is confidential and costs nothing. We read the terms against the market, mark the grid (what is standard, what is negotiable, what is missing), and tell you plainly whether it is worth contesting or worth signing. See how a mandate runs in how we work, or the full range of what we advise on in our services.