Process
Term sheet
A term sheet sets out the terms a lender will lend on. Most of it is not binding, a few clauses are, and your negotiating leverage peaks in the moment before you grant exclusivity.
Also called indicative terms · heads of terms · commitment letter · indicative offer · term sheet vs facility agreement
Some terms move readily, some are customary by facility type, and a few will not move at all.
| Term | Movement |
|---|---|
| Security package | Rarely |
| Margin | A little |
| Arrangement fee | With competition |
| Covenant levels | Readily |
| Debt and EBITDA definitions | Most of all |
Market convention at £3-15m. Individual lenders and structures vary.
What is binding and what is not
A debt term sheet is mostly not a contract. The commercial terms it sets out, margin, leverage, covenants, security, amortisation, are an expression of what the lender expects to offer, and they remain subject to full credit approval and to diligence confirming what the pack said.
A small number of clauses usually are binding, and they are the ones worth reading closely: costs, so that the borrower pays the lender's legal and diligence fees whether or not the deal completes, confidentiality, and exclusivity where it is granted. Those provisions survive even if the facility never happens.
The practical consequence is asymmetric. Signing commits you to a cost and often to a period of exclusivity, while committing the lender to very little. That is normal and not a reason to refuse, but it is a reason to know what the costs clause exposes you to before you sign rather than after.
Indicative against credit-approved
There is a meaningful difference between a term sheet issued by an originator on an indicative basis and one that has been through the lender's credit committee. Both look similar on paper.
An indicative sheet reflects the originator's view of what their institution should approve. A credit-approved sheet reflects what it has approved, subject to conditions. The gap between them is where deals die: terms tighten at credit, leverage comes down, a covenant appears that was not in the draft, or the answer is no.
Which of the two you are holding changes what the document is worth. Where a sheet is indicative, the terms are a starting position rather than a commitment, and originators will usually say what credit is expected to test. Where a process is competitive, knowing which of two lenders has been to credit is often more valuable than a small difference in quoted margin.
Leverage peaks before exclusivity. Once it is granted, the alternatives that made the terms competitive are gone.
| Stage | Relative leverage |
|---|---|
| Teaser out | 30% |
| Offers received | 80% |
| Before exclusivity | 100% |
| After exclusivity | 45% |
| In documentation | 25% |
Relative negotiating position through a competitive process. Illustrative, not measured data.
Which terms move
Not evenly. The security package rarely moves, because it is usually a policy matter rather than a pricing one. The margin moves a little, and mainly where a competitive process is visible. The arrangement fee moves more readily than the margin, particularly on a fund deal where it starts higher.
Covenant levels and headroom move meaningfully, and are usually worth more than an equivalent movement in margin. So does the amortisation profile, which changes the cash cost of the facility more than the rate does on a heavily amortising structure.
The terms that move most are the definitions: what counts as debt, what counts as EBITDA, what is deducted before excess cash flow is struck, how acquisitions are annualised. These change the ratios without touching a single headline number, which is why they are the most valuable and the least contested part of most negotiations.
Comparing offers properly
Ranking indicative offers by margin is the single most common error, because the components that do not appear in the margin frequently exceed the difference between two margins.
The comparison that works is total pounds over the period you expect to hold the facility. That means margin plus base rate, plus the arrangement fee at bank convention near 1% or fund convention of 2 to 3%, plus any original issue discount at 1 to 2 points, plus the commitment fee on any undrawn line, which by Loan Market Association convention runs at roughly 35% of the margin, plus exit fees and prepayment protection if you expect to refinance early.
On a £5m facility held three years, an offer with a margin 50 basis points lower but a 2.5% fee and 1.5 points of discount can cost around £70,000 more than the apparently more expensive one. The ranking inverts, and it inverts on numbers that are all disclosed in the sheet.
The cheaper margin is not the cheaper loan. Offer B wins on headline and loses over three years.
| Offer | Total cost over three years |
|---|---|
| A: higher margin, 1% fee | £1040k |
| B: lower margin, 2.5% fee + OID | £1110k |
Illustrative on £5m over three years using published conventions: fee 1% bank / 2.5% fund, OID 1-2%, commitment fee ~35% of margin. Derived arithmetic.
Exclusivity, and when to grant it
Exclusivity commits you to stop talking to other lenders for a defined period. Lenders ask for it before committing significant diligence spend, which is reasonable, and it is usually the point at which a competitive process ends.
Negotiating leverage peaks in the window after offers are received and before exclusivity is granted. Everything you want in the sheet should be in it before that signature, because after it the alternatives that made the terms competitive no longer exist, and a lender that discovers something in diligence has no counterweight to your walking away.
Two protections are worth asking for: as short a period as the diligence realistically requires, and a cap on the costs you are agreeing to bear. An open-ended exclusivity with uncapped costs is the worst combination available, and both are ordinary requests.
Drift into the long-form documents
The term sheet is a summary of a facility agreement that has not been written yet, and the gap between the two is where agreed positions quietly disappear.
Drift is rarely deliberate. A term sheet says leverage is tested quarterly on a trailing twelve-month basis; the draft agreement defines EBITDA in a way that excludes an add-back everyone assumed was in. It says there is an equity cure; the draft caps it at two rather than the four discussed. It says disposal proceeds are swept; the draft omits the reinvestment right.
The defence is mechanical. The signed sheet read beside the first draft, with every term marked against it, surfaces the drift in one pass rather than in six. Raising the whole list at once rather than as they are noticed. Anything agreed in a call and not written into the sheet should be added by email at the time, because in six weeks it will not be recoverable.
What to settle before signing
Six things, and none of them is the margin.
The definitions of debt and EBITDA, including the treatment of leases, deferred consideration and shareholder loans. The covenant suite, including which tests apply and the headroom against a downside case rather than the plan. The amortisation profile and whether any capital holiday applies during an integration. Whether the arrangement fee bites on the commitment or the drawn amount. What exclusivity period is granted and what costs you are agreeing to bear. And the conditions precedent, since a long list can delay drawdown past the date the money is needed.
Each of these is easier to move before signature than after, and each of them is worth more in cash terms than the twenty five basis points most negotiations are spent on.
Common questions
Is a term sheet legally binding?
Mostly not. The commercial terms remain subject to full credit approval and diligence. A few clauses usually are binding: costs, meaning you pay the lender's legal and diligence fees whether or not the deal completes, confidentiality, and exclusivity where granted. Those survive even if the facility never happens.
What is the difference between an indicative term sheet and a credit-approved one?
An indicative sheet reflects what the originator expects their institution to approve. A credit-approved sheet reflects what it has approved, subject to conditions. The gap between them is where deals die, so ask which you are holding, and in a competitive process knowing which lender has been to credit often matters more than a small margin difference.
Which terms in a term sheet are negotiable?
The definitions move most of all: what counts as debt, what counts as EBITDA, what is deducted before excess cash flow. Covenant levels, headroom and the amortisation profile move readily. The arrangement fee moves more easily than the margin, particularly on a fund deal. The security package rarely moves at all.
How should I compare two term sheets?
In total pounds over the period you expect to hold the facility, not by margin. Include the arrangement fee, any original issue discount, the commitment fee on undrawn amounts, exit fees and prepayment protection. On £5m over three years, an offer with a margin 50 basis points lower but a 2.5% fee and 1.5 points of discount can cost about £70,000 more than the apparently dearer one.
When should I grant exclusivity?
As late as the process allows, and never before everything you want is in the sheet. Your negotiating leverage peaks in the window after offers are received and before exclusivity is signed, because that is the last moment competing alternatives exist. Ask for as short a period as the diligence requires and a cap on the costs you are agreeing to bear.
What is a commitment fee and does it belong in the comparison?
It is a periodic charge on the undrawn portion of a facility, and yes. By Loan Market Association convention it runs at roughly 35% of the margin on the undrawn line. On a structure with a large revolving or delayed-draw tranche you do not expect to use fully, it can be a material part of the real cost.
How do I stop the documents drifting from the term sheet?
The signed sheet read beside the first draft, with every term marked against it, surfaces the drift in one pass rather than in six. Raising the whole list at once rather than piecemeal. Anything agreed on a call and not written into the sheet should be confirmed by email at the time, because six weeks later it will not be recoverable.
Can I negotiate after signing the term sheet?
You can raise points, but your position is materially weaker, particularly once exclusivity has been granted. The lender knows the alternatives have gone and that you have already incurred costs. Anything that matters should be settled before signature, which is why the definitions and covenant package deserve more attention at that stage than the margin does.
The full treatment sits in the guide: debt term sheet negotiation.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.