A term sheet sets out the terms a lender expects to offer if underwriting confirms what the buyer has told it: the amount, rate, maturity, collateral, guarantees and covenants. It is not an approval, and almost none of it binds the lender. A commitment letter comes after underwriting and credit approval. It binds the lender to lend on stated terms, subject to a closing list of conditions precedent and an expiry date. In an acquisition, only a signed commitment with conditions the buyer can actually satisfy should be relied on for the purchase agreement's financing timing.
- Indicative terms
- A read on size and structure from summary figures; binds no one
- Term sheet
- Proposed terms, subject to diligence and credit approval; an invitation to underwrite
- Commitment letter
- Credit-approved terms the lender agrees to fund, subject to listed conditions
- What survives to closing
- Conditions precedent: reports, lien releases, equity verification, legal documents
- What to tie the purchase agreement to
- The commitment, with an outside date that allows for its conditions
Three documents, three levels of promise
Lenders speak in stages, and each uses words that sound firmer than they are. Before seeing the full file, a lender may give indicative terms: a likely size, structure and price from summary figures. After reviewing a package and deciding the deal fits its box, it issues a term sheet, sometimes called a letter of interest. After underwriting, third-party reports and credit committee, it issues a commitment letter. In SBA lending the approval is then documented in the SBA loan authorization.
| Stage | What the lender has done | What it binds the lender to | What it usually asks of the buyer |
|---|---|---|---|
| Indicative terms | Read summary figures and the deal outline | Nothing | Nothing, beyond the information needed to give a view |
| Term sheet | Reviewed the package; a loan officer or deal team believes it can get approval | Usually only confidentiality and, sometimes, exclusivity; the terms themselves are non-binding | A signature, often a good-faith deposit toward third-party costs, and sometimes a period of exclusivity |
| Commitment letter | Underwritten the deal and taken it through credit approval | To lend on the stated terms if the conditions are met before the expiry date | Acceptance by a deadline, and in many conventional and private credit deals a commitment fee |
| Loan documents and closing | Drafted the credit agreement, security documents and guarantees | To fund at closing once every condition is satisfied | Signatures, equity in escrow, and the closing deliverables |
Why a term sheet is an invitation to underwrite
The conditions paragraph of an acquisition term sheet says the terms are subject to some version of: satisfactory due diligence, a quality of earnings review, a valuation or appraisal, review of the purchase agreement, checks on the guarantors, verification of the buyer's equity, no material adverse change, and final credit approval. Each item is a door the lender can close. Final credit approval alone means the people who actually decide have not yet seen the deal.
That is not a flaw. A lender cannot commit before it has verified the earnings it is lending against, and a lender that commits without looking will look later and retrade. The term sheet's job is to agree the shape of the loan before either side spends real money on underwriting: amount, rate, maturity and amortization, collateral, guarantees, covenants and fees.
The practical consequence is that the terms most likely to move after a term sheet are the ones that depend on what diligence finds. If the quality of earnings review takes adjusted earnings down, the loan amount comes down with it, because coverage and leverage are computed on the verified figure. If the valuation comes in below the price in an SBA deal, the loan for the purchase cannot exceed it. If a key customer turns out to be a larger share of revenue than the teaser suggested, the lender may add a covenant, a guarantee or a reserve.
A term sheet tells you what the loan will look like if the lender's diligence confirms your numbers. It tells you nothing about whether it will.
What a commitment letter adds, and the conditions that remain
A commitment letter is issued after credit approval. It restates the terms, now approved, and lists the conditions precedent that must be satisfied before the lender funds. It also carries an expiry date: if the loan has not closed by then, the commitment lapses unless the lender extends it. The difference from a term sheet is that the open questions have moved from whether the lender wants the deal to whether the closing deliverables arrive.
Conditions precedent in an acquisition commitment usually fall into three groups. Some are purely mechanical and within the buyer's control. Some depend on third parties. A few remain matters of lender judgement, and those are the ones to read closely.
| Condition | Who controls it | What to watch |
|---|---|---|
| Executed purchase agreement consistent with the terms reviewed | Buyer and seller | Late changes to price, structure or seller financing may need the lender's consent |
| Equity injection verified and in escrow | Buyer | The source of the cash must be documented, not just the balance |
| Lien searches and payoff letters for the seller's debt | Seller and its lenders | An unexpected filing or cash advance can hold the closing; see paying off the seller's debt at closing |
| Lease assignment or new lease, landlord waiver | Landlord | Landlords set their own timetable |
| Business valuation, appraisals, environmental reports | Third parties | Often in hand before an SBA commitment; if not, the commitment is conditioned on it, and a low valuation cuts the loan |
| Tax transcripts matching the returns provided | Taxing authority | Mismatches between returns and transcripts stop SBA closings |
| No material adverse change | Lender judgement | Broadly drafted, this lets a lender walk if trading deteriorates before closing |
| Loan documents satisfactory to the lender | Lender and counsel | Should refer to documents consistent with the commitment, not open-ended discretion |
Two kinds of language weaken a commitment back toward a term sheet: a surviving credit condition, such as subject to final credit approval, which means underwriting is not finished; and a broad material adverse change clause that lets the lender decide, in its discretion, that the business has changed. Some private credit commitments also carry market flex on pricing or structure. Know which your commitment contains before signing a purchase agreement that depends on it.
SBA deals: where the commitment comes from
In a 7(a) acquisition the sequence has an extra layer. A lender with delegated authority under the preferred lender program makes the credit decision itself and obtains the SBA loan number; a lender without it sends the file to SBA for approval. Either way, the lender's commitment letter or approval letter is the document the buyer relies on, and the SBA authorization sets the program terms the closing must follow.
Several SBA requirements can change the loan itself, so lenders prefer to have them in hand before committing; where they are not, the approval is conditioned on them. Where the amount financed, less appraised real estate and equipment, exceeds $250,000, or the buyer and seller are related, SBA requires an independent business valuation, and the loan for the purchase cannot exceed it. From 1 October 2026, under SOP 50 10 8.1, financial due diligence is required on every change of ownership, and a quality of earnings report on acquisitions of $3 million or more excluding real estate. A change of ownership must also show debt service coverage of 1.25x on historical results from that date. An SBA term sheet issued before those reports exist is, by construction, subject to them.
Seller-note standby, the seller's consulting period and the ban on earnouts are program rules; a purchase agreement that drifts from them is not the deal the commitment covers. See how SBA 7(a) loans finance a business acquisition.
Deposits and fees at each stage
Money usually changes hands at two points, and it is worth knowing what each payment buys.
- At the term sheet: many lenders ask for a good-faith deposit. It usually funds third-party costs such as the valuation, a field exam on an asset-based deal, quality of earnings work and environmental reports. Ask whether unused amounts are refunded if the lender declines.
- At the commitment: conventional and private credit lenders commonly charge a commitment fee on acceptance, sometimes payable only at closing and sometimes earned when the letter is signed. Read whether it is refundable if the lender, rather than the buyer, fails to close.
- At closing: origination fees, legal fees for the lender's counsel, and on SBA loans the SBA guaranty fee, which can be financed in the loan.
- SBA limits: SBA restricts what lenders may charge a 7(a) borrower, and compensation paid to anyone who helped obtain the loan is disclosed on SBA Form 159.
Transparent charges nothing before a loan closes: no application fee and no retainer. On SBA loans the lender pays Transparent, not the borrower.
Timing the purchase agreement to the right document
The expensive mistake is a purchase agreement whose financing condition or outside date is keyed to a term sheet. The buyer's deposit may go hard on a timetable that assumes the lender has decided; if diligence then cuts the loan, the buyer must fill the gap, renegotiate, or walk away at a cost.
A buyer-protective approach ties three things together. The letter of intent should anticipate that financing is subject to a commitment on terms at least as good as a stated loan amount and structure; see the financing contingency in an LOI. The purchase agreement's financing condition should be satisfied by a signed commitment, not a term sheet, and should allow for the commitment's own conditions. And the outside date should leave room for the conditions a third party controls, such as the landlord's consent and the valuation, with an extension if the lender is still working.
Keeping more than one lender engaged until a commitment is signed is ordinary practice, not disloyalty. Where a term sheet asks for exclusivity, a short period tied to the delivery of a commitment is reasonable; an open-ended one is not. Where the buyer has not yet signed a letter of intent, a lender can still give a view on leverage, structure and equity need; see lender prequalification before an LOI. The full sequence from package to closing is in the acquisition financing process, step by step.
Getting to a firmer term sheet sooner
The distance between a term sheet and a commitment is mostly made of questions the lender could not answer from what it was given: how the adjusted earnings were built, whether the returns tie to the statements, what the seller owes, where the equity comes from. Answer those in the first submission and the term sheet carries fewer open conditions, and fewer surprises follow it.
Once a borrower's documents are in, Transparent builds the financing model, lender presentation, blind teaser and underwriting memo in a day; built by hand the same package takes at least a week. It goes to the lenders in Transparent's book that write the deal, so the buyer compares term sheets on the same facts. See the package and how we underwrite.
Common questions
- Is a commitment letter legally binding on the lender?
- It binds the lender to lend on the stated terms if the listed conditions are satisfied before the expiry date. How firm it is depends on those conditions: a commitment still subject to credit approval or a broadly drafted material adverse change clause is weaker than one with only closing deliverables left.
- Can the loan amount change after the term sheet?
- Yes, and it often does when diligence changes the earnings the loan is sized on. A lower adjusted figure from a quality of earnings review, a valuation below the price on an SBA deal, or a newly found debt can each reduce the amount.
- What happens if the commitment expires before closing?
- The lender is no longer bound. Lenders often extend a commitment for a deal that is progressing, sometimes asking for updated figures, but it is their choice.
- Should I sign a purchase agreement after the term sheet?
- Buyers often sign once they have a term sheet they are comfortable with, but the financing condition in the purchase agreement should be satisfied by a signed commitment, not the term sheet, with an outside date that allows for the commitment's conditions.
- Is the good-faith deposit refundable?
- It depends on the term sheet. Deposits usually fund third-party reports; amounts already spent are rarely returned, but unused amounts often are. Ask before signing.