A term sheet is a lender's proposal: the main terms, before credit approval, and almost never binding except for confidentiality, exclusivity and expense clauses. A commitment letter comes after credit approval and does bind the lender to lend on its terms, but only if every condition in it is met, such as finished diligence, no material adverse change and signed documents. The credit agreement is the final contract that governs the loan for its life. The time to settle anything that matters to you is the term sheet, while you still have alternatives.
- Term sheet
- Proposal before credit approval; business terms are not binding
- Commitment letter
- Binding after credit approval, subject to stated conditions
- Credit agreement
- The final contract; conditions precedent to funding still apply
- What keeps a lender free
- Diligence outs, material adverse change, documentation, market flex
- Lock in early
- EBITDA definition, covenant levels, distributions, prepayment, guarantees
Three documents, three levels of commitment
Every financing moves through the same three stages, though the names vary. A lender first proposes terms, then approves the loan internally and commits to it, then signs the full contract. Each document is longer and more binding than the one before it, and each leaves fewer ways for either side to walk away.
| Term sheet | Commitment letter | Credit agreement | |
|---|---|---|---|
| Also called | Indication of interest, proposal letter, letter of interest | Commitment, approval letter; on SBA loans, the lender's commitment and the loan authorization | Loan agreement, facility agreement, with the note and security documents |
| When it arrives | Before the lender's credit committee | After credit approval | At closing |
| Does it bind the lender to lend? | No | Yes, if its conditions are satisfied | Yes, subject to conditions precedent to each funding |
| What does bind | Usually confidentiality, exclusivity, expense reimbursement or a deposit, governing law | The commitment itself, fees payable on acceptance, the expiry date | Everything: covenants, defaults, remedies |
| Length | A few pages | Several pages, often with the term sheet attached | Dozens of pages, often many more with schedules |
| What is still open | Nearly everything | Diligence items, documentation, closing conditions | Only the conditions precedent to funding |
The term sheet is where the business deal is struck: amount, pricing, amortization, covenants, security and guarantees. The commitment letter converts that deal into an obligation once the lender's credit committee has approved it. The credit agreement turns it into a contract a lawyer can enforce. For a narrower look at the moment a lender becomes bound, see term sheet versus commitment letter.
What each document actually binds
The term sheet. Most term sheets say expressly that they are not a commitment to lend and are subject to credit approval, satisfactory diligence and documentation. The few clauses that do bind are the ones that protect the lender: keeping the terms confidential, an exclusivity period during which you agree not to negotiate with other lenders, and reimbursement of the lender's costs (legal, third-party reports), often backed by a deposit collected when you sign. Read those clauses as carefully as the business terms, because they are the only ones you are actually agreeing to. An exclusivity period that runs longer than the lender needs takes away your alternatives; a deposit that is fully non-refundable even if the lender changes its terms is a one-way bet.
The commitment letter. Once the lender's committee has approved the loan, the commitment letter obliges it to lend on the stated terms. That obligation is real, and it is conditional. A lender that has committed cannot walk away because it changed its mind, but it can decline to close if any condition is unmet. The commitment also expires on a stated date, and a closing that slips past it needs an extension the lender does not have to give.
The credit agreement. The definitive contract sets out every covenant, definition, representation and event of default. Even after it is signed, the first funding happens only when the conditions precedent are delivered: officer certificates, payoff letters, lien searches, insurance endorsements, legal opinions, the funds flow. Later draws on a line or delayed-draw facility have their own conditions, usually that the representations are still true and no default exists.
The conditions that keep a lender free to walk
A commitment is only as firm as its conditions. These are the ones that matter, and how to narrow each:
- Satisfactory diligence. A commitment that is still subject to diligence "satisfactory to the lender in its sole discretion" is barely more binding than a term sheet. Ask for the remaining diligence to be listed item by item: the quality of earnings report, an appraisal, a field exam, a site visit. Once those are delivered, the condition should be met.
- No material adverse change. A MAC clause lets the lender refuse to close if the business or the market deteriorates materially. Ask for it to cover the borrower's business only, not general market conditions, and to be measured from the date of the financial statements the lender relied on.
- Documentation. Closing is conditional on a credit agreement acceptable to both sides. The commitment should say the documents will reflect the term sheet, so the lender cannot introduce new terms during drafting.
- Financial conditions. A minimum EBITDA at closing, a maximum leverage ratio, a minimum equity contribution. Make sure each is measured the same way as in the model the lender approved.
- Market flex. Mostly a feature of larger, syndicated loans: the arranger may change pricing or structure within stated limits if needed to sell the loan to other lenders. In the lower middle market, loans are usually held by one lender or a small club, and a flex clause in a bilateral commitment deserves a question.
A condition the lender alone judges is not a condition; it is an option to walk away.
Which terms tend to move between term sheet and close
Pricing and loan amount rarely move unless diligence finds something. The terms that do move are the ones the term sheet left vague, because the lender's lawyers fill the gaps in the lender's favor. These are the provisions worth pinning down in the term sheet itself:
| Provision | How it tends to move | What to lock in at term sheet |
|---|---|---|
| Covenant EBITDA definition | Add-backs agreed in conversation are omitted or capped in the draft | The named add-backs, any cap, and the pro forma treatment of acquisitions; see how EBITDA is defined |
| Covenant levels and headroom | Levels set off a model that later changes | Levels with stated headroom to your base case, and the test dates |
| Distributions | Tax distributions left unaddressed or conditioned on tests | An express tax distribution carve-out and any owner distribution basket |
| Prepayment premium | Added or lengthened in the draft | The premium schedule, and exceptions for a sale of the company |
| Guarantees | Personal guarantee described generally, then drafted as unlimited | Who guarantees, for how much, and whether it steps down; see avoiding a personal guarantee |
| Change of control | Definition drafted to catch estate planning and minority sales | Permitted holders and thresholds; see change of control |
| Equity cure | Omitted or limited | The number of cures and how cure money is counted; see equity cures |
| Reporting | Monthly reporting added where quarterly was discussed | Frequency, deadlines and whether audited statements are needed |
| Permitted debt and acquisitions | Baskets drafted small | Room for equipment financing and add-on acquisitions in the plan |
None of these is unusual to ask for at term sheet stage, and lenders expect sophisticated borrowers to raise them. They are much harder to win once you have signed exclusivity, paid a deposit and told the seller you have financing.
How the sequence runs on an SBA loan
SBA loans follow the same pattern with different names. The lender's term sheet or letter of interest comes first. After the lender approves the credit, and SBA's guaranty is in place (under delegated authority for a Preferred Lender, or through SBA for others), the lender issues a commitment and the loan authorization sets out the terms and conditions SBA requires. SBA-specific conditions are not negotiable in the way conventional terms are: every owner of 20% or more personally guarantees the loan, a seller note counts toward the equity injection only on full standby for the life of the loan, and on a change of ownership the lender needs an independent business valuation where the amount financed, less appraised real estate and equipment, exceeds $250,000 or the buyer and seller are related, and the loan for the purchase cannot exceed that valuation. From 1 October 2026 financial due diligence is also required on every change of ownership, so a commitment on an SBA acquisition will list it among its conditions. What remains negotiable is mostly business-specific: collateral, reporting and the treatment of any non-SBA debt.
Getting term sheets worth comparing
A term sheet is only as good as the file behind it. A lender that has seen incomplete figures writes a vague term sheet with wide conditions, and fills the gaps later. A lender that has seen a complete package can commit to specifics, and the conditions list shrinks to real diligence items.
That is the reason Transparent prepares the full lender package before approaching lenders: the financing model, lender presentation, blind teaser and underwriting memo, built in a day once the documents are in. With the package in hand, several lenders from a book of 1,800+ can respond to the same facts, and the term sheets can be compared line by line on the provisions in the table above, not just on rate. What goes into the package is set out separately. Transparent charges nothing before a loan closes.
Common questions
- Can a lender change the terms after I sign a term sheet?
- Yes. A term sheet is not a commitment, so a lender can change terms or decline after credit review or diligence. What it cannot usually do is keep a deposit it promised to refund, or hold you to exclusivity past the stated period. A signed commitment letter is much harder to change, though its conditions still have to be met.
- Is a commitment letter legally binding?
- On the lender, yes, subject to its conditions and expiry date. If every condition is met and the lender refuses to close, it may be liable. On the borrower, commitment letters usually bind only the fee and expense provisions; you are rarely obliged to borrow, but you may owe the commitment fee either way.
- What is market flex, and should I accept it?
- Market flex lets an arranger change pricing or structure, within limits, if it cannot sell the loan to other lenders on the original terms. It belongs in syndicated deals. In a loan one lender will hold, ask why it is there; if it stays, cap how far pricing can move and what structural changes are allowed.
- How long is a commitment letter good for?
- Until its stated expiry date, which the lender sets to match the expected closing. If closing slips, you need a written extension, and the lender may refresh its diligence or terms before granting one. Build the expiry into the purchase agreement timeline in an acquisition.
- Should I sign exclusivity with a lender?
- Only after you have compared the alternatives, and only for as long as the lender genuinely needs to reach a commitment. Exclusivity is often reasonable once you have chosen a lender. Signing it with the first term sheet ends the competition that produces better terms.
- What is the difference between conditions precedent and commitment conditions?
- Commitment conditions decide whether the lender must sign the credit agreement. Conditions precedent, in the credit agreement itself, decide whether money actually moves at closing: payoff letters, lien searches, certificates, insurance and the like. Both lists should be agreed well before the closing date.