A term sheet is a lender's written expression of interest: the terms it expects to offer if its credit committee approves and diligence confirms what it has been told. Apart from confidentiality, expenses and any exclusivity clause, it binds the lender to nothing. A commitment letter comes after credit approval and does bind the lender, but only if every condition in it is met by a stated date. A lender is committed when you hold a signed commitment whose conditions are limited and within your control. Keep other lenders moving until then.
- Term sheet
- Proposed terms before credit approval; not binding on the loan
- Commitment letter
- Terms after credit approval; binding, subject to conditions
- The dividing line
- Credit committee approval
- What still lets a lender walk
- Unmet conditions precedent and the expiry date
- When to stop shopping
- After a signed commitment with limited conditions
- What to watch in both
- Exclusivity, deposits and fees, expiry
The ladder from interest to money
A lender's promise firms up in steps, and the words used for each step are not standard. What matters is where the lender stands on two questions at each point: has its credit committee approved the loan, and has it signed something that obliges it to lend?
| Stage | What has happened at the lender | Binding on the lender? |
|---|---|---|
| Conversation or soft quote | A banker has looked at a summary | No |
| Letter of interest or indication | A banker or small team has reviewed some figures | No |
| Term sheet | Proposed terms, often screened by credit, not formally approved | No, apart from confidentiality, expenses and any exclusivity |
| Credit approval | The credit committee has approved, usually with conditions | Not yet; approval is internal |
| Commitment letter, signed by both sides | The approved terms are offered in writing and accepted | Yes, subject to its conditions and expiry |
| Loan documents signed and conditions met | The final contract governs | Yes; funding follows |
Two stages cause most of the misunderstanding. A term sheet feels like an offer because it has numbers on it, but it has usually not been through the lender's credit committee. And credit approval feels like a commitment, but until the lender signs a commitment letter it can still revise or withdraw, often without saying why.
Term sheet and commitment letter, side by side
| Term sheet | Commitment letter | |
|---|---|---|
| Issued | Before credit approval | After credit approval |
| Purpose | To agree the main terms worth underwriting | To promise the loan on approved terms |
| Binding on the loan | No | Yes, if the conditions are satisfied |
| Binding provisions | Confidentiality, expense reimbursement, sometimes exclusivity | The commitment itself, fees, expenses, indemnity |
| Detail | Amount, rate, term, collateral, guarantees, main covenants | Adds covenant levels, key definitions and the conditions list |
| Money usually asked | A deposit toward third-party costs | A commitment fee on acceptance, sometimes credited at closing |
| Expiry | Often open-ended, or a short acceptance window | A stated date by which the loan must close |
| Can you rely on it? | For choosing a lender to underwrite with | For timing the closing, if the conditions are ones you control |
The term sheet is where to negotiate. It is the last point at which several lenders are competing, and the terms it leaves vague, such as covenant levels, the EBITDA definition and personal guarantee scope, tend to be settled in the lender's favor later. Our page on term sheet, commitment and credit agreement covers which terms usually move between stages.
Reading the outs: conditions precedent
A commitment letter binds the lender only if its conditions precedent are met. The list decides how firm the commitment really is. Some conditions are objective and in the borrower's control; others leave the lender free to decide it is no longer satisfied.
| Condition | How firm it leaves the commitment | What to ask for |
|---|---|---|
| Due diligence satisfactory to the lender in its sole discretion | Soft: a general right to walk | Diligence finished before the commitment, or a named list of items still open |
| No material adverse change | Depends on the definition | A definition tied to the business, not to markets generally. See material adverse change |
| Documents satisfactory to the lender | Soft if the commitment is thin on terms | Covenant levels and definitions set out in the commitment itself |
| Minimum EBITDA or liquidity at closing | Objective; can still fail in a weak quarter | A level with room below the latest results |
| Appraisal, valuation or field exam results | Objective, but the outcome is not in your control | Order early; know the threshold before signing |
| Equity injection verified | In your control | Agree what source documents prove it |
| Insurance, lien searches, landlord waiver, payoff letters | Mechanical | Start them as soon as the commitment is signed |
"Limited conditions" means the lender has finished deciding. The fewer judgement calls left in the conditions list, the more the commitment is worth.
Expiry and money at each stage
Money usually changes hands twice before closing, and neither payment makes the loan certain.
- With the term sheet, many lenders ask for a deposit to cover third-party work they will commission: legal review, a field exam, an appraisal, a quality of earnings review. Read whether the unspent part is refunded if the loan does not close, and whether the lender can spend it before credit approval.
- With the commitment, some lenders charge a commitment fee when the borrower accepts. It may be credited against closing costs, and it is often not refundable if the borrower walks away. Private credit funds are more likely to charge one than banks, and SBA rules restrict which fees an SBA lender may charge the borrower at all.
- Expiry. A commitment lapses on a stated date. If closing slips past it, the lender can re-underwrite, reprice or decline, and an extension may carry a fee. Set the date with the purchase agreement or payoff timetable in mind.
Transparent charges nothing before a loan closes: no application fee, no retainer. On SBA loans the lender pays Transparent, not the borrower. Lender deposits and fees are a separate matter, and each one should be compared across offers alongside the rate; see interest rate vs all-in cost.
Keep alternatives alive until the commitment is signed
A term sheet is an expression of interest. Treating it as a decision is how owners end up with no alternative when the credit committee comes back with a smaller amount, a tighter covenant or a broader personal guarantee. The practical rules:
- Avoid exclusivity at the term sheet stage, or keep it short and tied to a credit decision by a named date. An exclusivity clause is one of the few term sheet provisions that does bind, and it binds you.
- Run more than one lender through credit. With two lenders underwriting in parallel, a decline or a retrade from one does not cost the deal. It also keeps both honest on the terms that move late.
- Match the purchase agreement to the commitment. In an acquisition, do not let the financing contingency lapse, or sign away the right to walk, on the strength of a term sheet.
- In a refinancing, do not give notice to the existing lender or let a line lapse until the new commitment is signed and its conditions are close to done. See moving loans to a new bank.
- Tell the other lenders when you sign. A courteous close keeps the door open if the committed lender's conditions cannot be met.
Running several lenders at once is practical only when each receives the same complete package. Transparent's lender book holds 1,800+ lenders, and once a borrower's documents are in, Transparent builds the full lender package, including the financing model, lender presentation, blind teaser and underwriting memo, in a day, so more than one lender can take the same file to its credit committee at the same time.
How it works on an SBA loan
SBA 7(a) loans follow the same logic with one extra layer. A lender with delegated authority under SBA's Preferred Lender Program can approve the loan itself; other lenders send it to SBA. Either way, the SBA loan authorization sets the terms SBA has guaranteed, and the lender's commitment letter sits alongside it with the lender's own conditions. A pre-qualification letter from an SBA lender is not a commitment; see lender prequalification before an LOI.
The conditions on SBA acquisition loans are heavily rule-driven: the independent business valuation where the amount financed, less appraised real estate and equipment, exceeds $250,000; on a complete change of ownership, the equity injection of at least 10% of total project costs, with any seller note counted toward it only on full standby for the life of the loan and for no more than half; and, from 1 October 2026, financial due diligence on every change of ownership and a quality of earnings report on acquisitions of $3 million or more excluding real estate. Each can be planned for before the commitment, which is the best way to keep the conditions list short. See SBA preferred vs standard lenders for how delegated authority changes the path.
Common questions
- Is a term sheet legally binding?
- Not as to the loan. Most term sheets say expressly that they are not a commitment to lend. The provisions that usually do bind are confidentiality, reimbursement of the lender's expenses and any exclusivity clause, so read those before signing.
- Can a lender back out after signing a commitment letter?
- Only if a condition is not met or the commitment expires. That is why the wording of the conditions matters: a condition such as diligence satisfactory to the lender in its sole discretion leaves a wide exit, while objective conditions leave very little.
- Does credit approval mean the lender is committed?
- Not by itself. Approval is an internal decision, often with conditions of its own. The lender is committed when it signs a commitment letter, or loan documents, that the borrower accepts.
- Should I pay a deposit with a term sheet?
- A deposit toward third-party costs such as legal work, appraisals or field exams is normal. Check what it covers, when the lender may spend it, and whether any unspent balance is refunded if the loan does not close.
- How many term sheets should I get?
- Enough to have a real alternative at every stage until the commitment is signed. In practice that means at least two lenders willing to take the loan to credit, with complete and identical information.
- Is an SBA pre-qualification letter a commitment?
- No. It says a lender has looked at the deal and expects it to fit SBA rules and its own policy. The commitment comes after underwriting and approval, alongside the SBA loan authorization.