Signed, Sealed… Not Quite Delivered: A Guide to Term Sheets

If you’ve read enough of our articles, you’ll know we’re partial to a bit of imaginative scene-setting. So today, friends, let’s imagine you’re building a house (and no, Kevin McCloud and the Grand Designs crew are nowhere to be seen).

Before you break ground, order overpriced reclaimed timber or debate the merits of a solar-panelled roof, you need a blueprint – something that says, “Here’s what we’re building, and roughly how we’ll do it.” That’s what a term sheet is in a lending transaction.

It’s the architectural sketch before the lawyers show up with their steel-toe capped boots and start drafting the full facility agreement. It lays out the key commercial and legal terms both sides intend to go ahead with. While not usually legally binding, it’s crucial – setting the stage, aligning expectations, and making sure everyone is building the same kind of house.

So, whether it’s a £10 million term loan, a revolving credit facility, or a multi-tranche project finance deal with more moving parts than a flat pack wardrobe, the term sheet is where the foundations are laid.

When Do You Need a Term Sheet?

Short answer: when things are getting serious.

A term sheet usually appears after the borrower and lender have flirted with the idea of doing a deal and decided there’s mutual interest. It’s the bridge between a chat over coffee and a 100-page facility agreement. They’re especially useful when a deal is complex, high value, time-sensitive – or about to be dissected by a credit committee with a passion for red ink.

Common Scenarios:

1. Bilateral and Syndicated Loans
These are your classic term sheet stomping grounds – the bread and butter of lending transactions. Once the terms like loan amount and tenor are broadly agreed – usually via a flurry of emails and a slightly overworked spreadsheet – the lender issues a term sheet.

The term sheet lays out the commercial essentials: interest margins, fees, financial covenants, repayment terms, and any conditions the borrower needs to tick off before the funds are released. It’s also where security is outlined – in other words, what the lender gets to grab if things go a bit topsy turvy.

Think: a £50 million facility, repaid over five years, with a margin over SONIA, covenants to keep financial discipline in check, and security over key assets – including, potentially, the office kettle (if it’s worth anything).

2. Acquisition Finance
In the world of M&A, time waits for no one – least of all lenders. When buyers need to show they’ve got financing lined up (usually to impress a seller juggling a queue of suitors), the term sheet becomes Exhibit A.

It’s usually attached to a debt commitment letter to prove that funding is available – subject to final due diligence. For the buyer, it’s the difference between saying “we’re working on it” and “we’re good to go.”

Take a private equity firm in a competitive auction: a unitranche term sheet from a lending syndicate won’t get the deal done, but it will keep them in the running. It’s not binding, but it’s serious enough to show they mean business.

3. Project and Infrastructure Finance
Now we’re into the heavyweight division. Multi-phase, multi-party, multi-year undertakings that make bilateral loans look like a quick cashpoint withdrawal.

In these deals, a term sheet is essential – not just to align borrower and lender, but to get the whole cast of developers, contractors, government bodies, and funding partners reading from the same script. It brings structure to the chaos and helps keep the whole thing from going off the rails before the legal documents have even left the station.

With multiple tranches, currencies, funding phases and stakeholders, the term sheet acts as an anchor – and often makes the rounds with export credit agencies, public sector partners, and institutional lenders, just to make sure everyone is still smiling (and funding).

4. Internal Approvals (On Both Sides)

Before anyone commits – whether it’s the lender’s credit committee or the borrower’s board, the term sheet gets its moment in the spotlight.

For lenders, it provides a digestible summary of the deal: pricing, covenants, structure, risks. Enough to secure internal sign-off without unleashing the full facility agreement and the legal team that comes with it.

For borrowers, it gives key stakeholders – treasury teams, boards, investment committees – a clear view of what’s being offered, and more importantly, a chance to raise the alarm before something awkward gets buried in the fine print. An interest rate that pushes you over your cost of capital? A security package that reads like a hostage note. Better to catch it now.

And if multiple lenders are involved, term sheets become a helpful comparison tool – particularly in club deals or when trying to squeeze a few basis points off the margin.

5. Smaller Deals (Yes, Even the Modest Ones)

Even in simpler deals, a short, a punchy term sheet is your best ally. It keeps expectations clear, legal fees low, and stops the dreaded “I thought you meant…” conversations turning into expensive misunderstandings.

It’s especially helpful when no one wants to rack up legal fees just to confirm that both parties are on the same page. Clarity upfront, fewer headaches later. Simple as that.

To summarise, if there’s any meaningful time, money, or risk involved, a term sheet is the sensible place to start. It lines up expectations, flags potential issues early, and makes sure everyone’s building the same house – not one party drawing up plans for a bungalow while the other imagines a castle.

Is a Term Sheet Legally Binding?

Mostly, no. But sometimes, yes.

Term sheets are generally non-binding. They’re more like a handshake than a contract. But it’s common to include a few binding clauses such as confidentiality and cost reimbursement.

For instance:

• A borrower may want assurance that sensitive information isn’t casually forwarded to half the deal team.
• A lender may want its legal and due diligence costs reimbursed, even if the borrower ghosts them before signing anything.

These clauses should be clearly labelled. Simply scribbling “subject to contract” on the cover page isn’t always enough – especially in cross-border deals where the rules of engagement differ. So, some careful drafting is required to avoid unintentionally locking yourself into something you’d rather walk away from.

What’s in a Term Sheet?

The format may vary, but most term sheets cover the same core elements:

• Parties involved
• Type of facility (term loan, revolving credit, bridge, etc.)
• Amount being borrowed
• Purpose (acquisition, capex, refinancing, or just a rainy day)
• Tenor (loan term), repayment schedule, and any availability period
• Pricing: interest rates, fees, margin over benchmark rates, and any hedging requirements
• Covenants: financial (like leverage or interest cover ratios) and non-financial (like information undertakings)
• Events of default: the big red buttons
• Conditions precedent: things to tick off before drawdown
• Security and guarantees

In syndicated deals, you’ll also see:

• Majority lender rules (usually two-thirds needed to amend key terms)
• Transfer provisions for lenders who want to sell down their positions

Other favourites include tax gross-up clauses, governing law, jurisdiction, and of course, confidentiality. It’s less of a legal script and more of a scene outline – just enough to set the direction, without locking anyone into their lines too early.

Key Negotiating Points: Lenders vs Borrowers

This is where the strategic dance off begins.

The Lender’s View:

Lenders want enough detail to secure internal approval, while keeping terms flexible enough to revisit once due diligence is complete. They’ll often include a disclaimer like “indicative only – not an offer of finance”, and use sweeping phrases like “customary representations and warranties” to keep things suitably vague for negotiation down the line.

They also care deeply about:

• Covenants
• Events of default
• Conditions precedent
• Prepayment protections (i.e. fees if you repay early)
• Transfer rights (especially in syndicates)

The Borrower’s View:

This is the best time to negotiate – before the terms start getting buried in annexes and definitions, and the real fun begins. Borrowers should focus on:

• Specificity – watch for vague terms that can morph into something more painful later
• Financial covenants – ensure they’re achievable
• Security – don’t give away the crown jewels without good reason
• Fees and costs – particularly those lurking in the fine print about reimbursing the lender’s expenses

Borrowers may also want to:

• Limit the lender’s walk-away rights
• Lock in commitments until a certain date

Ultimately, the term sheet is a battlefield of detail vs ambiguity. Both parties want to say just enough – without painting themselves into a corner.

The Last Word

The term sheet is where the deal gets dressed before it goes out in public. It sets expectations, steers negotiations, and gives everyone involved a chance to nod in agreement before things get expensive. It’s not just about what’s agreed – it’s about what’s avoided: namely, misunderstandings, mismatched assumptions, and a 3am realisation that what you signed up for wasn’t what you thought you’d agreed.