Oakridge Business Loans, a small-business funding broker in Bellingham, WA, explains business loan offer documents: a term sheet outlines proposed terms, a commitment letter states the lender's commitment subject to conditions, and the loan agreement is the binding contract. Owners should check conditions precedent, fees and security before signing.
| Term sheet | An outline of proposed terms, often early in the process |
|---|---|
| Commitment letter | The lender's commitment to lend, subject to conditions |
| Loan agreement | The final contract, with security documents and guarantees |
| Conditions precedent | What must happen before funds are released |
| Commitment fee | A fee some lenders charge for the commitment; ask how it is treated |
| Not legal advice | Have an attorney review binding documents |
Three documents, three jobs
| Term sheet | Commitment letter | Loan agreement | |
|---|---|---|---|
| When | Early, after a first review | After underwriting approval | At closing |
| Purpose | Outline the proposed deal | State the lender's commitment and its conditions | Set out the binding obligations |
| Level of detail | Headline terms | Detailed terms and conditions | Full contract with security and guarantee documents |
| What you sign | Often an acknowledgment | Often an acceptance, sometimes with a fee | The agreement and related documents |
Not every lender uses all three. Some smaller or faster products go straight to an agreement; some larger loans add further documents. What matters is knowing which stage you are at, and what signing commits you to.
What a term sheet for a business loan usually contains
A typical business loan term sheet, as an example of structure rather than of any real offer, covers:
- Borrower and guarantors: the business, and any owners asked to guarantee.
- Amount and purpose: what is being financed.
- Rate and term: the interest rate or how it is set, the length of the loan, and any balloon.
- Repayment: payment frequency and amortization.
- Fees: origination, commitment, documentation or other fees.
- Security: the collateral, and whether a UCC filing will cover specific assets or all business assets.
- Covenants: promises the business makes during the loan, such as reporting financial statements.
- Conditions: what must be satisfied before closing.
- Expiry: how long the proposal stays open.
Read the security, guarantee and fee sections at least as closely as the rate. They are often where two similar-looking offers differ most.
What a loan commitment letter looks like
A commitment letter usually follows underwriting approval. It restates the terms in more detail, says that the lender commits to make the loan, and lists the conditions that must be met before it will close. It typically sets a deadline for you to accept, and a date by which the loan must close, after which the commitment expires.
A financing commitment letter can also be useful to third parties. A seller of a business, or an equipment dealer, may ask to see one as evidence that the buyer's financing is in progress.
Conditions precedent
Conditions precedent are the things that have to happen before the lender releases money. Common examples include an appraisal or valuation of collateral, satisfactory review of final financial statements, proof of insurance, evidence that the business is registered and in good standing, signed guarantees, and the payoff of debts the loan is refinancing.
For a Washington business, being in good standing usually means current registration with the Secretary of State and an active state business license; the Washington licensing guide explains both. Any condition you cannot meet is a reason to ask questions before you accept, not after.
Commitment fees
Some lenders charge a commitment fee for holding funds available or for issuing the commitment. Owners often search for what a commitment fee on a loan is; the short answer is that it is whatever the commitment letter says it is. Ask when it is due, whether it is refundable if the loan does not close, and whether it is credited against other fees at closing. No amounts are given here, because they vary by lender and loan.
From commitment to closing
Once conditions are met, the lender prepares the loan agreement, promissory note, security agreement and any guarantees. Compare them line by line against the commitment letter. Differences do happen, and the time to raise them is before signing. Having an attorney review the closing documents for a significant loan is a sensible expense.
How a request works shows where these documents arrive in the process. Start a request when you are ready, or browse the other guides.
By Oakridge Business Loans ยท Updated