A term sheet is a short, written summary of the main terms a lender or funder is proposing for a financing deal, provided before the full legal contract is drawn up. It is not the loan agreement itself; it is a preview of the price, size, and structure so both sides can agree on the big items first.
Think of it as the outline of a deal on one or two pages. Instead of reading through a long contract to find out how much money you would receive, what it costs, and how you would repay it, a term sheet puts those figures in one place. Most term sheets are non-binding, meaning either side can still walk away, though certain clauses (like confidentiality or a good-faith period) may bind you. Reviewing it carefully is your best chance to ask questions and compare offers before you commit.
Key takeaways
- A term sheet summarizes the main proposed terms of a financing deal before the full contract is written.
- Most term sheets are non-binding, though clauses like confidentiality or exclusivity can commit you.
- Core items usually include the amount, cost, repayment schedule, fees, and conditions to be met.
- The term sheet stage is your best opportunity to negotiate and to compare competing offers side by side.
- Because a listed offer still depends on conditions, receiving a term sheet does not mean funding is guaranteed.
How a term sheet works
After you apply for financing and a funder reviews your business, they may respond with a term sheet rather than a final contract. It typically lists the amount offered, the cost of the financing, the repayment schedule, any fees, and conditions that must be met before funding.
You review it, ask questions, and negotiate items that matter to you. Once both sides agree, the funder prepares the formal agreement, which should mirror the term sheet. The main items you will usually see include:
- Amount: how much funding is offered (many business products start at a $10,000 minimum).
- Cost: an interest rate, a factor rate, or total payback figure.
- Repayment: the payment size and how often it is collected (monthly, weekly, or daily).
- Fees: origination, processing, or other one-time charges.
- Conditions: documents or approvals still required, such as bank statements or a minimum FICO of 500+.
A quick example
Suppose a funder sends you a term sheet for a working-capital advance. Using round numbers, it might read like this:
| Item | Proposed term |
|---|---|
| Amount offered | $50,000 |
| Factor rate | 1.30 |
| Total payback | $65,000 |
| Repayment | $500 per business day |
| Estimated term | About 130 business days |
| Origination fee | $1,000 |
This snapshot lets you see, at a glance, that $50,000 in funding would cost $15,000 plus a $1,000 fee, repaid at $500 a day. You can now compare it to another offer or ask the funder to adjust a term before signing anything.
Why it matters to a business owner
A term sheet is your window to negotiate. Once you sign a final contract, the terms are set. The term sheet stage is when you can question the cost, request a longer repayment period, or push back on a fee.
It also makes comparing offers straightforward. Because each term sheet lists the same core figures, you can line up two or three side by side and see which is genuinely cheaper, not just which sounds better on a phone call. No legitimate funder can promise an approval is guaranteed, so treat a term sheet as a serious proposal to evaluate, not a done deal. If you already carry a merchant cash advance and the goal is relief, remember that relief options work by lowering your daily or weekly payment amount, not by erasing the balance.
Related terms
A term sheet often appears alongside these concepts:
- Letter of intent (LOI): a broader statement of intent to move forward, sometimes paired with a term sheet.
- Factor rate: a multiplier used to express the cost of an advance instead of an interest rate.
- Origination fee: a one-time charge for setting up the financing.
- Personal guarantee: a promise to repay from personal assets if the business cannot.
- Funding agreement: the binding contract that follows an accepted term sheet.
Frequently asked questions
Is a term sheet legally binding?
Most term sheets are non-binding, meaning either side can still decide not to proceed. However, specific clauses such as confidentiality or an exclusivity period may be binding. Read the document to see which parts, if any, commit you.
How is a term sheet different from a contract?
A term sheet summarizes the key proposed terms in a short format, while the contract is the full, legally enforceable agreement. The contract should reflect what the term sheet described, but it also includes the detailed legal language the summary leaves out.
Can I negotiate a term sheet?
Yes. The term sheet stage is the natural time to negotiate. You can ask about the cost, the repayment schedule, fees, or conditions before anything is finalized. Once you sign the final contract, the terms are generally locked in.
What should I check on a term sheet first?
Start with the amount, the total cost or payback figure, the payment size and frequency, and any fees. Then look at the conditions you still need to meet, such as document requests or credit and revenue minimums.
Does receiving a term sheet mean I am approved?
Not necessarily. A term sheet is a proposal that usually still depends on conditions being met, such as verifying documents. No funder can guarantee approval, so treat the term sheet as a serious offer to review rather than a final commitment.
