A nonbinding term sheet is an instrument used in commercial lending. The document achieves several objectives.
1) Delineates the terms and structure under which the lender is willing to consider a credit request. The term sheet is usually prepared prior to a full underwriting of the loan request. Nevertheless by the time the term sheet is issued, the commercial loan officer has already discussed the loan with the credit officer, and both are in preliminary agreement about the proposed terms and structure.
2) Formalizes the process and makes it more likely that the borrower will accept the proposed commercial loan once the credit request gets formally approved by the lender.
3) In some cases, the prospective borrower is asked to submit a deposit for the process to move forward. This is made to incentivize the borrower to follow through if the lender is able to approve the proposed loan. It is also used as a deterrent for the borrower to shop around a “commitment letter” to other lenders looking for one to beat the terms.
The term sheet layout is very similar to a “commitment letter”. It specifies the parties to the transaction (borrowing entity and guarantor). It delves into terms and structure (loan amount, maturity, interest rate, fee, collateral, etc.). It also lists ongoing reporting requirements, and covenants for the facility. There is an important difference between a commercial loan term sheet, and a commercial loan commitment letter. The term sheet has nonbinding language allowing the lender to decline the request after going through its due diligence procedure.
I am a big believer in real life examples as a learning tool, and decided to provide a sample term sheet below. It is based in a real term sheet provided to a friend’s customer, but the names of the borrower, bank, terms, and structure have been changed to protect the innocent. As far as I know there is no Anytown Bank.
See sample commercial loan term sheet below
May 6, 2012
Mr. John Smith
1st Main St.
Thank you for giving Anytown Community Bank (the “Bank”) the opportunity to review your credit request. This term sheet is a basic outline of the terms and conditions currently being contemplated. This is not a commitment to lend, but merely an expression of our interest in providing the aforementioned financing request. The terms and conditions are subject to change in whole or in part once our due diligence, credit analysis and underwriting is complete.
Borrower: ABC Corp.
Amount: $2,500,000 Revolving Line of Credit under the Ex-Im Bank Working Capital Guaranteed Program.
Purpose: Advances on Eximbank eligible foreign accounts receivable, exportable inventory and export orders to (a) on first disbursement refinance existing debt and (b) to acquire exportable inventory and pay for direct and indirect costs related to the purchase of exportable goods.
Collateral: Blanket lien on the corporate assets of borrower (including first lien on accounts receivable and inventory). The advances shall be limited to the following borrowing base formula:
“Export-Related Borrowing Base” means, at the date of determination thereof, the sum of (a) 90% of the Eligible Export-Related Accounts Receivable Value and (b) 75% of the Eligible Export-Related Inventory Value; provided, however, that the portion of the outstanding principal balance that is supported by Export-Related Inventory Value shall never exceed 60% of the total amount outstanding under the Revolving Line of Credit.
“Eligible Export-Related Accounts Receivable” means all Export-Related Accounts permitted to be included in the Export-Related Borrowing Base pursuant to the Borrower Agreement; provided that “Eligible Export-Related Accounts Receivable” shall not include any Account Receivable that (i) is not covered by the Ex-Im Bank Guarantee (e.g. sales terms not in compliance with the Country Limitation Schedule then in effect, due and payable more than 180 days from the date of invoice), (ii) is due from a company affiliated with the Borrower or any guarantor (except for Permitted Affiliate Accounts Receivable), or (iii) the Bank may from time to time deem to be ineligible.
“Export-Related Inventory” shall mean Inventory of the Borrower that has a minimum of 50% United States Content, that is located in the United States, that has been purchased, manufactured or otherwise acquired by the Borrower for resale pursuant to a written export order or contract for the purchase by a buyer of finished goods or services and that is intended for export from the United States.
“Eligible Export-Related Inventory” means all Export-Related Inventory that is permitted to be included in the Export-Related Borrowing Base pursuant to the Borrower Agreement; provided, that “Eligible Export-Related Inventory” shall not include any Inventory that: (i) is not covered by the Ex-Im Bank Guarantee; (ii) is located at a facility not owned by the Borrower unless a landlord or warehouseman waiver (in form and content acceptable to the Bank) is obtained with respect to each such facility and the Bank gives its prior written consent; (iii) is owned by a company affiliated with the Borrower or any guarantor or by any guarantor; or (iv) the Bank may from time to time deem to be ineligible.
Interest Rate: Floating at one month Libor + 3.75% with a 5% floor
Facility Fee: $100 Ex-Im Bank application fee; and 1.5% guarantee fee on the facility amount due and collectable at closing.Borrower shall pay all costs, expenses and fees (including, without limitation, recording and attorney fees and cost and audit fees) associated with this transaction.
Maturity: One year from closing
Payments: Principal payments due at the earlier of (i) receipt of payment of any financed receivable, (ii) 180 from disbursement date or (iii) facility expiration date. Interest due monthly.
Guarantors: John Smith
Documentation: Borrower agrees to execute any and all documents necessary for Lender to perfect its first security interest in the collateral.
- Annual CPA Reviewed financial statements due within 120 days of fiscal year end.
- Quarterly management-prepared financial statements and covenant compliance certificate due within 45 days of each fiscal quarter end.
- Monthly borrowing base certificate along with a detailed account receivable aging, accounts payable aging, export order listing and inventory report due within 15 days of month end reconciling to their general ledger balances. (Sample borrowing base is attached).
- Borrower’s and Guarantors’ annual federal tax returns (including all schedules) due within 30 days of filing.
- Guarantor’s personal financial statement to be submitted within 30 days from year-end or no later than 12 months from last submission.
- Borrower shall at all times maintain a Tangible Net Worth of not less than $ 750,000 measured quarterly. “Tangible Net Worth” shall mean total assets of Borrower less Total Liabilities of Borrower, less intangibles of Borrower, less loans and advances to Affiliates, plus Subordinated Debt.
- Borrower shall at all times maintain a Debt to Tangible Net Worth of less than 4.0x measured quarterly defined as Total Liabilities (less Subordinated Debt) divided by Tangible Net Worth
- Borrower shall at all times maintain a minimum Debt Service Coverage Ratio of 1.5x, measured quarterly on a rolling 12-month basis defined as EBIDA (Earnings before Interest, Depreciation and Amortization) less Distributions and Withdrawals divided by the Current Portion of Long Term Debt plus Interest Expense
- Borrower shall maintain with the Bank its primary operating account and a cash collateral account wherein client payments will be deposited.
- All existing short-term bank and New Continent debt and the Wachovia term debt to be repaid prior to or at closing. The initial advance must not exceed 80% of the net borrowing base availability.
- Additional Indebtedness to be approved by Bank.
- Subordination of loans from shareholders or persons/companies related to or owned by shareholders
- Loan payments shall be set up on auto debit.
- Exclusion from Borrowing Base of all Receivables on cash or less than 15 day sales terms.
- Maintenance of Credit Insurance policy issued by Ex-Im Bank
- Field audit to be performed pre-funding. Advance rates and any other supporting documentation accompanying the borrowing base monthly submission subject to findings in field audit. Field Audit to be performed semi-annually thereafter by Bank personnel or outside auditors of Bank’s choice, costs to be borne by Borrower.
Again, this is a term sheet and not a commitment to lend. These terms and conditions are subject to change. Please note that this outline does not contain all of the terms, conditions and other provisions involved in this transaction that would be more fully described in the definitive legal document(s) for the proposed transaction.
Should you wish to request Anytown Bank proceed with obtaining formal credit approval under the general terms and conditions outlined herein in this non binding term sheet, please sign where indicated below and enclose a check payable to Anytown Bank in the amount of $10,000 to cover the cost of continued due diligence and underwriting by Friday, May 18 2012.
Should Anytown Bank obtain formal credit approval under terms and conditions materially similar to those presented in this discussion draft, these monies will be applied towards closing costs. Should Anytown Bank not obtain formal credit approval under terms and conditions materially similar to those presented in this discussion draft, these monies will be returned to the Borrower, net of any third party costs. Should you elect not to accept an approval materially similar to the terms herein, these monies shall be retained by Anytown Bank to cover the costs of due diligence in seeking to provide credit approval for the subject loan.
Very truly yours,
ACCEPTED BY: ABC Corp.