Quick answer
A term sheet is a short document summarising the main terms a lender is prepared to offer: loan amount, term, security, fees, conditions and key covenants. It's common on larger or more complex business loans, such as commercial property, development and private lending. Most of it isn't legally binding, but signing it usually commits you to certain costs, like valuation and legal fees, and sets the framework the final loan documents follow.
Key points
- A summary of proposed loan terms, issued before formal documents
- Mostly non-binding, but fee, exclusivity and confidentiality clauses often are binding
- Signing usually starts the clock on valuation and legal costs
- Anything you don't negotiate here is much harder to change later
The term sheet is the first time a lender puts its proposal in writing, and it’s the cheapest moment to change it. Once you’ve signed and paid for valuations and lawyers, walking away gets expensive and renegotiating gets awkward.
What goes into a term sheet?
Term sheets vary in length, from one page to a dozen, but most cover:
- Borrower and guarantors: the company, trust or individuals who will sign
- Facility: amount, type (term loan, line of credit, construction facility) and purpose
- Term: how long, and any extension options
- Security: which property or assets, and in what ranking
- Maximum LVR: the cap that will apply once the valuation is in
- Fees: establishment, line, valuation, legal, and any exit fee or break costs
- Covenants: financial tests and reporting you’ll need to meet
- Conditions precedent: everything the lender needs before it advances funds
Interest and the overall dollar cost should be there too. If the document lists fees as percentages, convert each one into dollars so you know what you’ll actually pay.
Where it sits in the lending process
| Stage | What it is | How firm |
|---|---|---|
| Indicative offer | Early outline based on what you’ve told the lender | Very soft |
| Term sheet | Detailed proposal you sign to proceed | Mostly non-binding, with some binding clauses |
| Conditional approval | Credit has said yes, subject to items | Firmer |
| Letter of offer | Final terms with loan documents | Binding once accepted |
Some lenders merge stages, so you may receive a term sheet that doubles as an indicative offer. Read the heading and the fine print rather than assuming.
The parts that bite even if you don’t proceed
Three clauses deserve more attention than the headline amount:
- Costs. Many term sheets say you’ll pay the lender’s valuation and legal costs whether or not the loan settles. On a commercial property deal that can run into thousands of dollars.
- Exclusivity. You may agree not to seek finance elsewhere for a set period. That can leave you exposed if the lender then tightens terms.
- Commitment or application fees. Check whether any upfront fee is refundable if the lender declines or changes the deal.
Got a term sheet you’re unsure about? Ask us to sense-check the bigger picture.
Worked example: a development term sheet
A small Adelaide builder plans four townhouses and receives a term sheet for construction finance:
- Facility: up to $1.6m, capped at a stated percentage of the as-if-complete valuation
- Term: 18 months
- Security: first mortgage over the site plus director guarantees
- Fees: $16,000 establishment, $4,500 valuation, legal costs payable on signing
- Conditions: fixed-price building contract, development approval, two pre-sales
The builder signs and pays for the valuation. It comes back lower than expected, so the lender’s LVR cap trims the facility to $1.45m. Because the term sheet tied the amount to valuation, the reduction is within its terms. The builder now needs to fund the $150,000 difference or find a second lender. Testing scenarios in our loan cost comparison calculator before signing would have shown how much buffer was needed.
Related terms
- Indicative offer: a lighter, earlier outline of terms.
- Letter of offer: the formal, binding offer.
- Establishment fee: a common fee on term sheets.
- Due diligence: the checks a lender runs after you sign.
Comparing terms, or still looking for a lender?
If one term sheet doesn’t stack up, or a bank has taken too long to issue one, there may be other ways to fund the deal. Banks often give the sharpest terms on property and development loans, so if yours is engaged, keep that conversation going. When it isn’t, specialist and private lenders can move quickly.
Getting started with us is simple: a handful of questions, about a minute, and no credit file search attached to it. Your enquiry is read by one person here rather than being shopped around, and they’ll ring you to talk it through. Include the real amount, the security and your deadline so we can steer you to a sensible option first up.
Frequently asked questions
Is a term sheet legally binding?
Usually not as to the loan itself. The lender isn't obliged to lend and you aren't obliged to borrow. But clauses dealing with costs, exclusivity and confidentiality are often expressed to be binding, so read the term sheet as if parts of it are a contract.
How is a term sheet different from a letter of offer?
A term sheet comes earlier and is shorter. A letter of offer follows credit approval and sets out the final terms, usually with the loan agreement and security documents attached or to follow. Accepting a letter of offer is a much firmer commitment.
Can I negotiate a term sheet?
Yes, and this is the best time to do it. Ask about the amount, term, fees, early repayment costs, financial covenants and the list of conditions. Lenders expect some back and forth before a term sheet is signed.
What if the valuation comes in lower than the term sheet assumed?
The lender will usually reduce the loan to keep within its maximum loan-to-value ratio, or ask for more security. That's why the term sheet often states the LVR limit rather than just a fixed dollar amount.
Do small business loans come with term sheets?
Smaller, standardised loans often skip straight to an online offer or letter of offer. Term sheets are more common where the deal is tailored, the amount is larger or several parties are involved.