Decoding the SBA Loan Term Sheet: A Guide for Business Owners
An SBA loan term sheet is a document the U.S. Small Business Administration (SBA) provides borrowers that details the terms of an SBA loan. This non-binding document includes important information, such as maximum loan amounts, down payment, interest rates, fees, repayment schedules, and collateral requirements. It helps entrepreneurs understand the financial obligations and structure of the loan before moving forward with the final agreement, which is particularly important for those looking to buy or sell a business.
Purpose of an SBA Loan Term Sheet
All essential terms of a Small Business Administration loan are outlined on an SBA loan term sheet. It gives the borrower and lender an opportunity to confirm the details of the small business loan before it’s official. While the term sheet is provided to the buyer, not the seller, understanding these terms can benefit both parties in the transaction.
For buyers, the term sheet clarifies their financing options and obligations. For business sellers, familiarity with SBA loan terms can help in assessing potential buyers’ financing viability and in structuring the sale to attract qualified, SBA-financed buyers.
The key difference between an Indication of Interest (IOI), Letter of Intent (LOI), and an SBA loan term sheet is their level of commitment and detail.
- An IOI expresses general interest with limited specifics, often used early in negotiations.
- An LOI is more detailed, outlining the intent to proceed, but is still non-binding.
- The SBA loan term sheet is specific to an SBA lender loan. This type of loan documentation then serves as the foundation for next steps.
Most lenders will give the borrower (potential buyer) the SBA loan term sheet after initial review of the loan application. The lender must be confident in the borrower’s eligibility to approve the loan. They’ll review the entrepreneur’s business plan and eligibility for business financing during the qualification process. Once satisfied, they will create the term sheet, which sets the stage for a formal commitment letter, underwriting, and the final loan program agreement.
Key Components and Clauses Included in the SBA Loan Term Sheet
- Non-binding nature: Indicates the term sheet is not legally binding and serves as a preliminary agreement before formal underwriting.
- Type of loan: There are a variety of SBA loans available including SBA 504 loans, SBA 7a loans, and SBA express loans.
- Loan amount: Specifies the proposed loan amount or line of credit based on the borrower’s needs.
- Interest rates and fees: Outlines the expected interest rates, loan process and fees, and repayment terms including prepayment penalties.
- Collateral: Details any assets required as collateral for the loan.
- Packaging fee/deposit: A fee or deposit to cover loan packaging and processing, which may be refundable or applied toward closing costs.
- Repayment schedule: Defines the term length and payment structure.
- Conditions precedent: Lists conditions that must be met before loan approval.
Differences Between a Term Sheet and a Loan Agreement
A term sheet and a loan agreement are similar, but distinctly different from one another. An SBA loan term sheet is a preliminary document that’s used early in the SBA lending process to give the borrower and lender a better understanding of the borrower’s qualifications and expectations.
A loan agreement, on the other hand, is a formal, binding contract that finalizes all terms and legal obligations. While the term sheet provides a framework, the loan agreement is the final legal document used to close the loan, and it’s enforceable by both parties.
Tips for Negotiating Terms and Understanding Their Implications
Understanding negotiations that relate to the loan is important for both business buyers and sellers.
- Focus on learning key terms: Interest rates, repayment schedules, working capital, and collateral requirements are just a few.
- Understand the impact on your cash flow: Lower interest rates or extended repayment terms can significantly affect cash flow.
- Familiarize yourself with personal guarantees and collateral: It’s important to understand the risk of personal liability if the business defaults.
- Consult a professional: Work with a financial advisor or attorney to evaluate short- and long-term consequences.
- Request flexibility: This is an opportunity to get clarity on and adjust future terms based on changing circumstances or business needs.
Where Does a Term Sheet Fall in the Timeline of Buying a Business?
The term sheet is usually provided to the borrower after the lender completes a preliminary evaluation of the application, but before formal underwriting begins. A lender will use it to bridge between LOI negotiations and final loan approval, so all parties agree on basic loan terms before proceeding to due diligence and closing the loan agreement.
How Does an SBA Loan Term Sheet Play in the Deal?
The SBA loan term sheet is an important part of securing financing for a business acquisition. It lays out the terms that will likely be included in the final loan agreement, and helps the borrower understand the loan’s structure based on their qualifications. While non-binding, it guides both the borrower and seller by indicating the lender’s commitment and creating the financial framework of the deal.
The clarity it provides can influence next steps in negotiations and potentially lead to a more favorable purchase price or changes in deal terms to better match the financing options. For sellers, understanding the terms of potential SBA loans can help in setting realistic expectations and structuring the sale to attract qualified buyers.
Understanding SBA loan term sheets is just one aspect of financing a business acquisition. For those seeking more information:
- Visit our Learning Center for in-depth articles and guides on various aspects of business financing.
- Explore our Finance Center to connect with a dedicated SBA lending team for personalized assistance and expert advice.