A term sheet is a summary of the deal before the lawyers draft the loan agreement. It is not binding on either side until conditions are met, but it sets the frame for everything that follows. Here is how to read one.
The numbers
- Interest rate: should be stated as an annual rate, because the federal Interest Act limits an undisclosed annual rate to five per cent. If it is quoted monthly, convert it before you compare.
- Lender fee: a percentage of the loan paid at closing, sometimes partly on acceptance.
- Third-party costs: appraisal, legal, title and registration. These are estimates; ask for a cap.
- Term and amortization: interest-only with a balloon, or amortizing. Both are legitimate; know which you have.
The conditions
Every term sheet lists conditions precedent: satisfactory appraisal, title, environmental report for some properties, corporate searches, personal guarantees and the loan documents themselves. Read them for anything you cannot deliver on time. An unrealistic condition is the most common reason a deal slips.
The fine print worth a second read
- Prepayment: is the loan open after a minimum interest period, or closed for the term?
- Extension: can you extend if the exit is late, and what does it cost?
- Default interest and cross-default to other facilities
- Reporting: what you must send and how often
- Priority: first or second position, and whether an intercreditor agreement with your bank is required
A good lender will walk through every line with you and put the answers in writing. If you cannot get a straight answer on any of these before signing, you will not get one after.
Have a situation like this? Tell us about the deal and a principal will respond within two business days. Cascade lends to businesses only, in Canadian dollars, and every rate we quote is an annual rate.
