Work through this literally, line by line, with your counsel, before signing the term sheet. The test for every item is the same: is it in the sheet, with a number (or an objective methodology)? Anything failing the test is a negotiation you've agreed to have after your leverage is gone (Part 8). "Market standard, we'll sort it in docs" = ask them to attach their standard exhibit now.
Economics
- [ ] Committed amount (not headline) — and what each further tranche requires, verbatim: right vs "sole discretion"
- [ ] Advance rate: full mechanism — every tier/gate/decay level, whole-book vs per-tranche, step-DOWN triggers and depths
- [ ] Spread, benchmark, floor, day-count convention
- [ ] Default interest: rate AND formulation (flat vs escalating; cash vs PIK)
- [ ] Every fee: upfront, draw, unused, agent, audit pass-throughs — each with number, base, and timing
- [ ] Warrants: %, strike, vesting/exercisability conditions, what happens if milestones never occur
- [ ] Reserve: size, funding source, release conditions
- [ ] Legal/diligence costs: capped? Dead-deal allocation? Expense tail if lender walks?
Structure & recourse
- [ ] Guaranty: type, %, denominator (limit / outstandings / high-watermark), burn-off schedule, full-recourse phases
- [ ] Bad-acts triggers: the actual list, word by word
- [ ] Personal guarantees: exist? scope?
- [ ] Key-person: named persons, trigger breadth, cure/replacement window, insurance requirements
- [ ] Waterfall: full order; servicing fee seniority; sweep conditions and cure-back
- [ ] Servicing fee: rate, base; backup servicer — when required, warm/cold, who pays
- [ ] Draw mechanics: min size, notice, frequency, monthly caps, per-draw conditions — vs your origination curve
- [ ] Draw window and amortization phases; re-borrowing: pipe or bucket? (Part 2)
Controls
- [ ] Eligibility criteria: the complete list, every number filled in; over-cap treatment (partial credit vs fully ineligible)
- [ ] Concentration limits: every cap; borrowing-base exclusion vs default; ramp-up holiday
- [ ] Weighted-average requirements (yield floors = pricing floors on your product; term caps)
- [ ] Financial covenants: formulas and numbers; frozen-cash impact on runway math
- [ ] Debt/lien covenant perimeter (borrower vs parent vs affiliates) + carve-out baskets
- [ ] Equity-raise conditions: any? Amount, timing, consequences
- [ ] Performance triggers: every level with a number or written objective methodology — and each consequence (pause / sweep / AR cut / EOD); compound vs graduated
- [ ] Events of default: full list; cure periods per item (esp. reporting); cross-default scope (materiality threshold, actual-acceleration only); MAC narrowed
- [ ] Discretion hunt: search the draft for "sole discretion," "satisfactory to lender," "as determined by lender" — especially in borrowing-base and eligibility definitions; convert to objective or "reasonable + deemed approval"
- [ ] Underwriting-guideline lock: scope of consent (any change vs material loosening), standard, timeline
- [ ] Reporting: each deliverable, cadence, deadline, format — confirmed operationally feasible by whoever will produce it
Exclusivity & exit
- [ ] Origination exclusivity / capacity rights: %, scope, duration — and the dies-when-funding-stops escape hatch
- [ ] ROFR/ROFO: which one, scope ($ and time), must-accept?, conditions on declined rights defined objectively
- [ ] No-call: length, clock resets (SPV conversion / upsize / amendment), whole-vs-partial prepay, fee-on-acceleration struck, same-lender-refi carve-outs understood
- [ ] Deal exclusivity: length, auto-expiry if lender misses document deadlines
- [ ] Conditions precedent: the complete list, in the sheet
- [ ] "No new material terms in documentation" understanding
Stress test (Part 8)
- [ ] Walk every trigger against your haircut projections and a mediocre-but-survivable quarter
- [ ] Model the compound bad month: trigger breach + AR cut + cash sweep + min-cash covenant, simultaneously
- [ ] Confirm: no covenant you'd trip in a quarter you'd otherwise survive