How do you read a business loan estimate or term sheet?

What to Look for on a Business Loan Term Sheet

A commercial loan term sheet (also called a commitment letter or loan estimate) is a binding or non-binding summary of the loan structure. Unlike consumer mortgages — which are covered by CFPB Regulation Z and require a standardized Loan Estimate form — commercial loans have far fewer federally mandated disclosure requirements. You are responsible for understanding every element before you sign.

Interest Rate: Fixed vs. Variable, and What the Spread Means

The rate section should state whether the rate is fixed (locked for the full term) or variable (adjusting periodically). For variable-rate loans, the term sheet will specify the index rate (Prime Rate, SOFR, or T-Bill) and the spread (margin above the index, e.g., 'Prime + 2.50%'). The all-in rate at closing is index + spread. For SBA 7(a) variable loans, the SBA SOP 50 10 caps the spread at Prime + 2.75% for loans above $50,000 with terms 7+ years. Check when the rate adjusts (monthly, quarterly, annually) — monthly adjustments on a variable Prime-based loan mean your payment changes every time the Fed moves rates.

Term, Amortization, and Monthly Payment

The term is how long the loan runs before it matures. The amortization schedule is the repayment calculation basis — term and amortization may differ. A common commercial structure is a 5-year term with a 25-year amortization, meaning your monthly payment is calculated as if the loan repays over 25 years, but a balloon payment (remaining balance) is due at the 5-year maturity. This keeps monthly payments low but creates a large lump-sum refinancing obligation at year 5. Verify both the monthly payment amount and whether a balloon payment exists — balloon loans require you to refinance or sell the underlying asset at maturity.

Fees, Prepayment Penalty, and APR vs. Nominal Rate

The term sheet should itemize all upfront fees: origination fee, SBA guarantee fee, appraisal, legal, and documentation fees. The nominal rate (interest rate stated in the term sheet) does not include these fees — the APR (annual percentage rate) does. CFPB Reg Z requires APR disclosure on consumer loans but does NOT require it on commercial loans in most states. Ask for the APR equivalent explicitly. The prepayment penalty section specifies what you owe if you repay early — common structures include a declining-balance penalty (3% in year 1, 2% in year 2, 1% in year 3), a fixed percentage, or a yield maintenance formula (for fixed-rate real estate loans).

Personal Guarantee, Collateral, and Covenants

Almost all commercial loans to small businesses include a personal guarantee — the owner(s) personally promise to repay if the business cannot. Verify the guarantee scope: full guarantee (no limit) vs. limited guarantee (capped at a dollar amount or percentage), carve-outs for specific assets, and whether spouse signatures are required (community property states). The collateral section should list every pledged asset — equipment serial numbers, property addresses, accounts receivable (UCC-1 blanket lien). Covenants are ongoing obligations you agree to maintain: minimum DSCR, maximum leverage ratio, reporting requirements (quarterly financials, annual tax returns), and restrictions on additional debt or major asset sales.