A lender just sent an offer. It runs two pages, mentions a "cross-default" and a "blanket lien," and expires on Friday. You do not have a lawyer on retainer.
You can still read it well. A business loan term sheet follows a predictable pattern, and once you know where the cost and the risk sit, the important parts are easy to find.
It is worth the hour. In the Federal Reserve Banks' 2026 Report on Employer Firms, 60% of firms that borrowed from online lenders said their costs were higher than they expected, compared with 37% at small banks and 32% at large banks. Most of that cost was in the paperwork before anyone signed.
What a term sheet is, and whether it binds you
A term sheet is a short summary of the terms a lender is proposing: amount, cost, repayment schedule, collateral and conditions. It is usually a preview of the final loan agreement, not the agreement itself.
Banks and SBA lenders typically produce three layers of paper. The term sheet (sometimes called a proposal or letter of intent) comes first. A commitment letter follows, which is the lender's formal approval subject to conditions you must meet before closing, and it carries its own expiry date. Then come the loan documents: the promissory note, the security agreement and any guarantee.
Some parts of a "non-binding" term sheet can still bind you. Look for language about deposits, application fees, expense reimbursement or exclusivity. Those clauses are often written to survive even if the loan never closes.
Online lenders and merchant cash advance (MCA) providers often collapse all three layers into one. You see a short offer summary on screen, then a full contract to e-sign. In that setting, the summary you are reading is effectively the deal.
Read it in this order
Follow the money first, then the risk. Start with what you receive and what you repay, then move to what you pledge and what can trigger a default.
- Net proceeds. Take the loan amount and subtract every fee deducted at closing. That is the cash that actually lands in your account.
- Total repayment. Add up every scheduled payment. Total repayment minus net proceeds is your dollar cost.
- APR. Look for an annual percentage rate. If there isn't one, ask for it in writing or calculate it yourself (below).
- Payment schedule. Note the amount, the frequency (daily, weekly or monthly) and whether a balloon payment waits at the end.
- Collateral and guarantee. Identify what is pledged and whether you are signing a personal guarantee.
- Covenants and default triggers. These are the rules during the loan and the events that let the lender demand everything back.
- The exits. Prepayment penalties, renewal terms and what refinancing would cost.
Pro tip: Write three numbers across the top of the page before you read anything else: net proceeds, total repayment and APR. If you can't fill in all three, you are not ready to compare offers.
How to work out the true cost
The true cost is what you repay minus the cash you receive, expressed as an APR. APR is the one measure that puts a bank loan, an online loan and an MCA on the same footing. Interest rates, factor rates and "total cost" quotes each leave part of the picture out.
Owners struggle with this, and the Fed has shown it. In its 2019 study Uncertain Terms, focus group participants were shown the same product with a 1.2 factor rate and asked what interest rate it implied. They "responded with a wide range of estimates, from 10 percent to over 50 percent" (p. 19).
- Interest rate is the yearly price of the principal, before fees.
- APR adds fees and accounts for how quickly you repay. It is the comparison number.
- Factor rate is a multiplier used by MCAs and some short-term lenders. A 1.35 factor on $100,000 means you repay $135,000, however fast you repay it.
Factor rates look small because they are not annualized. One lender in the Fed's study listed "factor rates usually between 1.14 and 1.48" for its advances (p. 16). The Fed's own worked example took a 1.15 factor on $50,000 with a 2.5% set-up fee and a $50 monthly fee, repaid by daily debits over six months, and estimated it at "approximately 70% APR" (p. 18).
Three $100,000 offers, side by side
The figures below are our own illustration, not quotes from lenders. APRs are nominal annual rates calculated from each payment schedule against the net proceeds, the same way a spreadsheet's RATE function would.
| Bank term loan | Online term loan | Merchant cash advance | |
|---|---|---|---|
| Quoted price | 10% interest | 18% "total cost" | 1.35 factor rate |
| Origination fee | 1% ($1,000) | 3% ($3,000) | 3% ($3,000) |
| Net proceeds | $99,000 | $97,000 | $97,000 |
| Payments | 60 monthly payments of $2,124.70 | 78 weekly payments of about $1,513 | About 189 daily debits of about $714 (roughly nine months of business days) |
| Total repaid | $127,482 | $118,000 | $135,000 |
| Dollar cost, including fee | $28,482 | $21,000 | $38,000 |
| APR (Loanistry calculation) | About 10.4% | About 26.7% | About 93% |
The online loan has the lowest dollar cost and still runs at well over twice the bank loan's APR, because you hold the money for a much shorter time. The MCA reads like "35 cents on the dollar" and lands near 93%. If sales are strong and the same advance is collected in about six months of business days instead of nine, the APR rises to roughly 140%.
Pro tip: If an offer shows no APR, put the payment schedule into a spreadsheet: RATE(number of payments, payment, net proceeds) gives the rate per period, and multiplying by payments per year gives the APR. It takes five minutes and changes the conversation with the lender.
Fees to hunt for
Origination fees vary widely. On the lender websites the Fed reviewed, one lender listed "0.99% to 6.99%" and another "1.99% to 8.99% of loan amount" (p. 16). The same report found equivalent APRs on online loans and lines "typically range from 10 percent to 80 percent" (p. 3). Also look for:
- Underwriting, processing or documentation fees, usually deducted at closing
- Draw fees on lines of credit, charged each time you pull funds
- Monthly maintenance fees that sit outside the interest rate
- Late and returned-payment fees, which matter a great deal with daily debits
- SBA guaranty fees on SBA loans. SBA publishes its upfront fee schedule each fiscal year (SBA), so ask the lender to show that fee as its own line.
How the repayment terms hit your cash flow
Repayment terms decide how much cash leaves your account, how often, and whether a large payment waits at the end. Two loans with the same APR can feel completely different if one debits daily and the other bills monthly. Read this section with your bank statements open.
Payment frequency
Daily and weekly payments are common with online lenders and MCAs. In the example above, a $714 daily debit seems manageable until a slow week or a late customer payment drains the account. Test the payment against your slowest month, not your average one.
MCA contracts often describe repayment as a share of sales, sometimes called a holdback or remittance. Check whether the contract has a reconciliation clause that lowers payments when sales fall. A fixed daily amount with no reconciliation behaves like a very short loan.
Amortization and balloons
Amortization is the schedule for paying down principal. If a loan amortizes over 25 years but matures in five, you owe a balloon payment of most of the principal at year five, and you will need to refinance or sell.
Variable rates
For a variable rate, find the index and the spread. Many bank and SBA loans are priced as "Prime + X%." The bank prime rate was 7.00% as of November 5, 2026, according to the Federal Reserve's H.15 release. If prime rises, so does your payment.
SBA caps the spread a lender can charge on 7(a) loans, with a lower cap on larger loans. For SBA's 7(a) Working Capital Pilot lines, SBA lists maximum rates of the base rate plus 6.5% for $50,000 or less, plus 6.0% for $50,001 to $250,000, plus 4.5% for $250,001 to $350,000, and plus 3.0% above that (SBA). With prime at 7.00%, that puts the ceiling between 10% and 13.5% as of November 2026. For other 7(a) loans, ask the lender which cap applies to your loan size. Our SBA loans overview explains the program.
Prepayment
Paying early is not always cheaper. With a factor-rate product you usually owe the full payback whenever you pay. Some bank loans carry a step-down penalty that shrinks each year.
SBA's rule is specific. For 7(a) loans with a maturity of 15 years or longer, SBA's terms page says a fee applies when you voluntarily prepay at least 25% of the balance within three years of first disbursement: 5% of the prepayment in year one, 3% in year two and 1% in year three.
Collateral, liens and personal guarantees
Collateral is what the lender can take if you default. A personal guarantee is your promise to repay the debt yourself if the business can't. Together they decide whether a bad year stays with the company or follows you home.
UCC liens and blanket liens
Most business lenders file a UCC-1 financing statement with your state, which publicly records their claim on business assets. Under the Uniform Commercial Code, "a filed financing statement is effective for a period of five years after the date of filing" unless continued (UCC § 9-515).
A blanket lien covers all business assets: cash, receivables, inventory, equipment and often intellectual property. It is common, but the next lender you approach will see the filing, and many will not lend behind it. Ask whether the lien can be limited to specific assets, and ask how the lender handles terminating the filing once you pay off.
Personal guarantees
Most small business loans require one. For SBA loans, the regulation at 13 CFR 120.160 says "holders of at least a 20 percent ownership interest generally must guarantee the loan." Read any guarantee for three things:
- Limited or unlimited. Unlimited puts your full personal net worth at risk. Limited caps it at a dollar amount or percentage.
- Joint and several. With more than one guarantor, this wording lets the lender pursue any one of you for the full balance.
- Personal collateral. A lien on your home or personal accounts is a major step up in risk.
Covenants and default clauses
Covenants are the rules you agree to follow during the loan. Default clauses list the events that let the lender demand full repayment. Most are routine. A few can turn a small slip into a full default.
Common covenants
- Financial covenants, such as keeping a debt service coverage ratio above a set minimum.
- Reporting covenants, such as sending tax returns or financial statements on a schedule.
- Negative covenants, such as not taking on more debt, selling major assets or changing ownership without consent.
- Anti-stacking clauses, common in MCA and online loan contracts, which bar taking another advance while the first is open.
Clauses to read twice
- Cross-default: a default on any other debt, even with another lender, counts as a default on this one.
- Material adverse change: lets the lender call the loan if your condition "materially" worsens. Vague wording gives the lender wide discretion.
- Cure period: the days you have to fix a problem before it becomes a default. No cure period is a warning sign.
- Acceleration: after a default, the whole balance is due at once.
Confessions of judgment
A confession of judgment is a clause in which you agree in advance that the lender can obtain a court judgment against you without a lawsuit. New York changed its law in August 2019 so that a confession of judgment can be filed only in the New York county where the debtor lives, which shut out borrowers from other states (New York Senate, S6395).
Regulators have also gone after abusive MCA providers. In January 2025, the New York Attorney General announced a settlement with Yellowstone Capital that included a $1.065 billion judgment, over loans the office said carried "ultra-high interest rates of up to 820 percent per year" (New York Attorney General). If you see a confession of judgment clause, ask for it to be removed.
What lenders are required to disclose
Federal truth-in-lending rules do not cover business credit, so required disclosures depend on your state. Regulation Z exempts "an extension of credit primarily for a business, commercial or agricultural purpose" (12 CFR 1026.3(a)). That is why many business offers never show an APR.
Some states fill the gap. California's commercial financing disclosure regulations took effect on December 9, 2022, and require providers of installment loans, open-end credit, factoring and merchant cash advances to disclose an annual percentage rate (California DFPI); the regulation applies to offers of $500,000 or less (DFPI regulation text). New York's Commercial Finance Disclosure Law covers financing "in amounts of up to $2,500,000," including sales-based financing and factoring, and its regulation sets out how providers calculate the APR (New York DFS).
Other states have passed their own rules, and requirements differ. If your state has one, the disclosure form is often the most useful page in the packet. Even where no law applies, you can ask any lender for the APR and total cost in writing. A lender that won't provide them is telling you something.
Red flags to spot before signing
The biggest red flags are missing cost information, pressure to sign quickly and clauses that remove your legal options. One is a reason to slow down. Two or more is a reason to walk away or get help.
| Red flag | Why it matters | What to ask |
|---|---|---|
| No APR or total repayment shown | You can't compare the offer to anything | "What is the APR and total payback, in writing?" |
| Offer expires within a day | Urgency stops you from shopping | "Can you hold this offer for five business days?" |
| Confession of judgment | Judgment without a lawsuit | "Can this clause be removed?" |
| Fixed daily debit with no reconciliation | Payments don't fall when sales do | "Is there a reconciliation process?" |
| Unlimited guarantee on a small deal | Personal assets exposed beyond the deal's risk | "Can the guarantee be capped?" |
| Fees deducted with no itemization | Net proceeds may be far below the loan amount | "Please list every fee and the net amount funded." |
| Renewal offered before payoff | Often adds new fees on top of unpaid ones | "What would I pay in total if I renew today?" |
None of these is automatically illegal, and some appear in fair deals. The point is to understand them before you sign. If you would rather compare several offers than decode one, see what you qualify for on Loanistry.
What you can negotiate
Fees, guarantee limits, collateral scope and prepayment terms are usually open to discussion. Program-set items, like SBA's guaranty fees and rate caps, are not. Competing offers give you the strongest footing.
| Usually negotiable | Rarely or never negotiable |
|---|---|
| Origination and processing fees | SBA guaranty fees |
| Rate spread, within any program cap | SBA rate caps and the SBA guarantee rule for 20% owners |
| Personal guarantee limits | The lender's base index (prime, SOFR) |
| Collateral scope (specific assets vs blanket lien) | State-required disclosures |
| Prepayment terms | A lender's minimum credit policy |
| Cure periods and covenant levels | Factor rates on some MCA platforms |
For tactics, read our guide on how to negotiate better business loan terms. If an MCA is on the table, compare it with a term loan first in our MCA vs term loan breakdown.
When a lawyer is worth paying for
You don't need a lawyer for every working capital offer. Consider one when the loan is secured by real estate or your home, when it funds an acquisition or partner buyout, when the amount is large enough that an hour of review is small next to the risk, or when the contract contains a confession of judgment or terms you still can't explain in your own words.
When you have your three numbers for each offer, compare them against other lenders on Loanistry.
Sources
- Federal Reserve Banks: 2026 Report on Employer Firms, checked November 2026
- Federal Reserve Board: Uncertain Terms, What Small Business Borrowers Find When Browsing Online Lender Websites (2019), checked November 2026
- Federal Reserve Board: H.15 Selected Interest Rates, checked November 2026
- SBA: 7(a) loans, including the 7(a) Working Capital Pilot, checked November 2026
- SBA: Terms, conditions, and eligibility, checked November 2026
- SBA: Terms, conditions, and eligibility (fees), checked November 2026
- Cornell Law School LII: 13 CFR 120.160, Loan conditions, checked November 2026
- Cornell Law School LII: UCC § 9-515, Duration and effectiveness of financing statement, checked November 2026
- New York Senate: Bill S6395 (2019), confessions of judgment, checked November 2026
- New York Attorney General: $1 billion settlement with Yellowstone Capital, checked November 2026
- CFPB: Regulation Z, 12 CFR 1026.3, Exempt transactions, checked November 2026
- California DFPI: Commercial financing disclosure regulations effective December 9, 2022, checked November 2026
- California DFPI: Commercial financing disclosure regulation, final text, checked November 2026
- New York DFS: Updated regulation for commercial financing disclosures, checked November 2026