Comparing growth debt term sheets

Growth debt term sheets are easiest to compare when every offer is translated into the same cash plan and downside case. A lower margin can be outweighed by earlier principal repayments, uncertain tranches, tighter covenants or a larger warrant.

The aim is not to identify one universally best offer. It is to find the facility that delivers dependable cash, acceptable total cost and enough flexibility for the company's actual plan.

First, normalise the offers

Lenders use different names, layouts and assumptions. Build one comparison sheet rather than reviewing each proposal in its original format.

Use the same proposed draw dates, reference-rate assumptions, repayment date, equity value, downside forecast and exit date for every offer. Otherwise the model may compare assumptions rather than terms.

Separate four outputs: cash available, cash paid during the facility, debt still owed and potential equity dilution. Do not collapse a warrant estimate into cash cost without also showing it separately.

The comparison grid

Cash available is the first test

Compare total commitment with the amount that is unconditional at closing. A milestone-based or discretionary tranche is not equivalent to funded cash.

Map the availability window, draw notice, no-default test, repeated representations and documents required for each tranche. Model the company if a later tranche expires or remains unavailable.

A smaller facility that is fully available can be more useful than a larger headline commitment that depends on a fragile milestone.

Interest and the base rate

A floating rate is often expressed as a reference rate plus a margin. Compare the same reference-rate path and any floor. A floor sets the minimum reference rate used in the calculation.

Separate cash-pay interest from PIK, which is added to principal. Include compounding and the larger repayment balance.

Do not compare margins alone. One offer may charge a lower margin on the full commitment drawn early, while another charges a higher margin only on staged draws.

Fees

List each fee by amount, calculation base and payment date. A percentage of commitment differs from the same percentage of drawn principal.

Common items include arrangement fees, undrawn commitment fees, monitoring charges, lender legal costs, exit fees and prepayment premiums. Some facilities also require a minimum return or make-whole amount.

Classify fees as unavoidable, scenario dependent or negotiable. This prevents a low-probability prepayment cost from obscuring a large fee payable at closing.

Repayment and runway

Build a monthly schedule from first draw to final maturity. Include cash interest, PIK, principal amortisation, bullet or balloon payments and all fees.

Interest only delays principal; it does not remove interest. A longer interest-only period can be more valuable to a cash-burning company than a small rate reduction.

Check whether each tranche gets its own full term or shares one maturity. A late draw with a shared final date can amortise much faster than the first.

Covenants and downside

Run every financial covenant through the company's base case and at least one realistic downside. Show the first month of breach and the cash headroom at that date.

Definitions matter as much as thresholds. Revenue, annual recurring revenue, unrestricted cash, EBITDA and permitted adjustments can change whether the same business passes a test.

Compare cure rights, grace periods, testing frequency and consequences. A facility without a maintenance financial covenant may still contain strong reporting, liquidity, default and drawdown protections.

Security and operating restrictions

Compare borrowers, guarantors, secured assets, bank-account control and treatment of intellectual property. Identify existing creditor consents and intercreditor needs.

Review permitted debt, security, acquisitions, disposals, investments, dividends, group changes and equity raises. Put likely strategic actions into the comparison rather than reading baskets in the abstract.

Broad security with sensible permitted actions may be more workable than narrower security paired with restrictive consent rights. Consider the package as a whole.

Warrants

A warrant gives the lender a right to acquire shares on agreed terms. Compare whether coverage is based on commitment or drawn amount, the exercise price, share class, expiry, adjustments and treatment on a sale or public offering.

Show an illustrative dilution range at several future equity values. The warrant's value is uncertain, so do not present one estimate as a guaranteed cost.

Also compare when the warrant is earned. An offer based on the full commitment may create the same equity right even if a later tranche is never drawn.

Worked comparison: Facility A and Facility B

Assume a company needs £3 million now and expects to need another £3 million in month nine. The figures below are fictional and simplified. Both stated rates are held constant; tax, legal costs, principal amortisation, reference-rate changes and warrant values are excluded from the short calculation.

What the first nine months cost

Facility A draws £6 million at closing. Nine months of cash interest at 10% is £450,000, and the 1.5% arrangement fee is £90,000. The simplified first-nine-month cash cost is £540,000.

Facility B initially draws £3 million. Nine months of cash interest at 11% is £247,500, and the first-draw fee is £30,000. The simplified first-nine-month cash cost is £277,500. A further £30,000 fee is due if the second tranche is drawn.

Facility B saves near-term cash because the second £3 million is not funded until needed, despite its higher rate. But that saving comes with milestone risk: if the revenue condition is missed, the company may never receive the second tranche.

Facility A pays more to secure all £6 million from day one and also carries an exit fee and larger warrant. It may still be preferable if funding certainty is essential or the milestone is uncertain.

The comparison cannot be completed from the first nine months alone. Model both facilities through repayment, include covenant downside, value the liquidity option and show warrant outcomes separately.

A decision method

1. 1Eliminate offers that fail a critical requirement, such as insufficient unconditional cash or an unworkable covenant.
2. 2Model cash and debt under the same draw, rate, repayment and exit scenarios.
3. 3Score structural flexibility and downside headroom using documented terms.
4. 4Review security, warrants and strategic restrictions with legal and finance advisers.
5. 5Check approval status, execution timetable and lender references.
6. 6Identify the three or four changes that would materially improve each offer.
7. 7Compare revised offers and record the board's reasons for selection.

Weighting the decision

The weights should reflect the company's risk. A short-runway company may put capital certainty and speed first. A profitable company planning acquisitions may value prepayment, permitted acquisitions and follow-on capacity.

A scorecard helps expose trade-offs, but a weighted average must not hide a fatal condition. Use pass/fail requirements alongside scores.

Term sheet status and exclusivity

A term sheet summarises proposed commercial terms but may leave the lender subject to credit approval, diligence and documentation. Some provisions, such as confidentiality, fees, costs or exclusivity, may be binding even when the loan commitment is not.

Exclusivity restricts the company from pursuing alternatives for an agreed period. Confirm its length, scope, extension and exit rights, and relate it to the lender's remaining approval steps.

Ask counsel to identify which provisions are binding and whether the term sheet contains enough detail to control the final documents.

Use a issues list

Maintain one issues list across all offers. For each point, record the company's preferred outcome, minimum acceptable position, lender response, owner and deadline.

Prioritise terms that change cash certainty, runway, default risk or strategic freedom. Do not spend equal time on every drafting point.

When a lender says a detail is standard, ask what it does in the company's expected transaction and downside. Market practice is context, not an answer.

Red flags in a comparison

• One offer is modelled with later draws or an earlier exit than the others.
• A discretionary tranche is counted as committed cash.
• The warrant is ignored because it is non-cash at closing.
• Covenant thresholds are compared without their definitions.
• Fees based on commitment and drawn principal are treated as equivalent.
• The model stops before principal amortisation or maturity.
• Relationship claims are accepted without reference calls.

The bottom line

Compare growth debt term sheets by translating each offer into the same cash, debt and downside scenarios. Start with dependable availability and repayment timing, then assess total economics, covenants, security, warrants and lender behaviour.

The best offer is the one that works in the company's real plan and remains manageable when that plan is late, smaller or different.

Where to go next

• Growth debt term sheets explained shows how to read the whole offer before long-form documents.
• Growth debt interest rates and costs builds a complete view of cash cost, fees and equity-linked value.
• Covenants in growth lending explains the promises and tests that govern the facility.
• Negotiating a growth debt facility explains where borrowers have leverage and how to trade terms.