Growth debt term sheets explained

A term sheet for a venture debt or growth credit facility can look short enough to read in one sitting. Its consequences can last for years. The headline may show a facility size, interest rate and maturity, but read into the details and you will also find draw conditions, fees, repayment, covenants, security, default triggers, lender consent rights and any equity participation.

The purpose of this guide is not to decide whether a particular offer is fair. It is to show founders, CFOs and operators where the economics and control actually sit, which questions should be resolved before signing, and how to compare offers that use different labels or structures.

What a growth debt term sheet does

A lender may call it a term sheet, heads of terms, financing proposal or commitment letter. The legal effect depends on the document and governing law.

Many term sheets state that most financing terms are non-binding, while provisions on confidentiality, exclusivity, costs, governing law or process may be binding. Do not infer the position from the title or from market habit; read the wording.

Non-binding does not mean unimportant. Once the borrower signs, the lender begins diligence and instructs lawyers on the agreed structure. Even though it’s possible, reopening a material point later can delay closing, add cost or cause the lender to reconsider the credit. So the best moment to discuss any potential disagreement is before the term sheet is accepted.

Read the whole offer, not the headline

A useful first pass separates the document into four questions: how much capital is genuinely available; what it costs in the expected and downside cases; what the company must do or avoid doing; and what the lender can do if the plan changes.

Facility size and availability

Start with the legal instrument.

A term loan is normally drawn and repaid over an agreed term.

A revolving facility can be borrowed, repaid and redrawn while it remains available.

A delayed-draw term facility provides a window for later drawings.

Some packages combine more than one instrument, for example a term loan for runway with a receivables-backed revolver for working capital.

Then distinguish what the commitment is from the initial availability. The term sheet should say how much is available at closing, how much is deferred, the last date for drawing each amount and whether later tranches depend on objective conditions - for example revenue or ARR targets, an equity raise, regulatory approval, product milestones and minimum liquidity can all act as draw conditions.

The drafting also matters. A measurable milestone with an agreed calculation is different from a condition that remains subject to lender satisfaction or fresh credit approval. Ask what information proves compliance, how disputes are resolved and whether a temporary default, market change or deterioration in performance blocks an otherwise earned drawing.

Price is more than the interest rate

The interest clause should identify the reference rate, margin, any floor, interest periods and whether interest is paid in cash, capitalised or split between the two. A floating-rate facility transfers movements in the reference rate to the borrower; a floor can prevent the coupon falling below a stated minimum even if the reference rate declines.

Then there potentially lots of other considerations. These may include an arrangement or origination fee, commitment or non-utilisation fee, legal and diligence expenses, an end-of-term or final payment, agency fees, default interest, prepayment fees, make-whole protection and warrants. Check the base used for each calculation: the full commitment, the amount available, the amount drawn or the amount prepaid.

Model costs against dates and balances rather than adding percentages. A fee charged on the commitment at signing behaves differently from interest on the drawn balance. A declining prepayment premium behaves differently from a minimum return that protects the lender’s target economics. Equity participation cannot be compared sensibly with cash fees without assumptions about valuation, dilution and exit.

Repayment, maturity and prepayment

The term sheet should show when principal starts to amortise, the repayment frequency, the maturity date and whether any balance remains as a bullet. An interest-only period preserves cash initially but may produce a steep increase in debt service when amortisation begins. The company’s cash model should show that transition explicitly.

Do not assume the company can refinance or repay early at par. Optional prepayment may carry a percentage premium, a minimum-return formula or a make-whole amount. Mandatory prepayment can be triggered by an asset sale, insurance proceeds, a change of control, new debt or equity proceeds, or other events. Confirm which proceeds are caught, what thresholds and reinvestment rights apply, and whether amounts prepaid can ever be redrawn.

Covenants and operating freedom

Covenants are not just default tests. They define the operating envelope while the loan is outstanding. Affirmative covenants require actions such as delivering accounts, budgets, compliance certificates and notices. Negative covenants restrict actions such as taking additional debt, granting liens, making acquisitions, disposing of assets, paying dividends, moving cash, changing the business or entering related-party transactions.

Financial covenants may test minimum cash or liquidity, revenue or ARR, cash burn, EBITDA, leverage, interest cover or debt-service capacity. The metric, accounting definitions, testing frequency, headroom, cure rights and consequences of a miss matter as much as the headline level. A test set at signing can tighten in practice if the threshold steps up while the plan moves more slowly.

Security, guarantees and priority

Growth debt is often secured, but the package varies by product, lender and jurisdiction. The term sheet should identify the borrowers and guarantors, the assets intended to secure the debt, the jurisdictions involved and any exclusions. Cash, receivables, shares, equipment and intellectual property may be treated differently; perfection steps and enforcement consequences are jurisdiction-specific.

Check how the new lender ranks against existing debt, leases, asset finance, receivables facilities and shareholder or intercompany loans. Existing creditors may need to consent, release security or enter an intercreditor or subordination agreement. A negative pledge can restrict future security even where the lender does not take a direct charge over an asset.

The commercial question is broader than whether security is present. Ask which entities and assets sit inside the credit group, how much value or cash may remain outside it, when guarantees or security are released, and whether future subsidiaries must join. For an international group, the cost and delay of local-law security can be material.

Events of default and lender remedies

Events of default commonly cover non-payment, covenant breach, incorrect representations, insolvency, cross-default, judgments, invalid security and change of control. Some facilities also include subjective triggers such as a material adverse change or, in venture lending, loss of expected investor support.

For each trigger, identify materiality thresholds, grace or cure periods, knowledge qualifiers and who makes any subjective determination. A missed report is different from a missed interest payment, yet either can technically activate default rights if the documents say so. The consequences may include stopping further drawings, charging default interest, accelerating the loan and enforcing security.

The term sheet will rarely contain every remedy, but it should not hide material default concepts behind boilerplate. Downside behaviour is part of the price: two lenders offering the same margin may create very different outcomes after a delayed fundraise or covenant miss.

Warrants and other equity participation

A warrant gives the lender a right, not an obligation, to acquire equity under agreed terms. The term sheet should state how the entitlement is calculated, which share class is delivered, the exercise or strike price, duration, adjustment mechanics and treatment on a financing, sale or IPO. Coverage may be expressed as a percentage of the debt amount or as a target percentage of fully diluted ownership; those formulations are not interchangeable.

Some growth-credit facilities have no warrant. Others use warrants, co-investment rights, exit fees linked to value or another return enhancement. Describe the entire package accurately: debt with equity participation is less dilutive than an equivalent equity raise only under particular outcomes, not non-dilutive in an absolute sense.

Conditions, diligence and the path to closing

A signed term sheet is not funded cash. Closing may depend on satisfactory legal, financial, commercial or technical diligence; internal credit approval; know-your-customer checks; corporate approvals; execution of finance and security documents; legal opinions; evidence of insurance; repayment of existing debt; perfection of security; or completion of an equity financing.

Separate conditions to signing, conditions to initial draw and conditions to later draws. Ask which are objective, which are controlled by third parties, which can be waived and which remain subject to lender discretion. Agree an owners-and-dates closing checklist early enough that an unregistered asset, missing consent or overseas security step does not become a liquidity problem.

The process section also deserves attention. It may allocate legal and diligence costs, impose confidentiality, restrict discussions with competing lenders, set an expiry date and require deposits or expense retainers. Identify which provisions are binding, how long exclusivity lasts, whether costs are capped and what happens if the lender or borrower stops the process.

Compare offers in the downside case

A term sheet comparison that lists only commitment, margin and maturity is incomplete. Normalise each offer against the same operating and financing assumptions, then run at least one credible downside.

Ask the same questions of every lender

1. 1Exactly how much is available at closing, and what can prevent each later drawing?
2. 2What is the total cash cost under the expected draw and repayment schedule, including every fee and the borrower’s transaction expenses?
3. 3Which covenant or availability test is most likely to bind if the company misses plan?
4. 4Which decisions require lender consent, and what baskets or exceptions preserve ordinary growth activity?
5. 5What happens after a reporting delay, covenant miss, delayed fundraise or change of control?
6. 6How are warrants or other equity returns calculated across different valuation and exit outcomes?
7. 7Which terms remain subject to credit approval, diligence or definitive documentation?
8. 8How has the lender behaved with comparable borrowers when performance diverged from the original case?

From term sheet to definitive documents

The finance documents translate the commercial outline into detailed rights, definitions and procedures. Depending on the transaction, they may include a facility or loan agreement, fee letter, debenture or security agreements, guarantees, intercreditor or subordination documents, account-control arrangements, warrant instruments and corporate approvals.

Create a term-sheet issues list before drafting starts. For every material point, record the agreed position, where it must appear in the documents and who owns the follow-up. During document review, reconcile defined terms, calculations and exceptions against the financial model and operating plan. A covenant basket is useful only if the definition feeding it captures the activity the company expects.

Some detail will properly be left to the long-form documents. The test is whether the omitted detail could change the economics, available liquidity, operating freedom or downside control. If it could, resolve the principle at term-sheet stage even if counsel drafts the mechanics later.

Where to go next

• Growth lending explained maps where venture debt, growth credit and adjacent facilities sit in the market.
• Growth debt interest rates and costs shows how to compare cash pricing and fees.
• Warrants and equity kickers in growth lending explains coverage, strike price and dilution.
• Covenants in growth lending covers covenant types, definitions, headroom and testing.
• Security and collateral in growth lending examines the security package and enforcement risk.
• Growth debt repayment structures covers interest-only periods, amortisation, bullets and prepayment.

The bottom line

A term sheet is valuable because it compresses a complex financing into a negotiable commercial outline. That compression is also its danger. Headline commitment and margin are easy to compare; conditional availability, covenant definitions, control rights and default outcomes require more work.

Read the document against the company’s model, planned decisions and credible downside—not against a generic idea of what growth debt should look like. Resolve the points that can change liquidity, cost or control before signing. The long-form documents should then express the bargain, not discover it.