What Lenders Look for Before Issuing a Term Sheet

When business owners apply for financing, many expect lenders to respond quickly with firm offers. In reality, lenders don’t issue term sheets until they have enough confidence in the deal.

Understanding what lenders evaluate before presenting terms can help you prepare more effectively — and avoid delays or disappointment.

1. A Clear Use of Funds

Lenders want to know exactly how the capital will be used and how it supports the business.

Strong use-of-funds explanations:

• Are specific and realistic

• Align with business operations or growth

• Show how the loan improves cash flow or stability

Vague or shifting explanations often slow the process.

2. Business Financial Health

Financials are the foundation of every lending decision.

Lenders typically review:

• Recent bank statements

• Profit and loss statements

• Balance sheets

• Cash flow consistency

They’re not only looking for revenue — they’re looking for predictability and the ability to service debt.

3. Credit Profile (Business and Personal)

Credit history helps lenders assess risk, but it’s rarely the only factor.

What matters most:

• Patterns, not perfection

• How past issues are explained

• Recent behavior versus old events

A lower score doesn’t always disqualify a borrower — but unexplained issues often do.

4. Time in Business and Industry Experience

Experience matters.

Lenders prefer businesses that:

• Have operated long enough to establish patterns

• Are run by owners familiar with their industry

• Can clearly explain their business model

Even younger businesses can qualify when experience and preparation are strong.

5. Documentation Quality and Consistency

Incomplete or inconsistent documentation is one of the most common reasons term sheets stall.

Lenders look for:

• Clean, organized financials

• Consistency across documents

• Prompt responses to follow-ups

When documentation is properly prepared, lenders move faster and with more confidence.

6. Risk Factors and Mitigation

Every deal has risk. What matters is how it’s managed.

Lenders assess:

• Customer concentration

• Revenue volatility

• Existing debt obligations

• Industry or market exposure

Clear explanations and mitigation strategies can significantly improve lender comfort.

7. Alignment with Lender Criteria

Not every lender fits every deal.

Before issuing terms, lenders confirm:

• Loan size and structure match their guidelines

• Industry falls within their appetite

• Risk profile aligns with pricing expectations

Proper alignment upfront prevents wasted time for everyone involved.

Why Preparation Changes Outcomes

Term sheets don’t appear by accident. They’re the result of:

• Clear information

• Proper positioning

• Thoughtful lender matching

When deals are structured intentionally, lenders can respond with meaningful offers — not just preliminary feedback.

Final Thoughts

Understanding how lenders think helps business owners approach financing with confidence instead of guesswork.

The more prepared and aligned a deal is, the more likely it is to receive competitive, actionable terms.

Capital decisions move faster — and close more often — when the groundwork is done right.