Know Your Terms
Tony Gray and Matthew Gillman go through the terms you will find on a lender’s term sheet, what each one means and how they connect, so the questions an AI tool suggests you ask actually make sense when the answers come back.
How is the interest rate on a term sheet set?
Matthew Gillman: It is the interest you pay for the money you borrow. Banks will be lower, non-bank and private credit lenders higher. Rates are rarely fixed. In asset-based and private credit lending they are usually benchmarked to an index such as SOFR or the prime rate, plus a spread, and the two together are your rate.
Tony Gray: Three things drive it: the lender, where the lender gets its own funding, and your risk. Private credit resells money it borrows, much like a contractor reselling servers to the government with a markup. And rates reflect risk, just as credit card and mortgage rates move with your credit score.
What is an advance rate, and can it go up?
Matthew Gillman: It is the percentage a lender provides against the collateral you pledge. On receivables, 80% or 85% is market standard; on inventory it might be 50% or 60% of cost; equipment and machinery have their own. If your business has no short-paid invoices, what lenders call dilution, a track record of on-time, in-full payment can support a higher rate, such as 90%, when you need more liquidity.
Tony Gray: Say you win a professional services contract, onboard employees through a 30-day transition, meet payroll every two weeks, and invoice $100,000 at the 30-day mark. With an 80% advance rate in your term sheet, you would receive $80,000 against that invoice.
Matthew Gillman: Talk openly about your costs. If your costs are $87,000 on a $100,000 invoice and you are always paid in full, your margin is 13%, and an 87% advance rate might make more sense than 80. That is a collaborative conversation, not lender against borrower.
How long should a credit agreement run?
Matthew Gillman: For a term loan, match the term, three, five or seven years, to the useful life of what it finances, such as a piece of equipment. For a revolving line, the question is how long you have access to it: one, two or three years. A longer term means you are not shopping for credit again in a year, and every hour spent with lenders is an hour not spent on your business. Most lines run one to two years, a balance between continuity and the freedom to leave.
Tony Gray: Revolving line, revolving credit and revolver all mean a line of credit.
Will I have to sign a personal guarantee?
Matthew Gillman: A personal guarantee means that if the loan cannot be paid by the business, you pay it personally. Whether one is needed depends on the global picture: the more a company makes, the more diversified its revenue and the longer it has been in business, the lower the need. Without a guarantee, as with non-recourse factoring, the rules on accessing your money get very strict, because repayment relies entirely on the invoices.
At a bank, a $250,000 line comes with a personal guarantee, and so does a $1 million or $2 million line. Larger middle market companies may offer a corporate guarantee instead. And a standard personal guarantee usually does not mean a lien on your home or a schedule of your assets; SBA loans are the more restrictive exception.
Tony Gray: As a rough yardstick, the conversation about dropping a personal guarantee tends to start around $30 million in annual revenue, roughly where the SBA’s small business line sits for many government contractors.
What is cash dominion?
Matthew Gillman: You may know it as a lockbox or a deposit account control agreement. It is common with asset-based lending and factoring, and in many bank products too. A bank already holds your account, so deposits simply roll through it. With a non-bank lender, payments go to an account at a national bank that the lender controls.
With factoring, the factor has bought the invoice, so the payment goes to the factor. With an asset-based line it works like a sweep: incoming money pays down the balance and you re-borrow when you need to. Either way, the lender needs clear visibility into when invoices are paid, because that determines how much availability it can give you.
Tony Gray: Once the lender is repaid, it releases the remainder to you.
What is a borrowing base?
Matthew Gillman: It is the collateral you borrow against: receivables, inventory, equipment, possibly real estate. An asset-based line has a credit limit and a borrowing base formula that includes the advance rate. With a $1 million limit, $1 million of receivables and an 85% advance rate, your borrowing base is $1 million and your availability is $850,000. The limit is the ceiling; availability is driven by collateral.
What is an air ball or over-advance?
Matthew Gillman: Every lender does not do everything. We do contract lending, asset-based lending and factoring: collateral-based lines. A term loan lender focuses on whether historical cash flow supports repayment over a few years. An air ball, or over-advance, is money advanced above what your collateral and advance rate support. You will not see it on a term sheet, but it is how the industry describes the gap.
Tony Gray: Need $2 million with $1 million of collateral, and you have a $1 million gap that has to be covered somehow.
What is a validity guarantee?
Matthew Gillman: It sits between a corporate and a personal guarantee. You are representing that the data you provide is true and factual to your knowledge: protection against misrepresentation or fraud. It is another lock on the door, confirming that whoever reports data on a routine basis is reporting it accurately.
Tony Gray: It is not tied to your personal assets, and some lenders may accept one in place of a personal guarantee, if you can get it.
What are covenants?
Matthew Gillman: Facilities can be covenant heavy or covenant light. Common ones are financial ratios, such as debt service coverage, fixed charge coverage or leverage; limits on distributions, keeping a share of profits in the business; and reporting, such as audited or reviewed financial statements, delivered weekly, monthly or quarterly.
People often trip covenants simply by not sending data on time. Make a list of what you owe the lender and set reminders. Most companies already produce the quarterly financials; they just forget to send them.
Tony Gray: If you trip a covenant, you want to be the one who tells your lender, not the other way round. Many covenants are simply good financial discipline.
What fees should I expect on a term sheet?
Matthew Gillman: A closing fee is standard. Some lenders want a diligence deposit before full underwriting, or a legal deposit. We have standard documents and aim for no added costs, but if a borrower wants to negotiate extensive legal changes, we ask for a legal deposit to cover them.
Tony Gray: Many terms are consistent across lenders. Fees and covenants are where they differ most, so dig into exactly what you are paying for.
Matthew Gillman: Understand the lender’s business model. A non-bank lender borrows money and makes a margin on it, the way a staffing company marks up people. A bank has a lower cost of capital and earns from deposits, treasury services and cards, so it can work on a thinner margin.
Read more on this
This is an edited version of the conversation: spoken repetition is removed and each answer leads with its point. Every figure and example is as said in the episode. For financing specific to your business, talk to us.
Ready to fund your contract?
No obligation, talk to a govcon financing specialist, not a call center. We'll structure capital around your award.