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Understanding the Role of a Term Sheet in Raising Debt Capital for Scale-Up Companies

Raising capital is an essential component of scaling up a company. While equity financing may be the most popular option, debt financing is also an effective means of achieving growth ambitions. However, securing debt financing requires careful negotiation and documentation to protect the interests of both the borrower and the lender. One crucial document in this process is the term sheet.

A term sheet is a non-binding document that outlines the key terms and conditions of the proposed investment. It serves as a basis for negotiation between the borrower and the lender and provides a roadmap for the final agreement. While a term sheet is not legally binding, it sets the framework for the final contract, and any significant deviation from its terms during the negotiation process may lead to a breakdown in the deal.

A typical term sheet includes several critical components that help to define the nature of the investment, including:

  1. Amount and type of investment: The term sheet should specify the amount of funding being offered and the type of security being provided. Debt financing can take several forms, including loans, bonds, or convertible debt, each with different terms and conditions.

  2. Interest rate and repayment terms: The term sheet should specify the interest rate charged on the loan and the repayment terms, including the duration of the loan, repayment schedule, and any penalties for default.

  3. Covenants: The term sheet should outline any covenants that the borrower must comply with, such as financial performance metrics, restrictions on capital expenditure, or requirements for maintaining certain levels of insurance.

  4. Collateral: The term sheet should specify the collateral being offered to secure the loan. Collateral can take various forms, such as physical assets, intellectual property, or personal guarantees from the founders.

  5. Conditions precedent: The term sheet should specify any conditions that must be met before the loan is disbursed, such as due diligence or legal documentation requirements.

  6. Warranties and representations: The term sheet should include warranties and representations from the borrower regarding the accuracy of their financial statements, the legality of their operations, and any potential liabilities.

  7. Governing law and jurisdiction: The term sheet should specify the governing law and jurisdiction for any disputes that may arise between the borrower and the lender.

While a term sheet is not a legally binding document, it is a critical component of the debt financing process. It provides a framework for negotiations, sets expectations, and ensures that both parties understand the key terms and conditions of the investment. A well-crafted term sheet can help to streamline the negotiation process, reduce the risk of disputes, and ultimately lead to a successful outcome for both the borrower and the lender.

In conclusion, a term sheet is an essential document in the process of raising debt capital for a scale-up company. It outlines the key terms and conditions of the investment and serves as the basis for negotiation between the company and potential investors. By understanding the key components of a term sheet, companies can ensure that they secure the right type of financing and negotiate a deal that supports their growth ambitions while protecting their interests.


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About the author

Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.

About Langdon Capital

With a network of 700+ alternative investors, Langdon Capital raises debt and equity capital between £1m and £25m for high-growth and innovative scale-ups in the technology, environmental impact and renewable energy sectors, who are beyond a Series A funding round or equivalent, to help them fulfil their growth ambitions and paths to profitability.

This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.

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