Most borrowers spend all their energy negotiating interest rate and miss the terms that actually drive total deal cost and flexibility.
Rate matters. But recourse, prepayment, reserves, and extension options will have a bigger impact on your actual outcome than a quarter point on the note rate.
Here are the seven term sheet clauses you should be dissecting before you sign.
1. Recourse vs Non-Recourse
This is the most consequential clause in the document.
Full recourse means your personal assets are on the hook if the loan goes bad. Non-recourse limits lender recovery to the collateral, with carve-outs for fraud and bad acts.
Most commercial loans today are structured with a non-recourse carve-out guaranty, which means the loan is non-recourse unless specific triggers are hit. Know exactly what those triggers are.
Recourse terms affect not just risk, but balance sheet presentation and your ability to take on additional leverage elsewhere.
2. Prepayment Structure
If you think you might sell or refinance before maturity, this clause will cost or save you more than anything else in the term sheet.
Common structures include: Yield maintenance: Pay the lender the present value of all future interest. Expensive, especially in low-rate environments. Step-down: Fixed percentage penalties that decline over time. Defeasance: Replace the loan collateral with government securities. Complex and expensive. Open prepayment: No penalty after a lockout period. Rare and valuable.
Model your exit before you lock rate.
3. Extension Options
Construction and bridge loans routinely have one to three extension options beyond the initial term.
What determines whether you can use them? Usually a combination of: current DSCR meeting a minimum threshold, no defaults on record, and sometimes an extension fee.
Extension options look like insurance on paper. In practice, they are only available when the deal is performing. Understand the conditions before you assume you can use them.
4. Reserves and Holdbacks
Lenders often require funded reserves for taxes, insurance, capex, and debt service.
Reserves reduce your effective loan proceeds at close. A $5 million loan with $500,000 in reserves is really a $4.5 million loan on day one.
Understand what is required at close versus what accumulates monthly, what triggers a release, and whether reserves earn interest.
5. Interest Rate Structure
Beyond the headline rate, understand:
Fixed vs floating: Floating rate loans tied to SOFR shift payment exposure to you. Rate caps: Required on most floating rate bridge loans. They cost money and expire. Know your cap cost and term. Interest only periods: IO reduces near-term cash demand but increases amortization exposure later. Spread vs index: On floating loans, know both the spread and the floor, if any.
6. Lockout Period
Even loans with attractive prepayment structures often have a lockout period during which no prepayment is permitted.
A two-year lockout on a three-year bridge loan is not a minor detail. If your business plan assumes a refinance or sale at 18 months, that deal may not work.
7. Guaranty Requirements
Beyond recourse structure, lenders often require operating guaranties, completion guaranties on construction, and carry guaranties during lease-up.
Each guaranty type has different triggers, duration, and burn-off conditions. Read them.
The Takeaway
The rate is where the negotiation starts. The terms are where the deal actually lives.
Before you counter on rate, understand what you are agreeing to on prepayment, recourse, reserves, and extension conditions. That is where the real cost and flexibility of the loan is hidden.
Ask the hard questions before you sign. Lenders negotiate all of these terms. Most borrowers never ask.