Guide
Comparing business loan offers: a framework that survives contact with a term sheet
Rate is one line of maybe fifteen that determine what a loan costs and what it does to your business. Here is the full comparison.
Reduce every offer to three numbers first
- Net proceeds — what actually lands in the account after every deducted fee.
- Total of payments — every dollar you will pay, added up.
- Time — over what period, and whether early repayment changes the total.
Do this before you look at anything else. It makes an SBA loan, a bank note, an online loan, and a merchant advance directly comparable, which nothing on their term sheets will.
Then work the rest of the term sheet
| Line | What to ask | Why it matters |
|---|---|---|
| Rate type | Fixed or variable? If variable, tied to what, and is there a cap? | A prime-linked loan reprices with every Fed move |
| Amortization vs. term | Do they match, or is there a balloon? | A 5-year term on a 25-year amortization means refinancing in year five at unknown rates |
| Origination fee | Deducted from proceeds or paid separately? | Deducted fees raise the effective rate materially |
| Prepayment | Penalty, or fixed total payback? | Determines whether refinancing later is possible |
| Payment frequency | Monthly, weekly, or daily? | Daily debits against lumpy receipts cause overdrafts |
| Collateral | Specific assets or a blanket lien? | A blanket lien effectively locks you to one lender |
| Personal guarantee | Unlimited? Joint and several? | The most consequential line on the page |
| Covenants | Ratios you must maintain, and what happens if you breach | A technical default can be called even while you pay on time |
| Reporting | Monthly, quarterly, annual? Audited or reviewed? | Audited statements cost real money every year |
| Deposit requirements | Must you move your operating account? | A genuine cost and a genuine loss of flexibility |
| Cross-default | Does default elsewhere trigger this loan? | Links otherwise separate risks together |
| Draw conditions | For lines: what must be true to draw? | A line you cannot draw on is not a line |
| Conditions precedent | What must happen before funding? | This is where approved deals quietly die |
| Guarantor release | Any path out of the guarantee? | Worth asking for even if the answer is no |
| Assumability | Can a buyer assume it if you sell? | Affects the value of your business at exit |
Covenants deserve their own thought
A covenant is a promise about the future condition of your business. Break one and the lender can technically call the loan even though every payment has been made on time. Common ones:
- Minimum debt service coverage, often 1.15x or 1.25x, tested quarterly or annually.
- Maximum leverage, expressed as debt to tangible net worth.
- Minimum working capital or current ratio.
- Limits on additional debt, distributions, or capital expenditure without consent.
- Key person and ownership change provisions.
Negotiate the thresholds against your actual projections with a real cushion, and ask for a cure period. In practice lenders usually waive a first technical breach for a performing borrower — but "usually" is doing a lot of work in that sentence, and a waiver often comes with a fee and repriced terms.
How to actually run the process
Get two or three written offers, not conversations
A term sheet in hand changes how every other lender behaves. Two is enough; eight makes you look desperate and stacks up inquiries.
Compare on the three numbers, then the term sheet lines
In that order.
Ask each lender to beat the best one on a specific line
Not "can you do better" — "lender B is not requiring a blanket lien; can you match that?" Specific asks get specific answers.
Read the loan agreement, not just the term sheet
Terms appear in the agreement that were never on the term sheet. If it is a significant amount of money, have a lawyer read it. It is a few hundred dollars against a decade of obligation.
Keep the runner-up warm
Deals fall apart at closing more often than anyone admits.
Questions people actually ask
Is the lowest rate always the best offer?
No, and it is not close. A 9% loan with a blanket lien, quarterly covenants, and a five-year balloon can be considerably worse for a business than an 11% loan with a ten-year amortization and no covenants. Compare the whole structure against what your business needs.
Should I tell lenders I am shopping around?
Yes. It is completely normal and it improves your terms. What you should not do is apply formally at eight places at once — that stacks hard inquiries and, in the SBA world where lenders talk, reads as a file being shopped because it has a problem.
Can I negotiate a business loan rate?
The rate itself, sometimes, and mainly with a competing written offer. Fees, prepayment terms, covenant thresholds, guarantee scope, and lien breadth are all negotiated far more often than rate, and on a ten-year loan they can matter more.