Laminar Team · 5 min read
You've been shopping for financing. You've talked to a few lenders. And now you're staring at a term sheet that's four pages of financial jargon, wondering which numbers actually matter and which ones you can skim.
This is the moment where most founders either call a lawyer (expensive) or just sign the thing (risky). There's a middle ground. You can learn to read the parts that matter in about 10 minutes.
Start with the total cost, not the rate
The first thing most people look at is the interest rate. That's a mistake.
Different lenders quote rates differently. One gives you an APR. Another gives you a factor rate. A third quotes a flat fee. A fourth uses a monthly rate. These numbers are not comparable on their face.
The number you want is the total cost of capital in dollars. Take the amount you're receiving, subtract it from the total amount you're repaying (including all fees), and that's what you're paying for the money. Then figure out the effective APR so you can compare it to other offers.
If a lender quotes you a 1.25x factor rate on a $200K advance, your total repayment is $250K. That's $50K in cost. If you repay over 12 months, the effective APR is roughly 45%. If a different lender offers a 15% APR on a $200K loan with a 2% origination fee, your total cost over 12 months is about $34K. Same amount of capital, very different price.
Always ask the lender to calculate the total dollar cost and the effective APR. If they can't or won't, that's a red flag.
Fees: what's deducted before you get the money
Origination fees, processing fees, and due diligence fees are usually deducted from your advance before you receive it. This means the cash that hits your account is less than the number on the term sheet.
A $200K advance with a 2% origination fee actually puts $196K in your account. But you're repaying based on $200K. That $4K difference is real money, and it makes the effective cost higher than the headline numbers suggest.
Look for every line item that reduces your actual disbursement. Add them up. Then recalculate the true cost based on what you're actually receiving, not what's listed as the loan amount.
Repayment structure: when and how you pay
There's a big difference between monthly payments, weekly payments, and daily deductions from your sales. Each one affects your cash flow differently.
Monthly payments are the most predictable and easiest to manage. Weekly payments create more frequent draws on your account. Daily deductions (common with MCAs) can be the most stressful, especially if your sales fluctuate.
Pay attention to whether payments are fixed or variable. Fixed payments are the same amount every period. Variable payments (like revenue-based financing) flex with your sales. Each has tradeoffs. Fixed is easier to forecast. Variable is gentler during slow months but can extend your repayment period.
Also check whether the term is fixed. Some products, particularly revenue-based financing, don't have a set end date. You keep paying until you hit the repayment cap. That could be 8 months or 24 months depending on your revenue.
Prepayment terms: what happens if you pay early
This is one of the most overlooked sections, and it can cost you thousands.
With a traditional loan, paying early saves you money because you're charged less interest over a shorter period. With many alternative products, paying early doesn't save you anything. The total repayment is fixed regardless of timing.
Some products go further and actually charge a prepayment penalty if you try to pay off early. This is money on top of the already-fixed repayment amount.
Read this section carefully. If your revenue is seasonal or unpredictable, the ability to pay early without penalty can be worth negotiating hard for.
Collateral and liens: what you're putting up
Secured financing requires collateral. The term sheet will specify what assets secure the loan: inventory, receivables, equipment, or sometimes a blanket lien on all business assets.
A blanket lien is important to understand. It gives the lender a claim on everything your business owns. If you default, they can go after any asset. It also shows up in public records as a UCC filing, which other lenders will see when you apply for additional financing. Having an existing UCC filing can make it harder or more expensive to borrow elsewhere.
If you're offered a choice between specific collateral and a blanket lien, specific collateral gives you more flexibility down the road. It's worth asking.
Personal guarantees: your skin in the game
Most small business financing requires a personal guarantee from any owner with 20% or more stake. This means if the business defaults, the lender can come after your personal assets: bank accounts, property, investments.
This is standard for SBA loans and traditional bank lending. Some alternative lenders don't require personal guarantees, which is a meaningful advantage even if their rates are higher.
If a personal guarantee is required, make sure you understand the scope. Some guarantees are limited to the loan amount. Others are unlimited, covering the loan plus legal fees, collection costs, and other expenses. The distinction matters.
Covenants: the rules you have to follow
Covenants are conditions you must maintain throughout the life of the loan. Common ones include keeping a minimum cash balance in your account, maintaining a certain debt service coverage ratio, providing quarterly financial statements, and not taking on additional debt without the lender's approval.
Violating a covenant, even accidentally, can trigger a default. That doesn't necessarily mean the lender calls the loan immediately, but it gives them the right to, and it gives them leverage to renegotiate terms in their favor.
Read every covenant and ask yourself: can I realistically maintain this? If a covenant requires a minimum cash balance of $50K and your balance regularly dips to $30K during slow months, that's a problem waiting to happen.
The five-minute term sheet checklist
When you get a term sheet, work through these questions:
What is the total dollar cost of this capital? Not the rate, the actual dollars. What is the effective APR? What fees are deducted before I receive the money, and what's my actual disbursement? What does the repayment structure look like, and can my cash flow support it? Can I pay early without penalty? What collateral is required, and is it a blanket lien? Is a personal guarantee required, and is it limited or unlimited? What covenants do I have to maintain?
If you can answer all of those, you understand the term sheet well enough to make an informed decision.
Why comparison makes this easier
The hardest part of reading term sheets isn't any single document. It's comparing two or three offers that are all structured differently. One quotes a factor rate with daily deductions. Another quotes an APR with monthly payments and a 2% origination fee. A third uses a flat fee with a revenue share.
Trying to compare these on a spreadsheet is tedious and error-prone. This is the core problem Laminar solves. We normalize offers across product types and lender categories so you can compare the true cost side by side. Same metric, same format, clear winner. Join our waitlist to see how it works.