Two loan term sheets can use the same ratio name differently

A loan with a higher permitted leverage multiple can still leave less room for the company's plan. The definition underneath the multiple determines which debt and earnings count. Before choosing between offers, translate each proposed test using the same financial facts and the same intended transactions.

BDC describes covenants as contractual conditions that can include financial measures and restrictions on company actions. It notes that no single covenant appears in every business loan. Request the proposed definitions and restrictions before comparing flexibility; a short term sheet may leave material provisions for later documentation.

Assume a hypothetical company has $6.6 million of debt and $2 million of earnings before contract-specific adjustments. Offer A permits debt up to 3.5 times defined earnings and accepts a supported $400,000 adjustment. Offer B permits 3.75 times earnings but rejects that adjustment. All other debt and earnings definitions are assumed identical solely for this example.

A therefore uses $2.4 million of defined earnings and a mathematical debt limit of $8.4 million. B uses $2 million and a $7.5 million limit. Their calculated cushions are $1.8 million and $900,000 respectively. These figures do not authorize additional borrowing or establish compliance with other provisions; they compare one negotiated test.

Suppose A's adjustment expires after the first year while operating earnings stay unchanged. Its mathematical cushion then falls to $400,000. B still shows $900,000 under the assumptions. An adjustment that makes closing possible may offer little protection for a commitment lasting several years.

Put each proposed acquisition, dividend, capital purchase or refinancing into the comparison on its intended date. Ask whether it requires consent, fits a contractual allowance or changes the test itself. A favorable ratio does not remove a separate restriction on the action management wants to take.

Test amendment drafts as well as the initial quote. If the lender replaces an unrestricted adjustment with a capped amount, show the effect on the planned transaction and future periods. Record the assumptions that must remain true for each offer to support the plan.

Give counsel a comparison of the clauses that change the decision: covered entities, cash netting, leases, adjustment eligibility, caps, measurement periods and scheduled threshold changes. Ask for interpretation where the language is incomplete. Finance should calculate the consequence of an interpretation, not select a legal reading because it creates more capacity.

Request a worked lender calculation using the company's facts. Where it differs from your model, resolve the input or definition before choosing an offer. A negotiated clarification in the executed documents is more useful than an informal assurance that the lender will be reasonable later.

Include reporting costs and available cure or waiver processes in the commercial assessment, without treating a possible waiver as an entitlement. Management may prefer a more expensive facility when a clearly defined permission supports a necessary action. Make that tradeoff visible in dollars and in the commitments it affects.

Approve the selected offer against its final wording and preserve the rejected alternatives. Identify any unresolved point that could reverse the preference. If definitive documents change a material definition, reopen the comparison before signing rather than assuming the term-sheet analysis still applies.

After closing, hand the agreed definitions to the team responsible for monitoring and lender reports. That team needs the executed obligation. The earlier comparison remains a decision record showing why management accepted that particular combination of price, conditions and operating room.