Term Sheet vs. Commitment Letter: What Actually Binds Your Lender Before You Close

You applied, the lender came back interested, and now there is a document on your desk with a rate, a dollar amount, and a repayment term. It feels like an approval. Before you sign anything else, celebrate anything, or tell your other lenders you are out, you need to know which document you are actually holding — because in business lending, two documents that look nearly identical carry completely different weight.

One is the term sheet. The other is the commitment letter. The gap between them is the gap between “here is what we might do” and “here is what we will do if you do your part.”

The short version

• Term sheet (or proposal letter / letter of interest): A summary of proposed terms. In almost every case it is explicitly non-binding. The lender can withdraw, re-price, or restructure the deal with no liability to you.
• Commitment letter: A signed undertaking by the lender to fund the loan — but conditioned on you satisfying a defined list of requirements by a defined date. It is the first document that can create real obligations on the lender’s side.

Read the document itself, not the label on top. Lenders are inconsistent with naming. What controls is the language inside: look for the words “binding,” “non-binding,” “subject to,” “conditioned upon,” and “this letter does not constitute a commitment to lend.”

Why the term sheet is usually non-binding — on purpose

A term sheet typically comes before full underwriting. The lender has looked at your application and basic financials and decided the deal is worth pursuing. It has not yet verified your tax transcripts, ordered appraisals, run final credit, confirmed collateral values, or cleared you through its credit committee.

So the term sheet protects the lender’s right to change its mind once the real work is done. Common non-binding language reads something like: “This term sheet is for discussion purposes only and does not represent a commitment or obligation to lend.” When that sentence is present, nothing in the document forces the lender to fund — not the rate, not the amount, not the closing date.

That does not make a term sheet worthless. It tells you the lender is serious, it anchors the price you will negotiate from, and it lets you compare offers side by side. But treat it as a starting point, not a guarantee.

The parts that can bind, even in a non-binding term sheet

Lenders often carve out a few clauses as binding even when the economic terms are not. Watch for these, because they can cost you money or freedom:

• Exclusivity / no-shop: You agree not to negotiate with other lenders for a set period. Sign this and you have taken yourself off the market before you have a real commitment.
• Expense reimbursement / deposit: You agree to cover the lender’s due-diligence costs — appraisal, legal, environmental, field exam — whether or not the deal closes. A good-faith deposit may be non-refundable.
• Confidentiality: Usually harmless, but read it.

If the economics are non-binding but the no-shop and expense clauses are binding, you are bearing risk the lender is not. That is a negotiation point, not a formality.

What a commitment letter actually promises

A commitment letter is issued after underwriting is substantially complete and credit approval is in hand. It says the lender commits to make the loan on the stated terms — provided you satisfy the conditions precedent it lists. Those conditions are the whole ballgame. A commitment to lend “subject to” forty open items is only as strong as your ability to close those forty items.

Typical conditions precedent include:

• Final, verified financial statements and tax transcripts that match what you submitted
• Acceptable appraisal, title, survey, and (for real estate) environmental review
• Perfected lien position — UCC filings, mortgages, or deeds of trust recorded as required
• Required insurance (hazard, flood where applicable, sometimes life insurance assigned to the lender)
• Executed guaranties and entity/authorization documents
• No material adverse change in your business or finances before closing
• Minimum equity injection or source-of-funds verification, where required

If you meet every condition on time and the lender still refuses to fund, you may have a breach-of-contract claim that you would not have against a non-binding term sheet. That is the practical difference. But notice how much power the conditions and the material adverse change clause hand back to the lender — a broad MAC clause lets a lender exit if your numbers soften before the wire goes out.

SBA loans add another layer

If you are financing through an SBA 7(a) or 504 loan, the lender’s own commitment is itself conditioned on SBA requirements. The binding, condition-by-condition document in that world is the SBA Authorization — the itemized list of everything that must be true before the loan can close and the guaranty stays valid. A lender’s commitment letter on an SBA deal will fold those federal conditions in. Clearing the lender is not the same as clearing SBA.

The expiration date is not decoration

Both documents usually carry a date by which you must accept, and a commitment usually carries an outside closing date. Miss it and the commitment can lapse — forcing a re-approval at whatever rates and terms exist then, not the ones you were quoted. In a moving-rate environment, a lapsed commitment can mean a materially worse loan. Calendar every date and build in margin for third-party delays like appraisals and title work, which are rarely under your control.

How to read either document without a lawyer in the room

You should still have counsel review a binding commitment on a significant loan. But here is how to triage the document yourself first:

• Find the binding/non-binding sentence. Search for “commitment,” “binding,” and “does not obligate.” That one sentence tells you which document you have.
• List every “subject to” and “conditioned upon.” Each one is a task you must complete. Ask which are in your control and which depend on third parties.
• Price the fees. Commitment fees, deposits, and expense-reimbursement clauses — are any non-refundable, and when are they triggered? Tie this back to how your total cost and net funding actually work.
• Check exclusivity. Are you barred from shopping other lenders? For how long?
• Read the MAC clause. How broadly can the lender define a “material adverse change” and walk away?
• Confirm the dates. Acceptance deadline, condition deadlines, outside closing date.

The trap: Treating a term sheet like an approval. Borrowers stop shopping, decline competing offers, and sometimes sign a lease or a purchase contract on the strength of a document that legally commits no one to lend them a dollar. Keep your alternatives warm until you hold a commitment whose conditions you can actually satisfy.

A note on good faith

Even a non-binding term sheet is not a license for either side to act in bad faith. Under the Uniform Commercial Code, every contract or duty within its scope carries an obligation of good faith in its performance and enforcement. That does not convert a non-binding proposal into a loan, but it is why the binding carve-outs — exclusivity, expense, confidentiality — are enforced as written. Say what you mean in these documents, because the parts that bind, bind fully.

The takeaway

A term sheet opens the conversation; a commitment letter can close it — but only after you clear its conditions. Do not let the formatting fool you. The controlling language is inside the paragraphs, not in the title at the top. Before you sign, know exactly which obligations are yours, which are the lender’s, which clauses bind regardless, and what happens if a date slips. That five-minute read is the difference between negotiating from strength and discovering, a week before you needed the money, that no one ever promised it.

Important: MidBank is not a bank, a financial institution, or a financial advisor. We are an advocate and ISO affiliate that connects businesses to vetted third-party providers. This article is general information published on October 26, 2026, not legal, tax, or financial advice — rules and rates change, and your situation is specific to you. Confirm details with the primary sources linked above and with a qualified tax or legal professional before acting.