Facility term versus amortisation period
Two of the most consistently misunderstood concepts on a commercial term sheet are the facility term (the period until the facility matures and must be repaid or refinanced) and the amortisation period (the schedule against which principal is reduced during the facility). They are not the same number, and the gap between them is structural to commercial debt.
A typical commercial facility runs a 3–5 year facility term with a 25-year amortisation. The borrower pays down principal as if the loan amortised over 25 years, but the entire remaining principal balance is due at maturity (3–5 years from settlement). The facility is then either refinanced or repaid. This is fundamentally different from residential lending, where the facility term and amortisation are typically the same (25–30 years).
The bullet payment is real
Commercial facilities require a deliberate refinance or repayment plan ahead of maturity. The biggest avoidable mistakes in commercial financing are made by sponsors who treat the facility as a 25-year residential equivalent and only address the maturity in the final 60 days — at which point pricing and lender choice are both compromised.
Interest-only versus principal-and-interest
Most investment commercial debt is structured interest-only for at least part of the facility term — frequently the full term on shorter (3-year) facilities, and 1–3 years IO followed by P&I on longer (5-year) facilities. Owner-occupier commercial is more frequently P&I throughout, reflecting the operating-business borrower's preference for principal reduction over time.
Three considerations drive the IO versus P&I decision: serviceability headroom (IO commitments are smaller, which lifts ICR), tax treatment for investment property (interest on investment debt is deductible regardless of P&I status), and lender appetite (most lenders accept IO on investment commercial; some require P&I within the facility term, particularly on smaller facilities).
Fixed versus variable interest rates
Most commercial debt is variable, priced against a BBSY benchmark plus a fixed credit margin. Fixed-rate commercial loans exist but carry a fixing premium (30–80 bps over variable) and material break costs on early refinance. The fixed-versus-variable decision and the partial-fixing structures are covered in detail in the commercial loan interest rates guide.
Covenants — the operational discipline of commercial debt
Covenants are the operating obligations attached to the facility — measurable conditions the borrower must satisfy throughout the term, breach of which triggers a review event with the lender. Four covenants appear on almost every commercial term sheet.
| Covenant | What it tests | Typical level |
|---|---|---|
| LVR covenant | Facility ≤ X% of asset value | 65–75% — tested annually against rolling valuation |
| ICR covenant | Net income ≥ X× interest | 1.10–1.50× — tested at stressed rate |
| Financial reporting | Annual financials within X days of year-end | 120–180 days — non-negotiable |
| Material adverse change | No material adverse change to borrower position | Subjective — defined in detail in facility doc |
Beyond the standard four, larger facilities frequently carry additional covenants — minimum tangible net worth on the sponsor, restrictions on additional debt, restrictions on related-party transactions, mandatory cash sweep provisions on excess income. The negotiation of these is where experienced borrowers extract material flexibility versus standard term sheet terms.
The commercial loan fee stack
| Fee | Typical level | When paid |
|---|---|---|
| Establishment fee | 0.25–1.50% of facility value | At settlement |
| Line fee | 0.25–0.75% pa on undrawn portion | Quarterly on construction / revolving |
| Legal documentation fee | $3,000–$15,000+ | At settlement |
| Valuation fee | $2,500–$15,000+ | Before formal credit decision |
| Annual review fee | $1,500–$5,000 pa | Annually |
| Break cost on early repayment | 0.5–1.5% if fixed | On early termination |
| Discharge fee | $300–$1,500 | At maturity / refinance |
When comparing competing term sheets, always reconcile to effective annualised cost including fees, not headline rate. A lender quoting 7.50% with a 0.75% establishment fee on a 3-year facility runs an effective annualised cost ~25 bps higher than the headline rate; a lender quoting 7.30% with a 1.75% establishment fee runs ~58 bps over — the apparent 20 bps pricing advantage is more than absorbed by the fee differential.
Security and guarantee structures
Standard commercial facility security is a first registered mortgage over the subject property, plus general security agreement (GSA) over the borrowing entity, plus personal guarantees from directors / unit holders. Five structural points are worth understanding.
- Personal guarantees are usually unlimited and joint-and-several — meaning each guarantor is exposed to the full loan balance, not their proportional share
- Cross-collateralisation across multiple properties is sometimes proposed by lenders; it simplifies their security position but compresses borrower flexibility on individual asset sales or refinances
- Specific security over additional assets (other commercial properties, business assets, securities) can be requested on weaker fits; this should be resisted where possible as it reduces optionality on the rest of the portfolio
- Guarantee caps and carve-outs can sometimes be negotiated, particularly on stronger sponsor profiles or where the sponsor wants to insulate non-related assets
- Spouse / partner guarantees are now restricted under common practice and are rarely required where the spouse has no direct beneficial interest in the borrowing entity
Events of default — what triggers a facility call
Every commercial facility document contains a list of events of default — triggers that allow the lender to demand immediate repayment of the facility. Standard triggers include payment default, breach of financial covenant, breach of reporting obligations, insolvency of the borrower or guarantor, material misrepresentation, and unauthorised dealing with the security property. The drafting around 'material' adverse changes and the cure periods available before a breach becomes a default are the most negotiable elements of the default clause — and worth careful review on any term sheet.