Part One: Private Credit Term Sheets: Evaluating Pricing, Covenants, and Repayment Terms

When evaluating private credit financing, borrowers often focus first on the interest rate. While pricing directly affects borrowing costs, it represents only one component of a financing arrangement.

Two term sheets offering similar amounts of capital can produce materially different outcomes depending on their covenants, repayment obligations, liquidity requirements, and operating flexibility.

For venture-backed companies, sponsor-backed businesses, and lower-middle-market borrowers, these differences can be particularly important. A financing structure appropriate for a profitable, cash-generating business may be poorly suited to a rapidly growing software company or an asset-intensive business.

The central question is not simply how much the capital costs, but how the financing supports the company's operating model, growth strategy, and future capital requirements.

Understanding the All-In Cost of Credit

Private credit pricing extends beyond the stated interest rate. Borrowers should consider upfront fees, original issue discounts (OID), unused commitment fees, exit fees, prepayment premiums, and, where applicable, equity warrants.

These provisions can materially affect financing economics, particularly when borrowers expect to refinance, pursue acquisitions, or repay debt ahead of maturity.

For example, a growth-stage technology company evaluating venture debt may receive competing proposals with different interest rates, warrant coverage, draw periods, and final payment obligations. The lowest stated interest rate may not represent the lowest overall financing cost.

Similarly, a middle-market borrower evaluating a $50 million senior secured term loan should consider whether prepayment premiums or call protection could create meaningful costs following an acquisition, recapitalization, or refinancing.

Beyond contractual pricing, borrowers should distinguish between cash-pay interest and payment-in-kind (PIK) interest. PIK can preserve liquidity in the near term but increases outstanding principal and potentially the overall repayment obligation.

The appropriate comparison is the all-in cost of capital over the expected life of the financing, considering different repayment and refinancing scenarios.

Financial Covenants Shape Operating Flexibility

Loan covenants establish financial and operational boundaries that borrowers must observe throughout the financing period.

Financial maintenance covenants may require companies to maintain specified leverage ratios, liquidity levels, or fixed-charge coverage. Other provisions can restrict additional borrowing, acquisitions, distributions, and asset transfers.

However, covenant structures vary considerably across private credit products.

For profitable middle-market companies, lenders commonly focus on Debt/EBITDA and cash flow generation. For growth-stage software companies, lenders may instead emphasize annual recurring revenue (ARR), minimum liquidity, and the sustainability of customer relationships.

Sidley Austin's March 2026 analysis of financial covenants in private credit transactions explains how these provisions can be adapted to different operating models, including recurring-revenue businesses and asset-intensive companies.¹

A critical consideration is covenant headroom: the amount of operating flexibility available before a company breaches a financial covenant.

For example, a company with $15 million of EBITDA and $60 million of debt operates at 4.0x Debt/EBITDA. A maximum leverage covenant of 5.0x provides room for financial underperformance, although the actual cushion depends on changes in both EBITDA and outstanding debt.

Borrowers should therefore evaluate covenants against realistic forecasts and downside scenarios rather than expected performance alone.

Equally important are the underlying definitions. Adjusted EBITDA, permitted add-backs, cash netting, and pro forma acquisition adjustments can materially influence leverage calculations and available debt capacity.

Sidley notes that these definitions are frequently negotiated because leverage ratios govern not only financial maintenance testing but also pricing, incremental indebtedness, and other contractual rights.¹

Recurring Revenue Lending and the Transition to EBITDA

Recurring-revenue lending introduces additional considerations for software and technology companies.

For businesses with predictable subscription revenue but limited current profitability, lenders may initially determine debt capacity using a Debt/ARR framework rather than traditional cash-flow leverage.

These structures require careful consideration of how ARR is defined, including treatment of churn, customer concentration, contracted versus recognized revenue, and changes in recurring revenue.

Some financing arrangements contemplate transitioning from ARR-based underwriting or covenants toward EBITDA-based metrics as the borrower reaches profitability.

For a software company pursuing an acquisition strategy, the timing and mechanics of that transition can materially influence future borrowing capacity.

Borrowers should understand whether the transition is automatic, optional, or contingent upon satisfying specific financial requirements.

The definitions governing both ARR and EBITDA should be evaluated alongside the company's operating plan, acquisition pipeline, and projected profitability.

A financing structure that provides sufficient capacity today may become restrictive if the company's growth or margin trajectory differs from expectations.

Repayment Structure and Liquidity Requirements

A facility's repayment schedule can significantly influence liquidity and the ability to reinvest.

Loans requiring regular principal amortization place different demands on cash flow than facilities with bullet maturities. Mandatory prepayments, excess cash flow sweeps, and restrictions on cash usage can further reduce capital available for operations.

For a profitable, sponsor-backed company, scheduled amortization may be manageable given predictable cash generation. For a venture-backed business investing heavily in product development and customer acquisition, the same repayment schedule could create unnecessary liquidity pressure.

Silicon Valley Bank, a division of First Citizens Bank, identifies extending cash runway, supporting growth, and providing liquidity between funding milestones as important applications of venture debt.²

Borrowers should also evaluate delayed-draw commitments, interest-only periods, minimum cash requirements, and the conditions governing future advances.

A facility with attractive pricing may offer limited practical value if committed capital becomes unavailable when financial performance changes.

Similarly, a minimum liquidity covenant should be measured against projected cash needs, including operating expenses, capital expenditures, acquisitions, and potential periods of weaker performance.

The objective is to align repayment obligations with sustainable cash generation and anticipated investment requirements.

Evaluating Competing Private Credit Proposals

Comparing private credit proposals requires a consistent assessment of financing economics and operating flexibility.

Borrowers should model the all-in cost of capital, covenant compliance, liquidity requirements, and repayment obligations under both base-case and downside scenarios.

They should also understand how changes in operating performance could affect borrowing availability, interest expense, or the ability to refinance.

A lower-cost facility may be less attractive if tighter covenants increase refinancing risk or repayment obligations constrain liquidity.

Conversely, a facility with modestly higher pricing may provide meaningful value through greater covenant headroom, flexible amortization, or more reliable access to committed capital.

Ultimately, the most appropriate financing is not necessarily the cheapest. It is the structure that balances cost, liquidity, and risk with the company's financial profile and long-term objectives.

In Part 2: Private Credit Term Sheets — Collateral, Debt Capacity, and Structural Flexibility, we examine how collateral requirements, incremental borrowing provisions, acquisition flexibility, and lender execution capabilities influence the long-term value of a financing arrangement.

About Axis Group Ventures

Axis Group Ventures is a boutique investment banking and strategic advisory firm focused on global debt placement and private-market secondaries for venture- and private equity-backed companies. We work with founders, C-suite executives, and investors to develop and execute customized private-market capital solutions.

For more information, visit www.axisgroupventures.com.

Sources

¹ Sidley Austin (March 24, 2026). Financial Covenants in Private Credit Transactions.

² Silicon Valley Bank, a division of First Citizens Bank. Accelerate Growth with Venture Debt Financing.

Disclosures & Disclaimers

This blog post is provided by Axis Group Ventures for informational and educational purposes only. It does not constitute investment, legal, accounting, or tax advice and should not be relied upon as such. Nothing contained herein should be interpreted as an offer to buy or sell any securities. Any actual offer or solicitation will be made exclusively through formal documentation provided by the relevant issuer or seller.

Axis Group Ventures is not a registered broker-dealer and does not execute, negotiate, or recommend the purchase or sale of securities. Any introductions or private-market support provided by Axis Group Ventures are conducted strictly in an advisory and consulting capacity. Readers should conduct their own due diligence and consult qualified professionals before making any financial decisions.

Investments in private securities involve significant risks, including the potential loss of the entire investment, and are typically illiquid. Past performance does not guarantee future results.

This blog post was developed using Axis Group Ventures’ proprietary market knowledge, professional insights, and years of industry experience, supplemented by large language model technology to assist with drafting and editorial refinement.

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