Part Two: Private Credit Term Sheets: Collateral, Debt Capacity, and Structural Flexibility
This is part 2, extending from an earlier post here. Part 1: Private Credit Term Sheets — Evaluating Pricing, Covenants, and Repayment Terms.
When evaluating private credit financing, borrowers should consider more than pricing and financial covenants. Collateral requirements, restrictions on additional borrowing, acquisition flexibility, and lender execution capabilities can have equally important implications.
These considerations are particularly relevant for venture-backed companies, sponsor-backed businesses, and lower-middle-market borrowers pursuing acquisitions or financing growth across multiple business units.
A term sheet offering attractive economics may introduce restrictions that limit a company's ability to obtain additional financing, deploy capital, or reorganize its corporate structure.
The objective is to secure financing that addresses current capital needs while preserving flexibility for future strategic initiatives.
Collateral, Guarantees, and Structural Protections
Collateral requirements and structural protections influence both lender risk and borrower flexibility.
Depending on the financing, lenders may require security interests in company assets, subsidiary guarantees, equity pledges, or restrictions on additional liens and indebtedness.
These considerations become particularly important when financing a subsidiary, establishing an asset-backed facility, or operating across multiple jurisdictions.
For example, a multinational technology company seeking a $30 million–$40 million senior secured loan at a U.S. subsidiary may evaluate financing structures ranging from subsidiary-only collateral to broader parent guarantees or co-borrower arrangements.
Each structure introduces different implications for borrowing at the parent level, acquisitions, asset transfers, and future financing alternatives.
A facility supported solely by subsidiary assets may preserve greater parent-level flexibility, although lenders may require additional protections, including equity pledges, distribution restrictions, or limitations on intercompany transactions.
Borrowers should also evaluate whether the lender expects a first-priority security interest in substantially all assets or a narrower collateral package tied to specific operating assets.
The appropriate structure depends on enterprise value, financial performance, collateral quality, and the availability of alternative financing.
Asset-Based Financing and Borrowing-Base Mechanics
For asset-intensive businesses, collateral eligibility and borrowing-base provisions may be as important as the interest rate.
Asset-based lenders typically determine availability using eligible receivables, inventory, equipment, or other collateral, subject to advance rates, concentration limits, reserves, and valuation requirements.
For example, a technology infrastructure company financing GPU inventory or related equipment may receive an asset-based proposal with advance rates tied to acquisition cost, appraised value, or contracted offtake prices.
However, the headline advance rate does not necessarily represent the amount of capital available.
Eligibility restrictions, inventory aging, depreciation, concentration limits, customer deposits, and collateral valuation methodologies can materially reduce borrowing capacity.
In a warehouse or forward-flow facility, additional considerations may include advance rates against eligible financial assets, concentration limits, cash waterfalls, portfolio performance triggers, and recourse arrangements.
Borrowers should model borrowing availability under both expected operating conditions and downside scenarios.
DLA Piper's June 2026 discussion of private credit market developments highlights the increasing relevance of asset-backed lending and the importance of specialized underwriting and documentation discipline.¹
The key question is not simply the stated facility commitment, but how much capital the borrower can reliably access throughout the life of the financing.
Incremental Debt and Acquisition Flexibility
One of the most important considerations in a private credit term sheet is the borrower's ability to raise additional capital after closing.
Growth-oriented companies may require incremental financing to support acquisitions, working capital, equipment purchases, or product expansion.
A senior secured term loan typically includes restrictions on additional indebtedness, liens, investments, and acquisitions. Even where additional borrowing is permitted, the facility may impose leverage tests, fixed-dollar limits, or lender consent requirements.
For a software holding company pursuing a buy-and-hold acquisition strategy, these provisions can directly influence the pace and financing of future transactions.
Consider a business with a $75 million senior secured term loan that anticipates acquiring two additional software companies over the next 24 months.
The borrower should evaluate whether the financing allows incremental term debt, acquisition financing, seller notes, earnout obligations, and additional subsidiary guarantees.
Importantly, permitted indebtedness does not automatically mean the borrower has sufficient lien capacity or permission to use the proceeds for acquisitions. These provisions must work together.
Sidley Austin's analysis explains how leverage-based incurrence tests can govern incremental borrowing, acquisitions, and distributions, making covenant definitions important beyond quarterly financial compliance.²
For companies pursuing acquisition-driven growth, negotiating reasonable flexibility at the initial closing may reduce the need for future amendments and lender approvals.
Lender Flexibility and Execution Certainty
Private credit facilities are frequently negotiated directly between borrowers and individual lenders or smaller lending groups, allowing terms to reflect specific financing requirements.
However, lenders can differ substantially in sector expertise, underwriting approach, capital availability, and willingness to accommodate future transactions.
Morgan Lewis's July 2026 analysis of private credit and sponsor finance identifies speed, execution certainty, and tailored financing solutions as important characteristics of the market.³
For borrowers, selecting an appropriate institutional credit investor extends beyond comparing headline pricing.
A recurring-revenue software business may benefit from a lender experienced in ARR-based underwriting and the transition to EBITDA-based financing.
An asset-intensive technology company may require a lender familiar with equipment values, inventory depreciation, and specialized collateral.
Similarly, an acquisition-oriented company may benefit from a credit investor with experience supporting multiple add-on acquisitions and providing incremental debt capital.
Borrowers should assess whether a lender has sufficient capital to fund the proposed facility, whether additional investment committee approvals are required, and whether future borrowing commitments are subject to material conditions.
They should also understand the lender's historical approach to amendments, waivers, and requests for supplemental financing.
Execution certainty involves more than receiving a term sheet. It includes completing diligence, obtaining final approvals, negotiating definitive documentation, and funding within the anticipated transaction timeline.
From Term Sheet to Definitive Documentation
A negotiated term sheet establishes the commercial framework for a financing, but important provisions are often refined during legal documentation.
Definitions of EBITDA, permitted indebtedness, restricted payments, mandatory prepayments, and events of default can materially influence the borrower's rights and obligations.
A term sheet may generally permit acquisitions, while definitive documentation imposes leverage limitations, minimum liquidity requirements, or consent conditions that restrict the company's acquisition strategy.
Similarly, a delayed-draw commitment may include funding conditions that limit access to capital if financial performance deteriorates.
Borrowers should also review amendment provisions, cross-defaults, collateral release requirements, and lender consent thresholds.
These terms can affect future refinancing, restructuring, acquisitions, or the introduction of additional financing providers.
Early alignment among management, financing advisors, institutional credit investors, and legal counsel can reduce execution risk and help preserve the original commercial intent of the financing.
Evaluating the Complete Financing Structure
Borrowers should evaluate collateral requirements, guarantees, borrowing-base availability, incremental debt capacity, acquisition flexibility, and lender execution capabilities alongside financing economics.
These provisions should be considered together with the pricing, financial covenants, liquidity requirements, and repayment obligations discussed in Part 1: Private Credit Term Sheets — Evaluating Pricing, Covenants, and Repayment Terms.
For growth-oriented businesses, a modest pricing premium may be justified by the ability to complete acquisitions, establish supplemental asset-backed facilities, or raise incremental capital without renegotiating the entire financing arrangement.
The objective is not simply to secure the lowest-cost debt, but to establish a capital structure that supports operating performance, future growth, and long-term financial flexibility.
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 DLA Piper (June 15, 2026). 2026 Debtwire Private Credit Forum: Areas to Watch for Market Participants.
² Sidley Austin (March 24, 2026). Financial Covenants in Private Credit Transactions.
³ Morgan Lewis (July 7, 2026). Private Credit's Evolution and the Changing Sponsor Finance Landscape.
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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