What should a commitment letter for a business acquisition loan include?

A commitment letter is the lender’s written offer, issued once it has decided in principle to finance your purchase. It is not funded money. Legal commentary from an Ontario firm describes it as generally a conditional commitment: the lender agrees to lend on stated terms, but only once you meet the conditions it lists. What the letter contains, and what to check, follows from that.

The terms it should state

• The loan amount and structure, with the repayment terms.
• The security the lender expects, often registrations under provincial personal property security legislation, and whether a personal guarantee is required.
• The conditions that must be satisfied or delivered before funds are advanced.
• The covenants, meaning the financial and operating promises you must keep once the loan is funded.
• The fees, including any payable simply for accepting the commitment, and an expiry date.

Check the inputs and the guarantee

BDC’s application checklist shows what a lender builds on: an agreed purchase price and how it was determined, the transaction structure, a letter of intent and an expected closing date. The letter should match each. On guarantees, the federal CSBF program lets a lender take an unsecured personal guarantee up to the original loan amount, and a guarantee secured by collateral assets can make the loan ineligible, but a conventional letter has no such program rule behind it, so read the guarantee clause for its cap and scope.

What is binding, and for how long

Until the conditions are satisfied, and often until final loan documents are signed, the lender may not be obliged to fund. Some provisions, such as confidentiality, exclusivity or cost reimbursement, are often drafted to bind you at once. Compare the expiry date with your purchase agreement’s closing date and any financing condition you negotiated, because a lapsed letter may be renewed on different terms. CSBF term loans add a step: the lender and borrower sign a loan document setting out the principal, the rate of interest and the repayment terms by first disbursement.