Commitment letter

Buyers often treat a preliminary conversation with a loan officer, or even a pre-approval, as equivalent to having financing lined up. A commitment letter is a meaningfully firmer step than either — it is the lender putting specific terms in writing and agreeing to lend against them, provided the stated conditions are met.

What it typically lists as conditions

• Satisfactory completion of the lender’s own due diligence on the target business
• Registration of the agreed security, including a general security agreement and any PPSA registration
• Delivery of personal guarantees from the buyer, and any subordination or intercreditor agreement with other lenders
• No material adverse change in the target’s business between the letter and closing

Why the timing matters against the purchase agreement

A buyer’s purchase agreement commonly includes a financing condition that lets the buyer walk away if financing does not close. A commitment letter is usually what that condition is actually waiting on — it is the practical evidence that financing has firmed up enough to remove the condition and proceed toward a closing date with confidence.

What can still go wrong after it is issued

A commitment letter is conditional, not unconditional — if diligence turns up something the lender did not expect, or a listed condition cannot be satisfied by closing, the lender can decline to fund even after issuing the letter. Reading the conditions closely, rather than treating the letter itself as the finish line, is what avoids a late surprise.