Ladies and Gentlemen, We are Now About to Begin the Pre-Boarding Process – Term Sheets and Commitment Letters
Term sheets and commitment letters are often used interchangeably, but they serve two distinct purposes. The term sheet will lay out what the lender will provide in the way of financing and also outlines your obligations, but it is non-binding. The commitment letter is the next step where the lender says you met all their pre-conditions and are ready to close.
These pre-closing components are kind of like all the pre-boarding steps when you get to the airport. Before you get on the plane, you have to check your bags, go through security, wait for your boarding position and meet any one of a number of other requirements before you actually get on the plane. At times, it can feel like you will never take off. Term sheets and commitment letters can sometimes feel the same way. However, once you meet all the pre-boarding steps, you will eventually get to a closing and the financing will occur. Below are more details on each.
The term sheet is the lender’s way of telling you what they are comfortable offering under the information you supplied. Of course, they will want to verify everything, which is why a term sheet is just a preliminary and non-binding commitment. It will typically lay out the following information:
- Borrower information
- Size of loan
- Interest Rate
- Term of the financing
- Prepayment option/penalty
- Assumptions that need verified
- Covenants (i.e., what you can and can’t do)
- Closing deliverables; and
- Required guarantees and securitization of collateral
A commitment letter is the next step in the process where the lender has approved the loan and is ready to close. It provides more certainty to the borrower, but there will typically be disclaimers that are inserted (e.g., if the business unexpectedly closes or something happens that materially changes the conditions required to close the loan). However, once you receive the commitment letter, the odds are high that you will go to closing.
Next week, we will review the loan agreement in more detail and highlight some of the key provisions.
A few things that may be of interest:
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- Pennsylvania Tax Update: Business Taxes Move to myPATH | RKL LLP (rklcpa.com)
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As always, please don’t hesitate to email myself (firstname.lastname@example.org), Andy Miller (email@example.com), Christian Miller (firstname.lastname@example.org), Erik Spurlin (email@example.com), Brad Leber (firstname.lastname@example.org) or anyone in our office with questions or comments.
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