Commercial Loan Commitment Letters: A Borrower’s Review Guide

01

Confirm what the lender has actually committed to

Start with the borrower and guarantor names, approved amount, loan purpose, collateral, use of proceeds, and transaction structure. Compare them line by line with the application, purchase agreement, construction budget, equipment quote, or refinance payoff. A commitment may be subject to final documentation, satisfactory due diligence, no material adverse change, and other conditions. Identify whether it is binding, conditional, or only an expression of intent, and ask counsel to explain the legal effect rather than relying on the document’s title.

02

Translate pricing into an all-in borrowing cost

Record the benchmark, spread, fixed or floating rate, floor, reset frequency, default rate, interest-calculation convention, and the date or event when pricing is established. Add origination, commitment, underwriting, legal, appraisal, environmental, inspection, unused-line, annual, exit, and third-party fees. Model the expected payment and total cash cost under the base structure and a reasonable higher-rate case. A competitive headline rate can be offset by a floor, short reset, expensive prepayment provision, or recurring fees.

• Requested amount and use of proceeds
• Historical and current financial statements
• Complete debt and ownership schedules
• Collateral and transaction documentation

03

Separate amortization from maturity

The payment schedule may amortize over a longer period than the stated loan maturity, creating a balloon balance that must be repaid or refinanced. Confirm interest-only periods, principal-payment start date, amortization period, maturity, extension options, extension tests, and any re-amortization after construction or draw periods. Model the balance at maturity and the cash flow required to qualify for a future refinance; do not treat an extension option as automatic unless its conditions are understood and realistically achievable.

04

Read prepayment and exit provisions early

A commitment may provide for a declining prepayment fee, yield maintenance, defeasance, minimum-interest requirement, lockout, make-whole payment, or another exit cost. These terms can affect a sale, refinance, equity recapitalization, or early payoff even when the current payment is affordable. Ask for examples at several potential payoff dates and confirm whether casualty, condemnation, required asset sales, partial releases, or a lender-initiated acceleration receive different treatment.

05

Map collateral, guarantees, and control rights

List every pledged asset, lien position, deposit relationship, assignment, mortgage, security interest, stock or membership pledge, and personal or corporate guarantee. Note whether future assets, proceeds, rents, leases, contracts, accounts, or affiliated entities are included. Identify cross-default, cross-collateralization, cash-management, lockbox, blocked-account, and setoff provisions. Reconcile these requirements to existing liens and loan agreements so releases, subordinations, intercreditor arrangements, and UCC terminations can be addressed before closing.

06

Convert closing conditions into a controlled checklist

Commitments commonly require financial statements, tax returns, entity documents, borrowing authority, insurance, title work, lien searches, appraisals, environmental reports, surveys, leases, franchise approvals, landlord waivers, licenses, permits, equity verification, payoff letters, and satisfactory legal documentation. Build a dated matrix showing the responsible party, provider, order date, expected delivery, approval status, dependencies, and expiration date. Distinguish items controlled by the borrower from reports ordered or approved by the lender.

07

Test covenants against the operating plan

Review financial covenants, reporting deadlines, borrowing-base rules, deposit requirements, distributions, additional-debt limits, capital-expenditure limits, change-of-control provisions, insurance duties, and restrictions on asset sales or affiliate transactions. Calculate proposed ratios using the lender’s definitions, not internal shorthand, and test them against the forecast and downside case. A covenant can constrain a business even when payments are current, so assign an internal owner and create a compliance calendar before closing.

08

Protect liquidity around fees, deposits, and equity

Identify which commitment fees and deposits are refundable, nonrefundable, earned on acceptance, credited at closing, or available to pay third-party costs. Confirm the equity contribution, source and timing of funds, required reserves, working capital left after closing, and treatment of cost overruns. Do not use the same dollars simultaneously for required equity, closing costs, lender reserves, and post-closing liquidity. Keep a contingency for report updates, legal work, valuation changes, and conditions discovered during diligence.

09

Control acceptance, expiration, and transaction timing

Record the acceptance deadline, commitment expiration, rate-lock period, report validity, purchase-agreement milestones, payoff dates, construction or delivery schedule, and any closing extension cost. A signed commitment does not eliminate execution risk. Work backward from the contractual closing date, allow time for lender review and document negotiation, and preserve alternatives if a third-party report, appraisal, title issue, lien release, or approval takes longer than expected.

010

Complete a cross-document review before signing

Compare the commitment with the final term sheet, application, sources and uses, debt schedule, organizational chart, purchase or lease documents, projections, and existing credit agreements. Mark unresolved questions and negotiated changes in one issues list, and obtain written confirmation of material revisions. Qualified counsel should review enforceability, remedies, guarantees, waivers, and conflicts with other agreements. PFCS can help organize the financing process and lender communication, but the lender and final loan documents determine approval, obligations, and terms.