A commitment letter is the lender's written agreement to make a loan on stated terms, issued after its credit committee has approved the request. A term sheet comes before approval and binds the lender to almost nothing. The commitment does bind the lender, but only if every condition in it is satisfied by an expiration date, and only as long as nothing material changes in the business. It is a conditional promise, not a guarantee of closing. The work after signing is clearing the conditions before the deadline.
- What it is
- The lender's conditional written promise to lend on stated terms
- When it comes
- After underwriting and credit approval; after the term sheet
- What binds the lender
- The terms, if every condition is met by the closing deadline
- What it usually costs to accept
- A commitment fee and the lender's legal expenses, often owed even if the loan never closes
- How it ends
- It closes into a credit agreement, expires, or is withdrawn under a condition or MAC clause
- On an SBA loan
- Follows SBA approval and mirrors the SBA loan authorization
Where the commitment letter sits
Business lending moves through a sequence of documents, each more binding than the last. A term sheet is a proposal, written before the lender has fully underwritten the business: it says what the lender expects to offer if diligence confirms what it has been told. The lender then underwrites, a credit officer writes up the request in a credit memo, and the credit committee approves it, approves it with changes, or declines. Only after approval does a commitment letter go out.
The commitment letter is therefore the first document that reflects what the lender's committee actually agreed to. It is not the final contract. That is the credit agreement, or the note and loan agreement on a smaller loan, which lender's counsel drafts after the commitment is accepted. The commitment sets the terms the final documents must carry and the conditions that must be cleared before money moves.
| Document | Issued after | What it binds | What the borrower learns from it |
|---|---|---|---|
| Term sheet or indication | An initial review of the file | Usually only confidentiality, expenses and any exclusivity | Whether the lender is interested, and roughly on what terms |
| Commitment letter | Full underwriting and credit committee approval | The lender, on its stated terms, if the conditions are met in time | What the committee actually approved, and what could still stop the loan |
| Credit agreement and loan documents | Negotiation of the commitment's terms into full legal text | Both parties, for the life of the loan | Every covenant, default and remedy in final form |
| Funding | Every condition precedent satisfied or waived | The loan is made | The first payment date |
The easiest way to see what changed in approval is to lay the commitment next to the term sheet. Committees commonly trim the amount, add a guarantor, tighten a covenant or add a condition. An unexplained change is a question to ask before signing. For a side-by-side of the two documents, see term sheet vs commitment letter.
What a commitment letter contains
Lenders format commitments differently, but the same clauses appear in almost every one. Read each against the financing model the lender underwrote, not against memory of the term sheet.
| Clause | What it says | What to check |
|---|---|---|
| Borrower, guarantors and facility | Who borrows, who guarantees, the loan type and amount | The amount still covers the sources and uses; no guarantor appears that you did not expect |
| Pricing and fees | The rate index and spread, any floor, and the fees at closing | Pricing matches the term sheet, or the change is explained |
| Maturity and amortization | The term, the repayment schedule, any interest-only period | Debt service is the figure your coverage was tested on |
| Collateral | The liens the lender takes, including real estate and any personal assets | Whether a residence or a spouse's guarantee was added |
| Financial covenants and reporting | The coverage or leverage tests, their levels and how often they are measured | The definitions, especially of EBITDA, and your headroom against projections |
| Conditions precedent | What must be delivered or true before the lender funds | Which items are in your control and which depend on someone else |
| Acceptance and expiration | The date to sign and return the letter, and the date by which the loan must close | Whether the closing date is realistic against third-party items |
| Fees and expenses | Any commitment fee, and who pays the lender's counsel and third-party reports | Whether they are owed if the loan does not close |
| Material adverse change and diligence outs | When the lender may walk away before funding | How broadly the wording is drawn |
Covenant levels deserve particular care because they outlive the closing. A commitment that states a minimum debt service coverage ratio but leaves EBITDA to be "defined in the loan documents" leaves the most important number open to negotiation later, when the borrower has less leverage. Ask for the EBITDA definition to be settled now, including the add-backs the lender accepted in underwriting.
The conditions: where a commitment can come apart
A commitment is conditional by design. The lender approved a business as it was presented, and the conditions protect it if that picture turns out to be wrong or changes before funding. The conditions fall into three groups, and they carry very different risk.
- Deliverables in the borrower's control: signed documents, organizational records, insurance certificates naming the lender, updated financial statements, evidence of the equity going in. These fail only through delay.
- Third-party deliverables: appraisals, a business valuation, lien and litigation searches, payoff letters from existing lenders, landlord consents, a quality of earnings report. These fail through timing, or because the result comes back different from what was assumed.
- Lender judgment: diligence "satisfactory to the lender", no material adverse change, documentation acceptable to the lender and its counsel. These are where a lender keeps room to reconsider.
The full list, item by item, is covered in conditions precedent. What matters at the commitment stage is the proportion. A commitment whose conditions are mostly deliverables is close to a loan. One that rests on a broad diligence out and several third-party reports not yet ordered is still, in practical terms, a well-developed term sheet.
Order every third-party report the day the commitment is accepted. A closing date is often missed because an appraisal, valuation or payoff letter was started late.
Expiration dates and what happens when they pass
Most commitments carry two dates. The first is an acceptance deadline: the borrower must sign and return the letter, usually with any commitment fee, by a stated date, or the offer lapses. The second is a closing deadline: if the loan has not closed by that date, the lender's obligation ends.
Extensions are at the lender's discretion. A lender asked to extend will usually want current figures first, because its approval rested on a particular period of results. If the closing slips past a quarter-end or a year-end, expect a request for the latest interim statements and, sometimes, for the approval to be refreshed. When results have moved, the terms can move with them. An acquisition that relied on the seller's trailing twelve months is especially exposed: a weaker quarter changes the coverage the loan was sized on.
In a business purchase, the closing deadline also has to line up with the purchase agreement. A buyer whose financing contingency expires before the lender's closing deadline, or whose commitment expires before the purchase agreement's outside date, can lose the protection the contingency was meant to give. See how to write the financing contingency.
Why a commitment is not a guarantee of closing
Commitments do fail to close, almost always for one of a handful of reasons.
| Reason a committed loan does not close | Who controls it | How to reduce the risk |
|---|---|---|
| Results decline between approval and closing | Partly the business; partly timing | Close before the next period's figures change the picture; share interim results early rather than late |
| An appraisal or business valuation comes in low | The appraiser | Test the price and collateral values before the commitment, not after |
| Diligence finds something the file did not disclose | The borrower, at the start | Disclose liens, tax issues, litigation and cash advances in the first package |
| A third party does not deliver in time | Existing lenders, landlords, sellers | Request payoff letters and consents at acceptance |
| Documentation stalls on terms the commitment left open | Both sides | Settle covenant definitions and guarantor scope in the commitment |
| The lender invokes a material adverse change clause | The lender, within the clause's wording | Negotiate a narrow clause tied to the business, not to markets generally |
Most of these begin with something knowable earlier. Once a borrower's documents are in, Transparent builds the full lender package, including the financing model and underwriting memo, in a day, and the memo discloses the difficult items up front, so the lender approves the file as it really is. See the package and how we underwrite.
Commitment letters on SBA loans
On an SBA 7(a) loan, approval happens in two places. A lender in SBA's Preferred Lender Program can approve the loan under its delegated authority; other loans go to SBA for approval. Either way, the SBA terms are recorded in the loan authorization, and the lender's commitment letter follows and mirrors it. The commitment will carry SBA's conditions alongside the lender's own.
- Personal guarantees from every owner of 20% or more.
- For a change of ownership, verification of an equity injection of at least 10% of total project costs before funding.
- Where seller financing counts toward that injection, a seller note on full standby, with no principal or interest paid, for the life of the SBA loan.
- Where the amount financed, less appraised real estate and equipment, exceeds $250,000, an independent business valuation; the loan for the purchase cannot exceed it.
- From 1 October 2026 under SOP 50 10 8.1, financial due diligence on every change of ownership, and a quality of earnings report on acquisitions of $3 million or more excluding real estate.
The valuation condition is the one that most often changes an SBA commitment after the fact. If the appraised value comes in below the price, the loan shrinks to fit it, and the gap has to be closed with more equity, a lower price or a larger seller note. Asking the lender to order the valuation as soon as the commitment is accepted, rather than waiting for other conditions, is the cheapest insurance in an SBA acquisition.
Before you sign it
- Sort the conditions into deliverables, third-party items and lender-judgment items, and note who owns each one.
- Put the closing deadline next to the purchase agreement's dates, and add time for the slowest third party.
- Find out which fees and expenses are owed if the loan does not close, and whether any commitment fee is credited at closing.
- Read the material adverse change clause and ask for it to refer to the business, not to lending markets.
- Keep other lenders warm until the judgment-based conditions have cleared.
Common questions
- Is a commitment letter legally binding?
- On the lender, yes, but only on its terms: if every condition is satisfied by the closing deadline and no material adverse change occurs, the lender must lend. The borrower is usually not obliged to borrow, but it typically owes any commitment fee and the lender's expenses once it accepts.
- What is the difference between a term sheet and a commitment letter?
- A term sheet comes before credit approval and binds the lender to almost nothing beyond confidentiality and expenses. A commitment letter comes after approval and binds the lender to lend, subject to its conditions and expiration date.
- Can a lender back out after issuing a commitment letter?
- Only through the commitment's own terms: an unmet condition, a missed deadline, diligence that is not satisfactory, or a material adverse change. How much room that leaves depends on how broadly those clauses are written.
- Is the commitment fee refundable?
- Usually not once the lender has approved the loan, though many commitments credit it against fees due at closing. The letter should say both whether it is refundable and whether it is credited; if it does not, ask before signing.
- What happens if the commitment expires before closing?
- The lender's obligation ends. Most lenders will consider an extension, but typically after reviewing current financial statements, and the terms can change if results have moved since approval.
- Does an SBA loan have a commitment letter?
- Yes. After the loan is approved under the lender's delegated authority or by SBA, the lender issues a commitment that reflects the SBA loan authorization and adds SBA's conditions, such as equity injection verification and guarantees from 20% owners.