A payoff letter is a creditor's written statement of the exact amount needed to retire its loan on a stated date, how much more accrues for each day after that date, where to wire the money, and its commitment to release its liens and file a UCC-3 termination once paid. A new lender will not fund a refinance, and a buyer's lender will not fund an acquisition, without one from every creditor being paid off, because the letter is what converts an old lien into a clean first position. Asking for letters early surfaces prepayment fees and notice periods while there is still time to plan for them.
- Who issues it
- Each creditor being paid off: banks, equipment lenders, cash advance funders, the IRS
- Who needs it
- The new lender and its closing agent, before they fund
- What it fixes
- The payoff amount on a stated date, plus a daily amount after it
- What it promises
- Release of liens and guarantees, and a UCC-3 termination, once paid
- What goes wrong
- Expired dates, missing fees, conditional releases and late requests
What the letter does
When a new loan replaces an old one, the new lender's money goes straight to the old lender at closing. Before sending it, the new lender needs certainty on two points: that the amount wired will fully retire the old debt, and that the old lender will then give up its security interest so the new lender's lien becomes first. The payoff letter gives both. It is addressed to the borrower, the new lender or both, signed by the existing creditor, and relied on by the closing agent when it builds the funds flow.
It matters as much in an acquisition as in a refinance. When a buyer purchases a business, the seller's existing loans are almost always paid off at closing so the buyer's lender takes a clean first lien, and each of those lenders issues a payoff letter. The buyer's lender funds against them, and the payoffs come out of the purchase price before the seller is paid. See paying off the seller's debt at closing.
Anatomy of a payoff letter
| Item | What it says | What the new lender checks |
|---|---|---|
| Payoff amount | Principal, accrued interest and fees to a stated good-through date | That it matches the debt schedule and the loan statements |
| Per diem | The interest that accrues for each day after the good-through date | That it is stated, so a slipped closing does not need a new letter |
| Fees | Prepayment fees, exit or termination fees, legal and release fees | That every fee in the old loan agreement is either included or confirmed as not applying |
| Other obligations | Letters of credit, credit cards, hedges or cash management tied to the loan | That each is paid, cash-collateralized or carved out of the payoff |
| Wire instructions | The account to receive the payoff | That they are verified by phone with a known contact, never taken from an email alone |
| Lien release | An agreement that, on receipt of the amount, the liens are released | That the release is unconditional once the stated amount arrives |
| UCC-3 and other releases | Authority for the new lender or borrower to file UCC-3 terminations; releases of mortgages, title liens, deposit account control agreements and guarantees | That every filing on the lien search and every guarantee is covered |
The lien release language deserves the closest reading. A letter that says the lender will release its liens after it receives the payoff and after, say, any returned items clear or its internal approvals are complete is a conditional release, and a new lender may not accept it. What the new lender wants is a commitment that the lien is released on receipt of the stated amount, plus authority to file the UCC-3 termination itself if the old lender does not. Removing a paid-off lender's UCC filing covers what happens when that step is missed.
Per diem interest, worked through
Closings move. A payoff amount is only good through one date, so the letter also states the per diem: the interest that accrues for each additional day. The closing agent adds it for every day past the good-through date. In plain numbers:
| Line | Amount |
|---|---|
| Principal balance | 800,000 |
| Accrued interest through the good-through date, the 15th | 9,900 |
| Prepayment fee under the loan agreement | 8,000 |
| Lien release and recording fees | 500 |
| Payoff amount good through the 15th | 818,400 |
| Per diem after the 15th | 150 |
| Closing slips to the 19th: four more days | 600 |
| Amount wired on the 19th | 819,000 |
Two practical points follow. A letter without a per diem forces a new letter every time the date moves, which is how a closing loses a day waiting for paperwork. And if the good-through date passes by more than a few days, many closing agents ask for a refreshed letter anyway, because fees, escrow balances or even the rate may have changed. A letter requested early should be updated close to closing, not relied on as it stands.
Prepayment fees and notice periods
The payoff letter is often where a borrower first sees what leaving the old loan costs, which is exactly why it should be requested early. Common items:
- Prepayment penalties. Many term loans charge a fee for early repayment, fixed or stepping down over time. On SBA 7(a) loans of 15 years or more, prepaying more than 25% in any of the first three years costs 5% of the prepaid amount in year one, 3% in year two and 1% in year three. See prepayment penalty structures and the SBA prepayment penalty.
- Early termination fees on lines. Asset-based facilities often charge a fee for terminating the commitment early. See ABL early termination fees.
- Breakage and hedges. Fixed-rate loans funded with matched money, and loans with an interest rate swap, can carry a break cost that moves with interest rates until the day of payoff. A swap termination value can be a cost or, occasionally, a receipt.
- Notice periods. Loan agreements commonly require written notice of prepayment some days in advance. A payoff requested at the last minute can run into that clause and push the closing.
- Letters of credit. A revolver with letters of credit outstanding cannot simply be paid off; each letter must be returned, replaced under the new facility, or backed by cash collateral or a backstop letter of credit.
None of these should be a surprise at closing. The debt schedule and the old loan documents show most of them; the payoff letter confirms the numbers. On a refinance, they belong in the refinance break-even calculation before the borrower commits. On an acquisition, they reduce what the seller takes home, so the purchase agreement should say who bears them.
Ask for payoff letters when the deal is committed, not the week of closing. What they reveal, fees, notice periods, a lien no one listed, takes time to handle.
Every creditor, not just the bank
The new lender's lien search shows every UCC filing against the business. Each filing needs either a payoff letter and termination, or a subordination agreement leaving that creditor in place behind the new lender. That usually means more letters than the borrower expects:
- Banks and credit unions on term loans, lines and real estate loans
- Equipment lenders and lessors on financing leases, whose buyout quote serves as the payoff letter
- Merchant cash advance funders, whose letter states the remaining purchased amount and releases the filing; see refinancing cash advances and MCA consolidation
- The IRS or a state tax authority, where a tax lien is being paid off
- Seller notes, shareholder loans and related-party debt being retired
- Old filings from lenders already paid, which need a termination rather than a payoff
A cash advance funder or a small equipment lender is often the slowest to respond, and a lien filed years ago by a lender that has since been acquired or closed can take real effort to clear. Those are the items that slip closings, which is why a complete debt schedule matched to a current lien search is the first thing to assemble. How a payoff letter works in a refinance covers the sequencing of multiple payoffs on closing day.
After the wire
Once the payoffs are wired, the closing agent confirms each receipt, and the releases start to happen: UCC-3 terminations filed, mortgage releases recorded, vehicle titles released, deposit account control agreements terminated, and personal and corporate guarantees returned or released. The new lender's post-closing checklist tracks each one. The borrower should keep the payoff letters, the wire confirmations and the filed terminations together; the next lender's lien search, years later, will ask about every filing still on record.
Transparent collects the debt schedule and existing lien position with the borrower's documents at the start and builds them into the financing model and sources and uses, so every creditor to be paid off is named before a lender issues a term sheet. The payoff letters then confirm figures everyone has already seen.
Common questions
- How long is a payoff letter good for?
- Until the good-through date it states, extended day by day by the per diem. If the closing moves more than a few days past it, most closing agents ask for an updated letter.
- Who requests the payoff letter?
- Usually the borrower, since the lender owes it the information, often with the new lender or its counsel copied. In an acquisition, the seller requests letters for its own debts, because the lenders deal with their borrower.
- Can an existing lender refuse to give a payoff letter?
- Refusals are rare: a creditor that is about to be repaid has every reason to say how much, and most issue letters routinely. Delays are more common than refusals, especially with cash advance funders and lenders being asked to release guarantees.
- Does the payoff letter release my personal guarantee?
- Only if it says so. Ask that the letter confirm that guarantees are released on payment, and keep the confirmation.
- What is per diem interest?
- The interest that accrues on the old loan for each day after the payoff letter's good-through date. The closing agent adds it for each extra day, so a slipped closing does not require a new letter.