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- It closes into a credit agreement, expires, or is withdrawn under a condition or MAC clause
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 simpler bank 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 every obligation 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, which is why difficult items belong in the first package rather than in diligence: a lender that approves the file as it really is has less reason to reconsider. Once a borrower's documents are in, Midas Partners builds the full lender package, financing model, lender presentation, blind teaser and underwriting memo, in a day, and a senior banker checks every page before the client approves it. See the package and how we underwrite.
Commitments in acquisitions
In an acquisition, the commitment has to hold until the purchase closes, and the seller wants to know the financing will not fall away for reasons the purchase agreement does not allow. Buyers, especially sponsors, therefore push for limited conditionality: the lender's conditions are narrowed to a short list that tracks the purchase agreement, such as the acquisition closing on its agreed terms, a small set of key representations being true, and the documents being signed. Broad diligence outs and market-wide adverse change clauses come out.
How far a lender will go depends on the lender and the deal. Private credit funds that finance sponsor acquisitions regularly are used to it; a bank lending to a first-time buyer may keep broader conditions. Either way, the conditions that remain should be matched to the purchase agreement's own conditions and outside date, and third-party items such as the quality of earnings report should be finished before the commitment is signed rather than listed as conditions to it.
Commitments in private credit often come with a separate fee letter setting out the lender's fees, kept confidential between the parties. Read it with the commitment: it usually says which fees are earned on signing and which only at closing.
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.