What is Commitment Letter?
The Short Answer
Commitment Letter explained simply
A Commitment Letter is a formal document issued by a lender to a borrower. It details the specific terms and conditions under which the lender is willing to provide a loan. Think of it as a promise from the bank. It covers key aspects like the loan amount, the interest rate, the repayment schedule, and any conditions the borrower needs to meet before the loan is officially closed. This letter is not the final loan agreement, but it signifies the lender’s intent to finance the deal.
Real-World Example
Buying a Business with a Loan
Imagine you want to buy a business for $500,000. You apply for a loan. The bank reviews your application and sends you a Commitment Letter. This letter states they will lend you $400,000 at a 7% interest rate over 10 years. It also says you need to provide a personal guarantee and show proof of a 20% down payment. Once you meet these conditions, the loan can be finalized.
Why this matters
A Commitment Letter is important because it gives you certainty. It confirms that you have financing lined up for your business purchase. This allows you to move forward with confidence, knowing the money will be there. It also helps you understand the exact terms of your loan before you commit.
Always read the Commitment Letter carefully. Pay close attention to all conditions and deadlines. Make sure you understand everything before you sign.
Always read the Commitment Letter carefully. Pay close attention to all conditions and deadlines. Make sure you understand everything before you sign.
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