What is Gift Letter?
The Short Answer
Gift Letter explained simply
A Gift Letter is a written statement from an individual (the "donor") to another individual (the "recipient") confirming that money has been given as a gift, with no expectation of repayment. In the context of buying a business, this letter is often required by lenders when a buyer uses gifted funds as part of their down payment or working capital. It assures the lender that these funds are not a hidden loan that would add to the buyer’s debt burden and potentially impact their ability to repay the business loan.
Real-World Example
The Family Gift for a Business Purchase
Let's say Sarah wants to buy a coffee shop for $200,000. She has $50,000 saved, and her parents want to gift her an additional $25,000 to help with the down payment. The bank providing the business loan will likely require a Gift Letter from Sarah's parents. This letter would state that the $25,000 is a gift, not a loan, and that Sarah is not obligated to repay it. This helps the bank confirm Sarah's true financial position and reduces their risk.
Why this matters
A Gift Letter is important because it provides transparency and clarity regarding the source of funds used in a business acquisition. For lenders, it confirms that the buyer is not taking on additional undisclosed debt, which could affect their ability to repay the business loan. For buyers, it helps secure financing by demonstrating a solid financial foundation without hidden liabilities.
Always make sure a Gift Letter is clear, signed, and notarized if required by the lender. Any ambiguity can cause delays in your financing.
Always make sure a Gift Letter is clear, signed, and notarized if required by the lender. Any ambiguity can cause delays in your financing.
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