The Commitment Letter in an Ontario Business Acquisition Loan: What to Check

Once a lender has decided, in principle, to finance your business purchase, it typically issues a commitment letter — a document setting out the loan amount, security, conditions, and key terms it's prepared to offer. It feels like good news, and often it is. But a commitment letter is not the same thing as funded money, and treating it as a done deal before reading it carefully is one of the more common mistakes buyers make when a closing date is already circled on the calendar.

This article walks through what a commitment letter typically contains, which parts are genuinely binding, and what to check before you rely on it.

What a Commitment Letter Generally Sets Out

A typical acquisition loan commitment letter addresses:

• The loan amount and structure — how much the lender is prepared to advance, and on what repayment terms.
• Security requirements — what collateral the lender expects, often including registrations under the Personal Property Security Act, R.S.O. 1990, c. P.10, and sometimes a personal guarantee from the buyer.
• Conditions precedent to funding — the list of things that must happen (or be delivered) before the lender will actually advance funds.
• Covenants — the financial and operating promises the borrower will need to maintain once the loan is funded.
• Fees — arrangement, standby, or other fees associated with the loan (specific amounts are set by your lender, not by this article).
• An expiry date — the commitment letter itself typically expires if not accepted, or if funding conditions aren't met, within a stated window.

Is a Commitment Letter Binding?

This is the point buyers most often get wrong. A commitment letter is generally a conditional commitment — the lender is agreeing to lend on the stated terms, but only once you meet the conditions it lists. Until those conditions are satisfied (and, often, until final loan documentation is signed), the lender may not be obligated to fund at all.

Some provisions inside a commitment letter — confidentiality, exclusivity commitments, cost-reimbursement obligations — are often drafted to be binding immediately, even though the loan itself is conditional. This mirrors how a letter of intent between buyer and seller typically works: mostly non-binding on the main terms, but with specific provisions carved out as binding from the start. Read the letter closely to see which provisions fall into which category — don't assume the whole document is either fully binding or fully non-binding.

Ten Things to Check Before You Rely on It

1. What conditions precedent must be satisfied, and whether you can realistically meet all of them before your intended closing date.
2. Whether the loan amount is confirmed, or still subject to further underwriting (for example, pending receipt of a quality of earnings report).
3. What security is required, and whether it matches what you and the seller have already discussed — particularly if a vendor take-back is also part of the financing stack.
4. Whether a personal guarantee is required, and its scope.
5. What financial and operating covenants apply, and whether your projections can realistically sustain them.
6. The commitment letter's expiry date, and whether it aligns with your purchase agreement's closing timeline.
7. Whether the letter requires exclusivity — some lenders expect you not to shop the financing elsewhere while their commitment is outstanding.
8. What fees are payable, and when — including any fees due simply for accepting the commitment, regardless of whether the loan ultimately funds.
9. How the commitment letter interacts with your purchase agreement's financing condition, if you negotiated one with the seller.
10. Whether anything in the letter conflicts with terms you've already agreed with a vendor take-back lender or other financing source in your stack.

• [ ] Conditions precedent reviewed against your closing timeline
• [ ] Security and guarantee terms confirmed
• [ ] Covenant thresholds checked against your financial projections
• [ ] Expiry date compared to your purchase agreement's closing date
• [ ] Fee obligations understood, including any non-refundable amounts
• [ ] Commitment letter terms reconciled with any vendor take-back or other lender

Common Problems Buyers Run Into

• Assuming the commitment letter guarantees closing. A commitment letter with unmet conditions is not the same as funded financing — treat every listed condition as a real task, not a formality.
• Missing the expiry date. If due diligence or purchase agreement negotiations run long, a commitment letter can lapse before you're ready to close, forcing a renewal (sometimes on different terms).
• Overlooking exclusivity or cost-reimbursement clauses. These can bind you even if the loan itself never funds, and buyers sometimes discover this only after trying to walk away and shop for better terms elsewhere.
• Not coordinating the commitment letter with the purchase agreement. If your purchase agreement doesn't include an appropriately drafted financing condition, an unfulfilled lending condition in the commitment letter may not give you a clean way to exit the purchase agreement if financing falls through.

Frequently asked questions