Letters of offer from financial institutions and difficulty in drawing down loan funds

From my many years’ of experience as a lending banker one area which causes a lot of anxiety and grief to businesses, is the finalisation of the letter of offer and the draw down of funds.

Most businesses see the letter of offer as the end of road and expect to be put in funds immediately, however, often times this does not happen for a number of reasons.

I have outlined below in order of importance some of the pitfalls to be avoided if one wants to ensure a timely and quick draw down of funds.

  1. When submitting your loan application it is essential that you ensure you have agreed with your bank the amount, rate, security, covenants of default, and financial covenants. Ask your banker to notify you on receipt of approval and be sure to read through the sanction conditions outlined to ensure they contain the agreed terms. Only once this has been done should you request the letter of offer. Thoroughly checking the sanction details before requesting the letter will prevent a lot of back and forth should the letter need to be amended. In addition reviewing the necessary information prior to requesting the letter of offer means that you will not get any unexpected surprises and conditions that you were unaware of after the initial discussions.
  2. Before signing the letter makes sure that you are satisfied with all the terms and conditions and that you are able to comply with all of the conditions outlined. I had recent experience of a letter of offer that contained a requirement for life insurance. At the time of signing the client was happy to provide insurance however when it came to completing the sale they could not take out life cover in Ireland as they were living abroad. Instead they took out a policy with an insurance company abroad that took five weeks to obtain, only then to discover that the financial institution could not assign it. It delayed the closing of the sale, caused stress to business and lead to more negotiations with the bank.
  3. Once the letter of offer is signed, the main stumbling block to a quick draw down is the completion of security items such as a debenture and/or a legal charge over property. It is vital that your solicitor and the banks solicitor work closely together to highlight any anticipated roadblocks. Get realistic deadlines from your solicitor as to how long it will take to complete the transaction; this will enable you to manage your own expectations.
  4. Many businesses assume (never, never, never assume) that the banker and the solicitors are working away on their file and giving it priority however this is not always the case. My advice here is to manage it vigorously, keep in constant contact with all the relevant parties and look for frequent updates. You must ensure that it is at the top of people’s agenda.
  5. When a business decides to undertake a new project and has to approach the bank for financing, you need to make sure you allow adequate time to complete the deal and finalise the project. One good legacy of the banking crisis is that banks now spend more time assessing applications, solicitors are more careful in examining title and ensuring that all legal matters are in order, and financial advisers are preparing better applications, however, all of this takes time and delays can happen. The clear message here is allow plenty of time and plan ahead. One of the services I offer clients is planning and assessing a firm’s future borrowing requirements. Planning ahead financially avoids fire fighting and a panic driven approach that ultimately puts the business and its owners under stress.

In summary, a lot time and preparation must go into negotiating the letter of offer, complying with terms outlined therein and the drawing down the funds. It is often an area that is overlooked by businesses applying for bank facilities.

Remember, that you do not have a loan and bank does not have a sale until the loan is fully drawn down. It is in the interests of both parties that this part of the loan process runs smoothly.

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