Letter of Solvency

Before making a loan, a lender will usually want comfort that the borrower can service the debt - in other words, repay on time and in accordance with the repayment schedule. This is often most relevant where the loan is unsecured, because the lender will have no recourse to security if the borrower defaults.

As part of due diligence, lenders will often review the borrower’s annual accounts (and, where available, management accounts) and other relevant financial information. A loan agreement will also typically include representations and warranties from the borrower about its financial position. In some cases, a lender may also want a separate, stand-alone confirmation of solvency from the borrower, particularly before the loan agreement is entered into. This Letter of Solvency is drafted for that purpose.

What This Letter of Solvency Template Does

In this notice, the borrower confirms to the lender that it is solvent, and that entering into the loan will not negatively impact its solvency.

When To Use This Letter of Solvency

This template is drafted to be given before the loan agreement is entered into.
It can also be repeated before each advance is made under the loan, if the parties want that additional comfort.

Important Points

Using a notice of solvency does not replace taking security for a loan or obtaining a legally binding guarantee. It may, however, be a useful additional comfort for lenders before any monies are advanced.

Related Template

Our long form loan agreement includes conditions precedent. If a solvency notice is being used, clause 5.1.5 should be adjusted to include reference to it.

Options In Square Brackets

Optional phrases and clauses are enclosed in square brackets. These should be read carefully and selected so they remain compatible with one another. Unused options should be removed.

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