Letter of Solvency
Before making a loan, a lender will want to ensure that the prospective borrower is in a financial position to service the loan, i.e. repay it on time and according to the repayment schedule. This may be particularly relevant where a loan is unsecured as the lender will have no recourse to security in the event of a default under the loan.
Lenders will often seek the comfort they require as part of their due diligence in the first instance by considering a borrower’s annual (and management) accounts as well as any other relevant financial information. A loan agreement will also usually include contractual representations and warranties that the borrower will make as to its financial health, however in addition, a lender may seek stand-alone confirmation from the borrower as to its solvency, particularly before a loan agreement is formally entered into. This letter of solvency has been drafted to be such an assurance.
In this template notice the borrower confirms its solvency to the lender and states that as a result of entering into the loan its solvency will not be negatively impacted. The template has been drafted so as to be given before the loan agreement is entered into, however the parties may also wish it to be repeated before each advance under the loan is made.
Using a notice of solvency does not replace either seeking security for a loan or obtaining a legally binding guarantee, but it can be a useful alternative for lenders who seek some level of comfort as to the financial health of a borrower before any monies have been advanced.
Our long form loan agreement includes conditions precedent and if a solvency notice is being used, clause 5.1.5 should be adjusted to include reference to it.
Optional phrases / clauses are enclosed in square brackets. These should be read carefully and selected so as to be compatible with one another. Unused options should be removed from the document.
This Letter of Solvency is in open format.
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