Commitment Letter — What It Is & What to Look For

Updated 12 Mar 2026Content was accurate at the time of publication

What is a commitment letter?

A commitment letter — also called a letter of commitment, loan commitment letter or funding commitment — is a document from a lender confirming it will provide specified financing on stated terms, subject to any listed conditions. For borrowers, it sits between negotiating terms and a full loan agreement: it records the lender's offer to lend, the amount, fees, security requirements and the conditions you must satisfy before drawdown.

Common examples include a loan commitment letter (a bank confirms a $1,000,000 facility for a business, subject to due diligence and board approval) or an investment commitment (a private investor confirms an agreement to subscribe for shares once certain corporate steps are completed).

Related topics you may find helpful: finance leasing, equipment finance, invoice discounting, and hire purchase structures.

How a commitment letter differs from a term sheet, letter of intent and loan agreement

Term sheet: a short, non-binding outline of commercial terms used early in negotiations. See Term sheet.
Letter of intent (LOI): like a term sheet but may include binding confidentiality or exclusivity; usually not a substitute for a commitment.
Commitment letter / offer to lend: a formal step that records a lender's commitment to fund, often with specific legal clauses and a list of conditions precedent.
Loan agreement: the full, legally binding contract that governs the loan after conditions are satisfied — see Loan agreement.

The typical sequence is: Term sheet/LOI → Commitment letter (subject to CPs) → Loan agreement and security documents. Each document may contain binding and non-binding parts; read carefully.

Types of commitment letters

Bank/loan commitment: commitment to provide a facility under stated terms.
Bridging finance commitment: short-term funding commitments with quick drawdown.
Equity/investment commitment: investor promises to subscribe to capital upon completion of milestones.
Sponsor/vendor commitment: used in M&A or project finance to guarantee funding from a sponsor.

When dealing with specialised assets, compare a commitment against equipment finance or business lending solutions.

Are commitment letters legally binding?

Short answer: parts can be binding; others are often conditional or non-binding. Under contract law you need offer, acceptance and intention to create legal relations. In practice:

Binding elements: confidentiality clauses, exclusivity periods, commitment/arrangement fees, governing law and sometimes a promise to lend if conditions precedent are met.
Non-binding elements: many commercial summaries and indicative pricing may be stated as "subject to credit approval" or "indicative only."

Courts look at the document's wording and context to decide enforceability. For corporations and directors, the Corporations Act and duties to creditors can influence behaviour once a commitment is relied on.

Tip: look for words like "obliges", "undertakes" or "agrees" for binding intent; words like "indicative", "subject to", or "for discussion only" indicate non-binding language.

Key clauses and what they mean

A commitment letter typically includes many clauses. Here are the core ones and what they practically imply for you.

Commitment amount The maximum facility or funding amount. Confirm whether sub-limits apply (e.g., working capital vs term loan). Check whether unused amounts attract fees.

Term / expiry The period the commitment is open. Note expiry date and any extension mechanics. If conditions precedent aren't met before expiry, the lender can withdraw.

Conditions precedent These must be satisfied before funds are released. See detailed section below and Conditions precedent.

Representations & warranties Parties' factual assertions (e.g., corporate status, solvency). A limited survival period is preferable; avoid wide, uncapped reps & warranties that survive long after drawdown.

Covenants Promises about conduct (e.g., maintenance of assets, no undisclosed liabilities). Watch for financial covenants that can trigger default.

Security and guarantee Confirm assets to be charged, registration obligations (PPSR), priority and intercreditor issues.

Commitment fee and other fees Commitment fees are often payable on undrawn amounts or for keeping the facility available. Calculate using the simple formula: fee = principal × rate × (days / 365) Example: 1,000,000 × 0.005 × (90 / 365) ≈ $1,233 AUD.

See Commitment fee.

Assignment Whether the lender can assign the commitment to another party. Limit consent requirements if you want to control who can step into the lender's place.

Governing law and jurisdiction Which courts govern disputes. The letter's governing law determines interpretive principles.

Default and remedies Note acceleration clauses, step-in rights and enforcement processes.

Confidentiality Often binding — protects negotiation and due diligence materials.

Watch out for overly broad lender discretion to refuse drawdown even if conditions precedent are satisfied.

Conditions precedent — common examples and timelines

Typical conditions precedent and realistic timings:

Corporate approvals: board/resolution and shareholders' approval — allow 1–3 weeks.
Due diligence: legal, financial and tax reports — allow 2–6 weeks depending on complexity.
Financial covenants: delivery of historical and pro forma financials — often immediate to 2 weeks.
Security documentation: executed charges, mortgages, and PPSR registrations — 1–3 weeks to prepare and register.
Insurance and valuations: asset valuations and insurance certificates — 1–2 weeks.
No material adverse change (MAC): lender may require no MAC since signing.

Conditions checklist:

Signed loan agreement and board minutes
Evidence of corporate capacity and solvency
Execution of security and guarantees, with PPSR registration details
Insurance certificates and valuations
No pending litigation that impacts the business materially

Timelines can be compressed for smaller facilities; allow several weeks for complex transactions.

What happens if a party breaches or the bank withdraws?

Lender withdrawal before expiry: if conditions precedent aren't met, the lender can typically withdraw without liability. If the lender withdraws despite satisfied conditions precedent, you may have a contractual claim if the commitment contained an unconditional promise to lend.

Breach by borrower: triggers remedies (fees, drawdown refusal, acceleration). Security enforcement follows the priority rules; insolvent borrowers face creditor priority issues under the Corporations Act.

Commitment and break fees: fees compensate the lender for committing capacity. Break fees may be payable if drawdown is cancelled or borrower reneges. Typical commitment fees might be 0.25%–1% p.a. on undrawn amounts, while break fees are negotiated.

Practical consequence: losing a commitment may leave funding gaps — include contingency plans and confirm expiry and extension mechanics.

Practical negotiation tips and red flags

Actionable tips:

Insist on specificity: fix amounts, interest margins, and precise definitions for MAC and material adverse events.
Limit lender discretion: replace unlimited discretion with "reasonable endeavours" where possible.
Cap or phase conditions precedent: ask for a short list of closing conditions only, leaving non-essential items to post-closing conditions.
Negotiate fees carefully: reduce or remove commitment fees on fully drawn portions; ask for a tiered fee structure.
Require waiver mechanics: get a process for lender waivers and specify timelines for lender responses.
Protect directors: ensure any representations or guarantees do not expose directors unnecessarily; consider indemnities.

Red flags:

Open-ended conditions precedent with no timeline.
Broad lender discretion to refuse funding.
Unlimited reps & warranties that survive indefinitely.
Security that captures unrelated group assets without clear carve-outs.
Hidden break-fees or unusually high commitment fees.

Legal and negotiating support early reduces risk and cost.

Sample wording and checklist

The following is a sample paragraph (illustrative only):

The Lender hereby commits to provide the Borrower a senior secured term loan facility of $1,000,000 (Facility) on the terms set out in this Letter. The Facility is available for drawdown subject to the satisfactory completion of the Conditions Precedent listed in Schedule A and receipt of executed loan and security documents. This commitment expires at 5.00pm on 30 June 20XX unless extended in writing by the Lender.

Checklist of items to verify:

Commitment amount and permitted uses
Expiry date and extension mechanics
Full list of Conditions Precedent and realistic deadlines
Details of fees and how they are calculated (sample calculation)
Security details and PPSR registration steps
Representations, covenants and survival periods
Assignment and lender discretion clauses
Governing law and dispute resolution

When to get legal or financial advice

Seek specialist counsel or adviser if:

Security is complex, involves multiple jurisdictions, or intercreditor arrangements.
You have related-party guarantees or director guarantees.
The commitment underpins a major M&A, restructure or insolvency-risk situation.
The lender insists on unusual covenants or broad step-in rights.

In these cases, corporate lawyers and commercial finance advisers can help map priority, PPSR registration and director duties.

FAQ

Is a commitment letter the same as an offer letter?

Often yes: an offer letter may be a form of commitment letter. Check whether it's conditional.

How long does a commitment letter last?

Until its expiry date. If conditions precedent aren't satisfied by then the lender can withdraw.

Can a bank change the terms after issuing a commitment letter?

Only if the commitment reserves such a right or if conditions precedent require further approvals. Otherwise changes may be a breach.

What is a commitment fee?

A fee for reserving the facility, usually calculated on the undrawn portion. Use the simple formula: fee = principal × rate × (days / 365).

What must you deliver to draw funds?

Typically executed loan and security documents, evidence of approvals, insurance, valuations and no material adverse change.

Are commitment letters enforceable against the lender?

Sometimes — enforceability depends on wording and whether key obligations were unconditional or subject to conditions precedent.

Who pays for legal fees on security documentation?

Often the borrower pays the lender's reasonable costs; negotiate any cap.

What should directors watch for?

Avoid giving personal guarantees unnecessarily and ensure reliance on a commitment does not breach duties under the Corporations Act.

Key takeaways

A commitment letter is a pivotal document between negotiation and a full loan agreement. Read it line-by-line to verify amounts, expiry, conditions precedent, fees, security and lender discretion. Pay attention to binding clauses (fees, confidentiality) and push back on vague conditions or broad lender powers. In complex or high-value deals involve legal and financial advisers early to protect priorities, director duties and the company's position.