What is a Letter of Intent?
Simply put, this piece of paper is issued by the Lender to you, indicating that they are fully interested in funding the deal.
Though this is NOT a Conditional Letter of Approval – which is issued after they do their final due diligence, having an LOI issued is a very positive step towards getting your money.
In an LOI, there are a few pieces of information that you should look out for whenever you get one:
Pre-Approved Loan Amount: Is the loan amount that the Lender is willing to fund you. This is typically listed near the very top of the Letter of Intent.
Loan to Value (LTV): The Loan-to-Value or…LTV is the percentage of the loan amount the Lender will be funding. It’s the ratio of the loan to the value of an asset being purchased. In my past video, I went into detail about how typically Lenders will not do 100% financing. Generally, in the Commercial Loan world, Lenders do anywhere from 50-90% LTV.
Rate/Term: The Lender gives their specific rate and term at which the loan will be paid.
Conditions: This is something that should never be overlooked. And this is why I highly suggest when reading over an LOI, you get a second set of eyes to look at it such as a lawyer, CPA or a trusted business associate. With conditions, these are the requirements that need to be satisfied as we enter the next step towards funding. For example, the Lender may ask that you present bank statements to verify liquidity, or they may ask that you submit your Articles of Incorporation. There may not even be any conditions at all. But these are generally listed in the LOI as a heads up as to what they will need documentation-wise next.
Next Steps: Near the end of the Letter of Intent, it usually spells out what will coincide next. If your loan purpose is to purchase a building, then an appraisal and title report may need to be ordered. If this is an SBA loan, a processing fee may need to be paid. In this section, it specifically states what the Lender will need next to advance your loan request to the next step towards funding.
We hope that you can use this knowledge in the next Commercial Loan that you pursue.
All the Best!