When you refinance an existing business loan, the payoff letter is a critical document. There are a few key pieces of information that need to be on there, and it may be a little frustrating if it’s missing and you are trying to close in a quick time frame. In a refinance, you’re borrowing new money from Lender #2 to pay off an existing loan secured by a different lender, Lender #1. The new lender, Lender #2, won’t release their funds without proof that the payoff will clear up Lender #1’s loan and security interest.
A payoff letter is the old lender’s statement of how much principal and interest remain due on the loan, including all applicable fees. New lenders rely on it to confirm it’s paying off everyone and getting a first-priority lien, so it’s essential and very frustrating when it contains errors that delay closings. Sadly, there is no standardized form for the payoff letter. Because lenders all draft them differently, they’ll sometimes need revisions to make the new lender happy. Closings can slip because of last-minute revisions.
A Wish List of Information to Include
Part of what makes these documents so frustrating is how they vary in quality from one lender to the next. Here is a suggested standard, a wish list of information to include.
A payoff letter needs to come from the existing lender. The payoff statement must be addressed to the person or company taking out the new loan. It should be signed by an authorized officer of the existing lender. The new lender or the new lender’s counsel can hardly rely on an unsigned statement.
It’s supposed to show one exact dollar payoff total as of a specific date, and should name an expiration date. Offhand and approximate don’t cut it. Any add-ons, extra fees, or contingencies must be deleted, including items vaguely listed like “legal fees” or “estimation to be calculated at closing”.
Until the existing lender gets paid, the interest keeps accruing and the amount due grows. If you can’t make it that day, what happens? The payoff letter should provide a ”per diem” or daily interest charge, and everyone will recalculate for the new closing date.
How is the lender going to receive the payoff amount? To pay off a commercial loan, the old lender usually insists on getting a wire. If money is being wired, the payoff letter should include the wire instructions. If it is a check being sent in the mail, then the lender will need the address for mailing.
Once the payoff reaches the old lender, it must promptly release its liens. Every UCC filing gets terminated via a UCC-3. A mortgage gets released by a certificate of discharge of mortgage. The old lender must file these as part of its closing obligations. What if they never get around to it? You or the new lender’s counsel are often better off doing this without delay, and the old lender should authorize that.
Lines of credit are often called revolvers, and if left open the borrower is empowered to draw more cash from them. If the old loan is a revolving line of credit, the payoff letter must provide that it’s terminated and the borrower can’t continue to draw on the line. New lenders need to know any old lines get terminated so nobody can draw up a hidden debt and make a mess at the closing.
Get the payoff letter once the closing date is firm and close. If you request it too early, the payoff letter will expire and you’ll have to order a new one. If you ask too late, you might see the closing date postponed. In complex payoffs, like a refi over several loans, it helps to have a draft of the payoff letter well ahead. Review the form at least three to five business days before you are actually closing.
Before refinancing, look out for these landmines.
If you are refinancing multiple outstanding loans, all taken out from the same lender and secured by different collateral, it will get complicated.
When a loan payoff letter just vaguely mentions a payoff without expressly releasing the old lender’s lien, that’s risky. The person signing it must have the authority to stand behind it. Figure out whether your payoff letter releases the lien as soon as it gets paid, or only once it gets back written confirmation of receipt in writing. If it needs a confirmation in writing, wait for an email from the signer directly before terminating any liens. If you’re of the automatic type, confirm receipt of the payoff immediately. For a wire, you really need the federal reference number as confirmation to give your lender that the payoff went through.
Refinancing entails clearing any underlying lien on your loan collateral, and it has to be a complete release. Occasionally the old lender has also provided a bank letter of credit to your landlord, which needs to be replaced by the new lender. If it isn’t, beware the risk of collateral hanging out there for the old lien. While a payoff letter should release all liens, sometimes the old lender insists on keeping an old lien. If so, consider an intercreditor agreement or specific terms in the letter.
Existing letters of credit may need to be assigned or replaced, and swaps need special handling too. Sometimes, a new lender steps in to repay the old lender, and the old lender says “wait a minute”. It fears some checks the borrower deposited in its account there may bounce, and now the bank’s stuck. Get ready, because an old lender may want you to indemnify it against your unpaid checks. Especially for troubled loans, the old lender may want a release the borrower must also sign.
The payoff letter is often one of the last documents ready for closing. Despite being so late, it should be one of the first documents to finalize and review. An early draft means your counsel can review, negotiate and correct it. If the payoff letter is not right, this can blow up at closing with no more time to figure it out.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
