How to read a business loan letter of offer, clause by clause

The letter of offer is the moment the conversation turns into paper. Everything you discussed with the lender, broker or bank manager is now either in the document or it isn’t, and from here what’s written is what counts.

It’s also the document most owners read fastest. Approval feels like the finish line, the deadline is tight, and the pages are dense. That’s a shame, because a letter of offer is short compared with the loan agreement that follows, and it’s where the commercial deal is set. Changing terms is far easier now than after you sign.

Below is a reading order that works for nearly every Australian business loan, from a $50k unsecured facility to a $3m commercial property loan, with the questions to ask at each step.

Where does the letter of offer sit in the process?

It helps to know what you’re holding. Most business loans move through three documents:

1. Indicative offer, term sheet or conditional approval. The lender’s early view, often before valuations, credit checks on every guarantor or a full read of the financials. Useful, but subject to change. See our glossary entry on the indicative offer.
2. Letter of offer. Issued after credit approval. Sets out the facility, price, fees, security, conditions and the date the offer expires.
3. Loan agreement and security documents. The formal contract, mortgage, general security agreement and guarantees, usually prepared by the lender’s solicitors after you accept.

Some lenders roll steps 2 and 3 together; smaller online lenders often send a single loan contract for e-signature. Either way, the sections below are where to look.

The reading order: section by section

Section	What to confirm	Worth querying if…
Parties	The borrower entity and every guarantor are named correctly	The wrong company, trust or trustee is listed
Facility	Amount, type (term loan, overdraft, line of credit) and purpose	The purpose is narrower than what you need the money for
Net advance	Facility minus fees, prepaid interest and retentions	The cash you’ll receive is well short of what you need
Term and repayments	Length, frequency, interest-only periods, balloon	Repayments are daily or weekly and your income is monthly
Pricing and fees	Every fee listed in dollars, when each is charged	Fees appear only as a percentage, or “as notified”
Security	What’s mortgaged, charged or guaranteed, and for what debts	“All monies” wording, or more security than you agreed
Conditions precedent	What must happen before settlement	Items you can’t control or can’t meet in time
Covenants and undertakings	Reporting, financial ratios, restrictions on new debt	Ratios your business would breach in a normal quiet month
Events of default	What lets the lender call the loan in	Open-ended triggers like “a change the lender considers material”
Expiry	The date the offer lapses	There isn’t enough time to get advice

Parties: is the right entity borrowing?

Check the borrower is the entity that will use the money and own any equipment bought. If your business runs through a trust, the borrower is usually the trustee company “as trustee for” the trust; an error here can cause problems at settlement. Check every guarantor’s name and that you understand why each one is there.

The facility and the net advance

The headline figure is the facility limit. What you actually receive may be lower. Short-term and private lenders often deduct the establishment fee, legal costs and sometimes several months of prepaid interest from the advance. Write down the figure that will land in your account and compare it with what you need. If it falls short, raise it now. The glossary entry for prepaid interest explains how that deduction works.

Repayments: frequency matters as much as size

A weekly or daily repayment can look small and still strain a business that’s paid by its customers monthly. Look for any interest-only stretch or final lump sum, and check whether the term matches the life of what you’re buying. The business loan repayment calculator helps you see the schedule in dollars.

Fees: list them all in dollars

Business loans can carry an application fee, establishment fee, valuation fee, legal fees, a monthly account or line fee, a discharge fee, early repayment costs and default charges. Put every one on a single list with a dollar figure and when it’s charged. Our guide to business loan costs and fees explains each.

Comparing two offers? Put both into the loan cost comparison calculator and look at the total dollars paid over the life of each, not the headline price.

Got an offer that doesn’t sit right, or a deadline approaching? Tell us what you’ve been offered and we’ll give you a straight second view; asking takes about a minute, with nothing recorded on your credit file.

Security and guarantees: what could you lose?

This section deserves the slowest reading. Look for:

• Which assets are secured. A specific property, a vehicle, or a general security agreement that catches everything the business owns today and acquires later.
• What debts the security covers. “All monies” or “all obligations” wording stretches the mortgage or guarantee across any debt owed to that lender, today’s and tomorrow’s, rather than this loan alone. That can tie up a family home well beyond the original deal.
• Guarantee limits. Is each personal guarantee unlimited, or capped at a dollar figure?
• Cross-collateralisation. Whether security for one loan also backs another.

Our guide to business loans and personal guarantees covers what guarantors should know.

Conditions precedent

These are the jobs that must be done before funds flow: a valuation at or above a stated figure, signed guarantees, insurance with the lender noted, discharge of an existing loan, evidence of a contract or lease, a solicitor’s certificate. Read each one and ask: can I satisfy this, and how long will it take? Our explainer on conditions precedent works through the common ones.

Covenants and events of default

Covenants are promises you make while the loan runs: supply annual accounts, keep a minimum debt service cover, don’t take on more debt without consent. Events of default are what let the lender demand repayment early, charge default interest or enforce security.

Model the covenants against an ordinary bad month, not your best year. If a single quiet quarter would breach a ratio, ask for headroom.

Which rules protect a small business signing loan documents?

Two sets of rules are worth knowing about when you read the fine print.

Unfair contract terms. ASIC’s reforms that took effect on 9 November 2023 made it possible for courts to penalise lenders, not just strike out a clause, when a take-it-or-leave-it small business contract contains an unfair term. For credit and other financial products, the ASIC Act protection covers a business that employs fewer than 100 people or had turnover under $10m in the previous income year, and the upfront price payable (excluding interest) is $5m or less. A term may be unfair if it creates a significant imbalance, isn’t reasonably necessary to protect the lender, and would cause detriment. This doesn’t mean you can ignore a clause you dislike, but it does mean a one-sided term is worth querying.

The Banking Code of Practice. Signatory banks make a set of extra promises to small business borrowers in the 2025 Code. Before you accept a loan, the bank says it will give you a plain English document setting out the key general terms (paragraph 80). In standard form small business loan contracts, it won’t rely on an unspecified “material adverse change” as a default (paragraph 92), and for most loans won’t use breaches of financial indicator covenants alone as a trigger for default action (paragraph 91). For non-monetary defaults it generally gives written notice and at least 30 days to fix the problem, where it can be fixed (paragraph 88). Guarantors also get a waiting period: the bank holds off accepting a guarantee until day three after the guarantor has been handed the required documents, with narrow exceptions (paragraph 112).

The Code binds banks only. Non-bank and private lenders work outside it, so their documents can be wider. That’s a good reason to read their default and security clauses even more carefully.

Worked example: reading a $320k second mortgage offer

Here’s an illustration. A Brisbane printing business owner is offered a $320k second mortgage over the family home for 12 months to fund a new press while a bank refinance is arranged. Reading in order:

• Parties: the borrower is the company; both owners guarantee. Correct.
• Net advance: $320k less a $6,400 establishment fee, $3,800 in legal and valuation costs, and three months of prepaid interest of $11,200. Cash received: $298,600. The press costs $305k, so the owner asks for the facility to be lifted to $330k.
• Repayments: interest-only monthly after the prepaid period, with the full balance due at month 12. A $1,500 discharge fee applies.
• Total cost in dollars: fees of $11,700, plus prepaid and ongoing interest of about $44,800 over the year: roughly $56,500 to borrow for 12 months.
• Security: a second mortgage over the home, with “all monies” wording. The owner asks for it to be limited to this facility.
• Conditions precedent: consent from the first mortgagee, a valuation of at least $1.4m, and insurance noting the lender.
• Default: events include “any change the lender considers material”. The owner’s solicitor queries it.
• Expiry: seven days. The owner asks for and gets a five-day extension to obtain legal advice.

None of this kills the deal. It does mean the owner signs knowing exactly what the year will cost and what’s at risk, with two clauses tightened. Our second mortgage calculator is a good starting point for numbers like these.

Unsure whether to sign this particular offer?

Reading a letter of offer closely sometimes reveals that the deal is fine. Sometimes it reveals the deal is fine but the lender is wrong for you: too expensive for the risk, too much security, too short a term.

If you’d like another set of eyes, or another option to compare against, send us the basics. The form is a quick one, about sixty seconds, and there’s no credit enquiry involved in asking, so your file isn’t affected. Nothing is broadcast to a list of lenders; a member of our team reads your situation and phones you personally. Copy the actual amount, term and security straight from the letter so our read is accurate, and you’ll hear soon whether a better-suited lender is worth a look.

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