Solvency Letter

Solvency Letter

Introduction

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. The lender may seek stand-alone confirmation from the borrower as to its solvency, particularly before a loan agreement is formally entered into, this is where the solvency letter come into play to provide some assurance.

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 is 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.

What is a solvency letter?

It is a report from an accountant attesting the financial status of the individual/entity. A solvency letter is issued by an accountant on request by the lenders or landlords or potential investors. An accountant will thoroughly analyse all assets and liabilities to determine if a company is solvent or insolvent.

What are the requirements?

It’s required that the documents below be submitted with the original for verification purposes. The requirements of documents as mentioned might vary with the purpose of obtaining the letter. An accountant may request the following documents if you are not their client:

  • Identity/address proof.
  • Bank statement (Savings/Current).
  • Financial statements.
  • Property documents.
  • Any other investment certificate.

What are the benefits of a Solvency Letter?

Solvency letter is an important financial document that proves the financial stability of an individual or entity. Some of the benefits of the letter are as follows:

  • Being able to apply for tenders.
  • Obtaining contracts.
  • Access to finance

Why should it be done by an accountant?

An accountant is regarded as an expert and their expertise will provide credibility to the letter. Also, most small business outsource their accounting functions so an accountants will be independent of the operations of the business. Their assessment will provide the objectivity that an internal accountant may fail to offer.

Conclusion

The solvency of a company helps determine if it is capable of growth. Also, solvency can help the company management meet their obligations and can demonstrate its financial health when raising additional equity or loans. Any business looking to expand in the long term should aim to remain solvent.

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