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 issued by an accountant or auditor confirming that a company or an individual has sufficient assets to cover their liabilities. This letter is often requested by lenders, landlords, and potential investors as part of their due diligence before entering into financial agreements.
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 statements (Savings/Current).
- Financial statements.
- Property documents.
- Any other investment certificates.
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:
- Applying for tenders: Many tenders require proof of financial stability, and a solvency letter can be a deciding factor in securing contracts.
- Securing contracts: Businesses that are solvent are seen as reliable partners, increasing the likelihood of winning contracts.
- Access to finance: Demonstrating solvency can open doors to new financing opportunities, essential for growth and expansion.
Why should it be done by an accountant?
Accountants are financial experts who provide credibility and objectivity. Their independent assessment ensures an unbiased review of the company’s financial health. This independence is crucial for stakeholders who rely on the solvency letter, providing them with assurance and confidence in the company’s financial stability. By relying on a professional accountant, stakeholders can trust that the solvency letter reflects an accurate and impartial analysis, enhancing the overall trustworthiness of the letter.
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.
What To Do Next?
