A Letter of Continuity is a document issued by a borrower to a lender, typically a bank or financial institution, to acknowledge that a specific borrowing arrangement, such as an overdraft, line of credit, or loan facility, will remain in force continuously until further notice or until the full amount is settled. This letter essentially serves as a formal declaration that the borrower will continue to use the loan or credit facility under the agreed-upon terms without interruption, even if certain conditions like maturity dates or credit limits might otherwise trigger a review.
Key Features of a Letter of Continuity:
- Continued Credit Facility: It ensures that the borrower acknowledges the ongoing use of the credit facility (such as a line of credit or overdraft) until it is canceled or repaid.
- No Need for Renewal: In some cases, this letter removes the need for frequent renewals or reapprovals of the credit facility, as it is understood that the facility remains active unless otherwise notified.
- Protection for the Lender: The letter may also protect the lender’s rights, ensuring that the loan continues under agreed terms, even if there are temporary lapses or adjustments in the loan terms, such as repayment schedules.
- Acknowledgement of Debt: The borrower confirms the existence of the debt or credit facility and agrees that it will remain continuous, providing legal documentation of the ongoing financial obligation.
Use Cases:
- Overdrafts and Revolving Credit: Commonly used in business banking where companies have overdraft facilities or revolving credit that they continuously utilize and repay.
- Loan Rollovers: In cases where loans are expected to be extended or rolled over, a letter of continuity may help formalize the ongoing arrangement between the borrower and lender.
By signing a Letter of Continuity, both the borrower and lender ensure clarity and mutual agreement regarding the ongoing nature of the financial obligation, simplifying future transactions or renewals.