A sanction letter is the document that turns "you're approved" into something legally specific: how much, on what terms, and under what conditions. Most founders skim it for one number, the sanctioned amount, and sign. That's usually the moment problems get baked in silently, since everything that actually governs the facility day to day sits in the sections nobody reads closely. Here's what to actually look for.
What a sanction letter is, and isn't
A sanction letter confirms that a lender has approved financing for you, in principle, and sets out the terms under which it will actually be disbursed. It isn't the final loan agreement, but it's the document that shapes what that agreement will say, so catching a problem here is far easier than trying to renegotiate after the formal agreement is signed.
The sections worth reading line by line
Facility type and structure. Confirm this matches what you actually applied for, sales invoice discounting, factoring, a short-term business loan, and so on. It's not unheard of for a sanctioned facility to differ slightly from what was discussed verbally, a smaller limit, a different product structure, so check this against your original expectation rather than assuming it matches.
Sanctioned amount and how it's calculated. For invoice-based financing, this is usually expressed as a percentage of Net Invoice Value, gross invoice value minus any advances, refunds, or adjustments, rather than a flat number. Understand exactly what that percentage applies to, since two facilities quoting "90% financing" can mean meaningfully different actual amounts depending on how the base value is defined.
Pricing: rate, fees, and what's actually included. Look beyond the headline discount or interest rate for processing fees, per-transaction charges, and any minimum utilisation fee. A transparent lender will lay all of this out clearly in the sanction letter and loan agreement rather than leaving it to be discovered later; if a fee isn't mentioned here, ask directly whether it exists.
Recourse terms. Confirm whether the facility is recourse or non-recourse, and if partial recourse applies, understand the specific conditions under which you'd remain liable for a buyer's non-payment. This single clause often matters more to your actual risk exposure than the pricing does.
Collateral or security requirements, or the explicit absence of them. For collateral-free facilities, the sanction letter should state plainly that no property or fixed-asset security is required, and specify instead what is required, typically the assignment of specific invoices to the lender. If a facility marketed as collateral-free suddenly introduces a security clause at sanction stage, that's worth raising immediately.
Tenure and repayment schedule. Check the exact repayment structure, often monthly instalments for term-based facilities, or automatic settlement against buyer payment for invoice-based ones, and confirm it aligns with your actual cash flow cycle, not just the lender's standard template.
Conditions precedent. This is the list of things that must happen before funds are actually disbursed, documentation to be submitted, invoices to be assigned, KYC to be completed. Read this closely, since it's often the actual determinant of how fast you'll see funds, more than the headline turnaround time quoted elsewhere.
Covenants and ongoing reporting requirements. Some facilities require periodic reporting, updated financials, buyer confirmations, or GST filing consistency, as an ongoing condition of the facility staying active. Know what you're committing to beyond the initial disbursement.
Events of default and penal charges. Understand specifically what triggers a penalty, late buyer payment, missed reporting, breach of a covenant, and what the actual cost of that trigger is. This is usually stated precisely in the pricing and penal policy referenced in your agreement.
Validity and renewal terms. Sanction letters typically carry a validity period, after which the offer may need to be revisited or re-approved. Note this date, since missing it can mean restarting parts of the process.
Questions worth asking before you sign
- Does the sanctioned amount match what I expected, and do I understand exactly how it's calculated?
- Are there any fees or charges not explicitly listed that I should ask about directly?
- What specifically triggers a penalty, and what does that cost?
- What do I need to submit before funds are actually disbursed, and how long does that typically take?
- Is this facility recourse, non-recourse, or conditional, and do I understand the difference for my actual risk?
How this shows up with CapitalXB specifically
CapitalXB's own process is built to make this straightforward: detailed information on fees and charges is provided during the application process and again in the loan agreement itself, collateral-free facilities require only the assignment of specific invoices rather than any property security, and repayment structures are laid out clearly against the specific loan type, generally through instalments over an agreed timeframe. The goal is a sanction letter a founder can actually read and understand, not one that requires a lawyer to decode.
The bottom line
A sanction letter isn't a formality to skim past on your way to the signature line. It's the actual blueprint for how your financing will behave, month to month, transaction to transaction. Reading it properly once, before you sign, saves the far more painful experience of discovering its terms for the first time when something goes wrong.