What Is a Committed Facility?
A committed facility is a credit facility whereby terms and conditions are clearly defined by the lending institution and imposed upon the borrowing company. A committed facility is a source of credit that has committed to providing a loan to a company. In committed facilities, the borrowing company must meet specific requirements set forth by the lending institution in order to receive the stated funds.
In other words, think of it as binding terms in a contract versus non-binding terms. In the case of a committed facility, the terms laid out are binding for the lender and the borrower.
- A committed facility is a credit facility where a source of credit is committed to providing a loan to a company.
- The terms of the facility are clearly defined, with the borrower having to meet specific requirements to get the funds.
- Terms loans a revolving credit are two types of committed facilities.
- Unlike a committed facility, an uncommitted facility is a credit facility where the lender is not obligated to loan funds when there is a request from the borrower, such as a bank guarantee.
How a Committed Facility Works
The terms committed and uncommitted facilities are used to refer to the terms and conditions of capital funding for short- or long-term agreements. With a committed facility, once the terms and conditions of the loan contract have been agreed upon, the lender must advance money to the borrower when requested. In return, the borrower pays the lender a commitment fee—a fee payable to a lender on available but undrawn amounts and calculated as a percentage of those undrawn funds from time to time.
With a committed facility, the bank agrees to provide funds up to a maximum limit for a specified period of time and at an agreed interest rate. Although the terms and conditions are stringent and specific on how the funds are to be used, borrowing firms receive a guaranteed source of funding for the duration of the agreement.
Types of Committed Facilities
There are a number of committed facilities that borrowers use to obtain loans, two of which are term loans and revolving credit facilities.
A term loan allows a borrower to draw a lump sum of capital for a period of time, usually not more than five years. The loan is to be repaid in accordance with a predetermined payment schedule and may be prepaid in part or in full before the dates specified in the repayment schedule. However, any amount repaid cannot be re-borrowed. Since the borrower can control how much it borrows from the committed facility, it also controls the interest it pays.
Like a term loan facility, a revolving credit facility provides a maximum loan amount over a specified period of time. Unlike a term loan, any amount repaid can be re-borrowed with revolving credit. The borrower may draw down and repay tranches up to a maximum amount of capital whenever it chooses during the term of the loan.
The borrower can often select a period of interest and fix the interest rate it pays over that period for each advance it draws.
With revolving credit, borrowers may be faced with high commitment fees and may have minimum and maximum limits on the amount that can be withdrawn at any one time.
Committed Facility vs. Uncommitted Facility
As opposed to a committed facility, an uncommitted facility is a credit facility in which the lender is not obligated to loan funds when there is a request from the borrower. An uncommitted facility is mostly used for temporary purposes in financing the short-term needs of a borrowing company. Types of uncommitted facilities include overdraft, the futures market, and bank guarantees.