What is ‘Uncommitted Facility’
An uncommitted facility is an agreement between a lender and a borrower where the lender agrees to make short-term funding available to the borrower; this is in contrast to a committed facility that involves clearly defined terms and conditions set forth by the lending institution and imposed on the borrower. Uncommitted facilities are used to finance seasonal or temporary needs of businesses with fluctuating revenues, such as paying creditors to earn trade discounts; single, or one-off, transactions; and meeting payroll obligations. Uncommitted facilities are generally less costly to arrange, compared to committed facilities, because the lender has no obligation to extend the loan; when financing is made available, it is short term, and the credit risk is comparatively small.
Explaining ‘Uncommitted Facility’
Because small businesses may struggle having adequate monthly cash flow, uncommitted facilities may help them operate until they establish a stronger presence in the marketplace and increase their annual revenues.
Example of Uncommitted Facility
An overdraft, or working capital facility, solves companies’ short-term cash flow issues. The bank or other financial institution decides whether to lend money and the limit. Because an overdraft is typically payable on demand, it is unsuitable for purposes such as funding a major acquisition. The lender typically does not call in the overdraft unless the borrower’s financial position or activities give the lender reasons for concern.
Example of Committed Facility
A term loan from a bank is for a specific amount with a specified repayment schedule and a fixed or variable interest rate. For example, many banks have long-term programs offering small businesses the cash necessary for monthly operations. In many cases, a small business uses the cash for purchasing fixed assets such as production equipment.
Further Reading
- Financing of property development – books.google.com [PDF]
- Strengthening regional financial cooperation in East Asia – books.google.com [PDF]
- Preaching to different choirs: How to motivate dismissive, uncommitted, and alarmed audiences to adapt to climate change? – www.sciencedirect.com [PDF]
- Crisis and responses: the Federal Reserve in the early stages of the financial crisis – www.aeaweb.org [PDF]
- Soviet-American economic competition in uncommitted countries – journals.sagepub.com [PDF]
- The Asian financial crisis and its aftermath: do we need a regional financial arrangement? – www.jstor.org [PDF]
