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Committed Facility

Committed Facility

What Is a Committed Facility?

A committed facility is a credit facility by which terms and conditions are obviously defined by the lending institution and forced upon the borrowing company. A committed facility is a source of credit that has committed to giving a loan to a company. In committed facilities, the borrowing company must meet specific requirements set forward by the lending institution to receive the stated funds.

All in all, think of it as binding terms in a contract versus non-binding terms. On account of a committed facility, the terms spread out are binding for the lender and the borrower.

How a Committed Facility Works

The terms committed and uncommitted facilities are utilized to allude to the terms and conditions of capital funding for short-or long-term agreements. With a committed facility, when 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 accessible yet undrawn amounts and calculated as a percentage of those undrawn funds occasionally.

With a committed facility, the bank consents to give funds up to a maximum limit for a predetermined period of time and at an agreed interest rate. Albeit the terms and conditions are severe and specific on how the funds are to be utilized, borrowing firms receive a guaranteed source of funding as long as necessary.

Types of Committed Facilities

There are a number of committed facilities that borrowers use to get loans, two of which are term loans and revolving credit facilities.

Term Loans

A term loan permits a borrower to draw a lump sum of capital for a while, normally not over five years. The loan is to be reimbursed as per a predetermined payment schedule and might be prepaid in part or in full before the dates determined in the repayment schedule. Notwithstanding, any amount reimbursed can't be re-acquired. Since the borrower have some control over the amount it gets from the committed facility, it additionally controls the interest it pays.

Revolving Credit

Like a term loan facility, a revolving credit facility gives a maximum loan amount over a predefined period of time. Not at all like a term loan, any amount reimbursed can be re-acquired with revolving credit. The borrower might draw down and repay tranches up to a maximum amount of capital at whatever point it picks during the term of the loan.

The borrower can frequently choose a period of interest and fix the interest rate it pays over that period for each advance it draws.

With revolving credit, borrowers might be confronted with high commitment fees and may have least and maximum limits on the amount that can be withdrawn at any one time.

Committed Facility versus Uncommitted Facility

Rather than a committed facility, a uncommitted facility is a credit facility wherein the lender isn't committed to loan funds when there is a request from the borrower. An uncommitted facility is generally utilized for impermanent purposes in financing the short-term requirements of a borrowing company. Types of uncommitted facilities incorporate overdraft, the futures market, and bank guarantees.

Highlights

  • Not at all like a committed facility, an uncommitted facility is a credit facility where the lender isn't committed to loan funds when there is a request from the borrower, for example, a bank guarantee.
  • Terms loans a revolving credit are two types of committed facilities.
  • A committed facility is a credit facility where a source of credit is committed to giving a loan to a company.
  • The terms of the facility are plainly defined, with the borrower meeting specific requirements to get the funds.