Offered by banks and other financial institutions, a committed credit line is a type of loan that can’t be suspended unless the borrower is notified.
Let’s take a closer look at what a committed credit line is and how it works, so you can determine if it makes sense for your situation.
Definition and Example of a Committed Credit Line
Essentially, a committed credit line is a legal agreement between you and the lender that can’t be broken without a formal notification process.
While a committed credit line requires the lender to continue to provide funds to the borrower for a designated period of time, an uncommitted credit line does not. With an uncommitted credit line, the lender may put an end to the flow of funds if they believe it's risky to lend to you due to market conditions.
- Alternate name: Committed credit facility
For example, a business may keep a committed line of credit on hand to guard against a sudden drop in revenue due to market conditions.
Committed credit lines are typically offered to businesses.
How a Committed Credit Line Works
Businesses typically apply for committed lines of credit because they’re looking for a kind of emergency fund they can draw from if they experience sudden losses of income or unexpected expenses.
Imagine you’re a business owner. Because of various reasons, your business experiences a sharp decline in revenue that jeopardizes your company’s solvency. Rather than scramble for quick funding from lenders that may charge you high rates, a committed credit line provides accessible cash to keep your business afloat.
The committed credit gives you the peace of mind of knowing you’ll be able to keep your business going as you try to recover the surprise decrease in revenue. In this scenario, a traditional business loan may be an alternative. However, it may be harder to get a loan because of the steep drop in revenue, and lenders may only be willing to lend you money if you pay a steep interest rate.
If you opt for a committed credit line, you’ll have to pay a commitment fee. A commitment fee pays for the cost of reserving the unused portion of your credit line. It guarantees that the entire credit line will be granted to you, instead of another individual or business.
While commitment fees vary, some lenders opt to charge you a percent of your unused credit amount at the end of each quarter. In addition to a commitment fee, you’ll have to pay interest on the amount you withdraw, just like you would with a traditional loan or credit line.
It’s highly likely a committed credit line will include a specific time frame or expiration date by which all the funds will be distributed by the lender. There may also be other fees, such as late fees.
Pros and Cons of a Committed Credit Line
Access to large sums of money
Funds eventually expire
- Guaranteed funds: With a committed credit line, you’ll be able to pull funds any time you need them. You don’t have to worry about running out of money when your business encounters unexpected expenses, drops in revenue, or expansion opportunities.
- Access to large sums of money: The amount of money you can have access to could be bigger than what you’d get through a traditional business loan. This can help you purchase new equipment, hire more employees, or expand a business.
- Commitment fee: To reap the benefits of a committed credit line, you’ll have to pay a commitment fee. Depending on the terms, this can cost you thousands of extra dollars.
- Funds eventually expire: A committed credit line will not be available to you forever. Your lender will include an expiration date in your agreement.
- A committed credit line is a loan that can’t be terminated without properly notifying the borrower.
- While individuals can use committed credit lines, they are often taken out by businesses with large expenses.
- The opposite of a committed credit line is an uncommitted credit line, in which a lender can suspend funds at any time if they believe lending to the borrower is risky.