Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Uncommitted Facility

What it is:

An uncommitted facility is a borrowing agreement that allows the lender to determine how much it will lend to the borrower at a given time.

How it works (Example):

Let's say Company XYZ needs extra cash once in a while because it has huge payroll expenses every two weeks and less predictable payments from customers. It approaches Bank ABC about the problem. Bank ABC offers Company XYZ an uncommitted facility, meaning that Company XYZ can borrow money on a very short-term basis when its payroll expenses don’t match its cash flows. This allows Bank ABC to see how well Company XYZ manages its debt and thus gives Bank ABC an idea of whether it wants to lend to Company XYZ again.

Why it Matters:

Uncommitted facilities differ from other facilities in that they do not have many specific terms and conditions. They are most commonly used for temporary financing. Although they are convenient for companies (they function much like overdraft accounts), they cost more because they don't often require collateral and the lender may not make much from the account if the borrower doesn't use the facility much.