Committed vs uncommitted line of credit: what are you actually buying?

The obligation is the product

A line of credit is a promise about money you have not borrowed yet. The limit, the rate and the collateral describe the promise; the commitment decides whether it is one. Under a committed line, the lender has contracted to lend: for the life of the facility, it must fund each properly requested draw up to the available amount, and it can refuse only if a condition in the agreement fails. Under an uncommitted line, the lender has agreed to consider draws. It can say no to any of them, without a reason and without the borrower having done anything wrong.

The labels vary. Banks call uncommitted facilities guidance lines, discretionary lines or advised lines. A demand line is the strongest form of uncommitted: the bank can decline new draws and also ask for the whole balance back at any time. How to tell from your own documents which kind you hold is covered in demand vs committed lines. This page is about what the difference is worth and how to plan around it.

What the fees pay for

A committed line costs more for a reason that has little to do with the borrower. Banks must hold capital against commitments they can be forced to fund, even when nothing is drawn. A line the bank can cancel at any moment needs little or none. The fees on a committed line are largely the lender passing that cost through, plus a return for keeping the money ready.

• Unused line fee (also called a commitment fee): an annual rate on the undrawn part of the commitment, accrued daily and paid monthly or quarterly. It is the main price of the commitment. See how unused line fees work.
• Upfront or closing fee: a one-time charge on the commitment amount when the facility is signed, more common on larger and asset-based lines. See fees at closing.
• Facility fee: on some lines, a fee on the whole commitment, drawn or not, in place of an unused fee.
• Documents and reporting: a committed lender writes a full credit agreement with conditions, covenants and events of default, because those are the only ways it can stop funding. The legal cost and the ongoing reporting are part of the price.

A worked example in plain numbers. A business has a committed line of 3,000 and draws an average of 1,000 over the year. Its unused fee runs on the undrawn 2,000; at an illustrative rate of a quarter of one per 100 a year, that is 5 for the year. Against that, consider what a declined draw would cost at the wrong moment: a missed payroll, a supplier who puts the business on cash-in-advance terms, or a seasonal order that cannot be filled. Five a year is a small premium for making those events depend on the business's own conduct rather than the lender's discretion. The fee does not need to be the lowest on offer; the commitment should be sized to the realistic peak need, so the business is not paying to reserve money it will never draw.

When a lender declines a draw

On an uncommitted or demand line, a declined draw is not a default and needs no justification. It usually arrives when conditions have already turned: a slow quarter, a customer paying late, a change in the bank's appetite for the industry, or a new credit officer. What usually follows:

• The draw request is refused or simply not funded. Payments the business expected to cover from the line, including checks already written against an operating account linked to it, can come back.
• The bank asks for information. Interim financials, an AR aging, a cash forecast. The line stays closed while it reviews them.
• On a demand line, the balance may be called. The bank can ask for repayment of what is outstanding, not just refuse more.
• Replacement lenders ask why. A new lender will want to know what prompted the decline, and a business shopping for a line under pressure has less time and fewer choices than one shopping from strength.

The practical response is covered in what to do when a bank cuts or freezes a line and when a bank won't renew. The better answer is not to be relying on an uncommitted line for anything the business cannot do without.

A line the lender can decline to fund is not liquidity to plan around. It is a courtesy that may be available.

What counts as liquidity

A cash forecast, a covenant compliance plan or an acquisition budget should count only money that will be there when needed. The same rule is how outside parties read the business: acquisition lenders testing liquidity at closing, sureties, landlords and sellers commonly give credit for undrawn committed availability and little or none for uncommitted lines. Minimum liquidity covenants in credit agreements usually define liquidity the same way.

The accordion deserves emphasis because it is often mistaken for committed money. An accordion lets the borrower ask the existing lenders, or new ones, to increase the facility; nobody is bound to say yes. Growth plans and acquisition pipelines built on an accordion are built on an uncommitted promise.

Uncommitted pieces inside committed facilities

Even a committed line has discretion built into it, and a borrower who plans on the headline commitment can be surprised.

• Reserves and eligibility. An asset-based lender can usually add reserves or tighten eligibility in its reasonable credit judgement, which lowers availability without any default. See availability reserves.
• Material adverse change. If each draw requires a representation that nothing materially adverse has happened, a broadly worded clause gives the lender an argument for not funding. Negotiate it narrow, or out.
• Maturity and renewal. A one-year committed line is committed for one year. At renewal the lender can decline, reprice or resize. A longer committed tenor is part of what a commitment buys. See line of credit renewal.
• Covenant headroom. A covenant close to its limit is a condition close to failing. The commitment is only as strong as the headroom; see the covenants on a line of credit.

When an uncommitted line is enough, and when to pay for a commitment

An uncommitted line is a reasonable tool when it is a second layer of comfort: a business with meaningful cash of its own, a line used occasionally for timing gaps it could cover another way, or specialized facilities such as letter of credit or foreign exchange lines where the bank decides each transaction on its merits anyway. It is simple and usually carries no unused fee.

Pay for a commitment when a declined draw would stop something the business must do: meet payroll, build inventory ahead of a season, back letters of credit that suppliers rely on, fund working capital after an acquisition, or satisfy a minimum liquidity test in another agreement. For businesses whose earnings are uneven, an asset-based line is often the most practical route to a real commitment, because the lender's protection comes from the collateral rather than from the right to walk away; see asset-based vs cash-flow lines. Asset-based lenders typically advance 80% to 90% of eligible receivables, so a business with steady, well-spread receivables has collateral a committed lender can lend against.

A committed lender underwrites more thoroughly because it is making a real promise. It will want an AR aging by customer with days outstanding, an AP aging, the balance sheet, the P&L and year-to-date P&L, the debt schedule with existing liens, an inventory report if inventory is in the borrowing base, and often bank statements and business tax returns. Transparent's book holds 235 lenders that write asset-based loans and lines, and their terms on commitment, tenor, conditions and reserves differ as much as their pricing. The lender package sets those terms side by side so the owner can see which offers are real commitments before choosing on rate. See how we underwrite.