A demand line lets the bank decline any advance and ask for repayment of the balance at any time, without needing a default. A committed line obliges the lender to fund your draws, up to the limit and until maturity, as long as you meet the conditions in the agreement: no default, accurate representations, and enough borrowing base. Committed lines usually cost more, through an unused line fee, and come with fuller documents. Many small-business lines are legally demand facilities, so read your note before you rely on a line for payroll, a seasonal build or an acquisition.
- Demand line
- The bank may refuse advances or require repayment at its discretion
- Committed line
- The lender must fund when the agreement's conditions are met
- Where it is decided
- The promissory note and loan agreement, not the term sheet or the banker
- Cost of a commitment
- Usually an unused line fee and tighter documentation
- Rely on it for
- Committed: payroll, seasonal builds, acquisitions. Demand: a cushion you could live without
Two different promises
A line of credit is a promise about the future. The question is who is making it. Under a demand or uncommitted line, the bank has made an offer it can withdraw: it will consider each draw request, and it may say no. It can also ask for the whole balance back at any time, without having to point to a default. Some banks call these guidance lines or discretionary lines; the effect is the same.
Under a committed line, the lender has bound itself. For the life of the facility, it must fund each properly requested draw up to the available amount, as long as the borrower satisfies the conditions to lending set out in the agreement. It can stop funding only if one of those conditions fails, and it can demand repayment early only after an event of default.
The difference rarely matters in a good year, because a bank that is happy with the credit funds both kinds the same way. It matters in exactly the year you need the line most: when earnings soften, a customer pays late, or the bank changes its mind about your industry. That is when a demand line can disappear. The owner's experience of a line being cut or frozen is often simply the demand feature being used.
Side by side
| Demand (uncommitted) line | Committed line | |
|---|---|---|
| Obligation to fund | None; each advance is at the bank's discretion | Yes, while the conditions to lending are met |
| When the balance can be called | At any time, on demand | At maturity, or earlier only after an event of default |
| Typical cost | Often no unused line fee | Usually an unused line fee on the undrawn amount |
| Documents | Often a short note and a letter agreement | A full credit agreement with conditions, covenants and defaults |
| Covenants | Sometimes few or none, because the bank does not need them to exit | Financial and reporting covenants that define when the lender can stop |
| Where it shows up | Smaller bank lines, overdraft-style facilities, some lines to closely held companies | Middle-market bank lines, most asset-based facilities, syndicated revolvers |
| What it is good for | A cushion for timing gaps you could cover another way | Payroll, seasonal inventory, letters of credit, acquisitions, anything a failure would stop |
The absence of covenants on a demand line is not a gift. A committed lender writes covenants because they are the only way it can get out; a demand lender does not need them, because it can leave whenever it likes. For more on the market labels, see committed vs uncommitted line of credit.
How to tell which one you have
Ignore the name of the product and the banker's description. The legal answer is in the documents, and it can differ between them. Look for these clauses:
| Where to look | Language that signals a demand line | Language that signals a committed line |
|---|---|---|
| The promissory note | "Payable on demand", or principal due "on demand, or if no demand is made, on" a date | Principal due on a stated maturity date |
| The advance provisions | The bank "may" make advances, "in its sole discretion" | The lender "shall" or "agrees to" make advances, subject to conditions |
| Termination | The bank may terminate or reduce the line "at any time" | The commitment terminates at maturity or on an event of default |
| The recital | Language saying the line is not a commitment to lend | A defined "Commitment" with a stated amount and period |
| Fees | No fee on the undrawn amount | An unused, commitment or facility fee |
Watch for the hybrid. Some lines have a loan agreement that reads like a committed facility, with covenants, a maturity date and events of default, attached to a note that says it is payable on demand. Some agreements say both, and add that nothing in the covenants limits the bank's right to demand. Where the documents conflict, the result depends on the exact wording and on the governing law, and the bank will read them its way. If you plan to depend on the line, have counsel give you a plain answer before you do.
If the note says "payable on demand", assume the bank can stop funding and ask for its money back, whatever else the documents say.
What a commitment does, and does not, guarantee
A committed line is far stronger than a demand line, but it is not unconditional. Every draw is subject to conditions to lending, and a lender will not fund if one fails. The usual ones:
- No default or event of default exists, including a covenant that has tripped but not yet been declared. See the covenants on a line of credit.
- The representations are still true, which in some agreements includes a representation that no material adverse change has occurred. A broad material adverse change clause gives the lender room to argue its way out of funding.
- There is availability. On an asset-based line, the draw must fit within the borrowing base, after reserves, and the lender may still have discretion over reserves. The usable amount is the excess availability, not the commitment.
- Reporting is current. A missing borrowing base certificate or compliance certificate can itself be a default.
The practical lesson is that a commitment is only as strong as your headroom under those conditions. A committed line with a covenant you are about to miss behaves much like a demand line. Negotiating the conditions matters: a narrow material adverse change clause, or none; reserves limited to the lender's reasonable judgement and to changes it did not know about at closing; and covenant headroom you can keep in a bad quarter.
When the difference matters most
Payroll. If the business would miss payroll without the line, the line must be committed. A demand line that stops funding in a slow month leaves no time to arrange another.
A seasonal build. A company that borrows to build inventory ahead of its season, as described in how a seasonal line works, is most exposed at the peak of its borrowing, when collateral has not yet turned into cash. That is the moment a demand lender is most likely to become cautious.
An acquisition. A buyer who plans to use a revolver to fund part of the purchase or the working capital after closing needs the lender bound to fund at closing and afterward. Sellers and senior lenders will ask. See using a revolver in an acquisition and working capital at close.
Letters of credit. Suppliers and landlords who take a letter of credit are relying on the facility behind it. Letters of credit under a revolver covers how they use availability.
Where a demand line is a reasonable choice is as a secondary cushion: cheap standby liquidity for a company with cash on hand and other sources, which could absorb the line being withdrawn. It is a poor foundation for anything the business cannot do without.
Getting to a committed facility
Banks offer demand lines because they are cheaper to hold and easier to exit, so a committed facility has to be asked for, and paid for. Expect an unused line fee, a fuller credit agreement, and possibly a borrowing base and more reporting. For a company whose earnings are uneven, an asset-based line is often the most practical way to get a commitment, because the lender's protection comes from collateral rather than from the right to walk away.
The time to change is before you need the line, and the natural moment is the annual renewal. Of the 1,800+ lenders in Transparent's book, 235 write asset-based loans and lines, and their terms on commitment, conditions and reserves vary as much as their pricing. Comparing them on those terms, not only on rate, is part of what Transparent's lender package is built to do; see how we underwrite.
Common questions
- Is my small-business line of credit a demand line?
- Many are, particularly smaller bank lines to closely held companies. Check the promissory note for the words "payable on demand" and the loan agreement for language saying advances are at the bank's discretion.
- Can a bank call a demand line if I have never missed a payment?
- Generally yes. A true demand line does not require a default; the bank may ask for repayment when it chooses. In practice banks usually give notice and time to refinance, but the documents do not require them to.
- Does a committed line mean the lender must fund no matter what?
- No. It must fund only while the conditions to lending are met: no default, accurate representations, current reporting and enough availability. A tripped covenant or a shrunken borrowing base can stop funding on a committed line too.
- Why would anyone accept a demand line?
- It is usually cheaper, with no unused line fee and lighter documents, and it is fine as a cushion a company could do without. The risk is relying on it for something essential.
- Can I convert a demand line into a committed one?
- You can ask, most naturally at renewal, and expect to pay a fee on the undrawn amount and accept fuller documents. If your bank declines, an asset-based or other lender may offer a committed facility instead.