What it means
The value of the word "committed" is that the lender cannot simply change its mind. An uncommitted line is available at the bank's discretion and can be withdrawn at short notice, which is exactly when a struggling business most needs it.
A committed line converts a hopeful arrangement into an enforceable promise. Businesses use these facilities as liquidity insurance rather than as everyday funding.
A company with seasonal working capital swings, a large acquisition pipeline or lumpy receivables wants certainty that cash will be there in the difficult month. Auditors and rating agencies also look at committed availability when assessing whether a business can meet obligations over the next twelve months.
The cost has three components. Interest is charged on drawn balances, usually at a reference rate plus a margin; a commitment or non-utilisation fee is charged on the undrawn portion; and an upfront arrangement fee is paid at signing.
Because you pay for capacity you may never use, a committed line is more expensive than an overdraft of the same nominal size. Availability is not unconditional.
The facility agreement will contain financial covenants, representations that must remain true at each drawdown, and a list of default events. If the borrower breaches a leverage or interest cover covenant, the commitment can be suspended or cancelled, which is why covenant headroom matters as much as the headline limit.
The nuance is the difference between a committed line and a term loan. A term loan is drawn once and repaid on a schedule; a committed revolving line can be drawn, repaid and redrawn many times within the term, which suits working capital far better than a fixed instalment structure.
In practice
Real-world examples.
Example
A toy importer arranges a $6,000,000 committed line each spring because 65% of its annual sales ship between September and November. It sits undrawn for seven months, paying only the commitment fee, then funds the entire buying season from it.
Example
A listed engineering group keeps a $50,000,000 committed facility undrawn purely so its auditors can sign off the going concern statement. The commitment fee is treated as a cost of financial resilience rather than a cost of borrowing.
Example
A software company breaches its leverage covenant after a poor quarter, and although it has drawn nothing, the lender suspends further drawings under the committed line until two consecutive quarters of compliance are reported.
Formula
Calculation
Total Annual Cost = (Average Drawn Balance x Interest Rate) + (Average Undrawn Balance x Commitment Fee Rate)
Effective Cost of Drawn Funds = Total Annual Cost / Average Drawn Balance
A distribution business arranges a $10,000,000 committed revolving line. Interest runs at 7.5% on drawn balances, and the commitment fee is 0.375% on the undrawn amount. Over the year the company draws an average of $4,000,000, leaving $6,000,000 undrawn.
Interest cost = $4,000,000 x 0.075 = $300,000
Commitment fee = $6,000,000 x 0.00375 = $22,500
Total annual cost = $300,000 + $22,500 = $322,500
Effective Cost of Drawn Funds = $322,500 / $4,000,000 = 0.080625, or 8.06%
So although the quoted rate is 7.5%, the true cost of the money actually used is 8.06% once the cost of keeping the standby capacity available is included. The extra 0.56 percentage points is the price of certainty.Case study
Seen in the real world.
Trentmoor Foods is an illustrative, fictional chilled-food producer with sharply seasonal cash flows. It had operated for years on a $10,000,000 overdraft that the bank reviewed annually and could withdraw on demand.
After a difficult year in which a competitor's uncommitted facility was pulled mid-season, Trentmoor's board moved to a three-year committed revolving line of the same size. The cost rose: the company now paid a 0.375% fee on the undrawn balance, adding $22,500 in the year it averaged $4,000,000 drawn, on top of $300,000 of interest.
The board judged the additional $22,500 to be well spent. In this fictional illustration, the committed line meant that when a major customer extended payment terms by 30 days the following winter, Trentmoor drew an extra $3,000,000 as of right, rather than asking permission from a bank that was entitled to say no.
Watch out
Common mistakes.
- Comparing a committed line with an overdraft on interest rate alone. The commitment fee buys legal certainty that an on-demand overdraft simply does not provide.
- Assuming a committed facility is always available. Covenant breaches, material adverse change clauses and failed conditions precedent can all block a drawdown.
- Sizing the facility to average need rather than peak need. The point of the line is to cover the worst month, not the typical one.
Questions
People also ask.
What is a commitment fee?
It is an annual percentage charged on the undrawn portion of the facility, typically between 0.20% and 0.75%, paid for keeping the money available.
Is a committed line the same as a revolving credit facility?
Most revolving credit facilities are committed, but the terms describe different things: "committed" is about the lender's obligation, "revolving" is about redrawing.
Does an undrawn committed line appear on the balance sheet?
No, the undrawn amount is disclosed in the notes rather than recorded as debt, though the commitment fee runs through the income statement.
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