What it means
"Committed" describes the lender's obligation, not the shape of the loan. A committed facility can be a single-drawdown term loan, a revolving line that is drawn and repaid repeatedly, or a standby facility held in reserve.
What unites them is that the lender has signed a contract to lend rather than expressed a willingness to consider lending. Companies rely on committed facilities for planning.
If a business is bidding for a contract that requires $8,000,000 of upfront working capital, it needs to know the money will be there when the contract is won, not hope so. The same logic applies to acquisition finance, where a signed commitment letter is often a condition of making a binding offer at all.
The documentation is where committed facilities differ most from ordinary bank borrowing. A facility agreement sets out conditions precedent that must be satisfied before each drawdown, representations that must be repeated, financial covenants tested quarterly, and detailed default provisions.
It is a long document because it converts a relationship into a set of enforceable obligations on both sides. Fee structures reflect the lender's cost of setting capital aside.
There is typically an arrangement or upfront fee of 0.25% to 1.5% of the facility, a commitment fee on undrawn amounts, sometimes a utilisation fee that steps up when drawings exceed a threshold, and an agency fee where several banks participate in a syndicate. The nuance is that commitment has limits.
Most agreements include a material adverse change clause and require that no default is continuing at drawdown, so the promise is conditional rather than absolute. Well-advised borrowers negotiate the tightness of those conditions as carefully as they negotiate the margin.
In practice
Real-world examples
Example 1
A construction group secures a $45,000,000 committed facility before tendering for a motorway contract, because the client requires evidence of funding at bid stage. The facility stays undrawn for eight months, costing only the commitment and agency fees.
Example 2
A retailer negotiates a committed facility with a utilisation fee that increases the margin by 0.25% once drawings exceed 50% of the limit. Its treasury team manages month-end balances specifically to stay below that threshold.
Example 3
A private equity-backed business replaces two uncommitted overdrafts with a single $20,000,000 committed facility ahead of a bolt-on acquisition. The certainty allows it to sign a purchase agreement without a financing condition, strengthening its position against rival bidders.
Think of it
Imagine booking a hire car in advance with a guaranteed reservation fee. Even if you walk instead of drive, the rental company keeps the car parked and waiting just for you.
Formula
Calculation
All-in Annual Cost = Interest on Drawn + Commitment Fee on Undrawn + Amortised Upfront Fee
Effective Cost of Drawn Funds = All-in Annual Cost / Average Drawn Balance
A manufacturer signs a $30,000,000 committed revolving facility for three years. The upfront fee is 0.75%, interest is 7.0% on drawn balances, and the commitment fee is 0.40% on undrawn amounts. Average drawings for the year are $12,000,000.
Upfront fee = $30,000,000 x 0.0075 = $225,000
Annual share of upfront fee = $225,000 / 3 = $75,000
Interest = $12,000,000 x 0.07 = $840,000
Commitment fee = ($30,000,000 - $12,000,000) x 0.004 = $18,000,000 x 0.004 = $72,000
All-in Annual Cost = $840,000 + $72,000 + $75,000 = $987,000
Effective Cost of Drawn Funds = $987,000 / $12,000,000 = 0.08225, or 8.23%
The quoted 7.0% margin understates the real cost by 1.23 percentage points, entirely because of fees paid for capacity the company did not use during the year.Case study
Seen in the real world
Marnwood Industrial is an illustrative, fictional components manufacturer that signed a $30,000,000 committed revolving facility to support a period of rapid growth. In the first year it drew an average of $12,000,000 and paid $987,000 in total financing cost, an effective 8.23% on the money it actually used.
The finance director came under pressure from the board, which pointed out that a smaller $18,000,000 facility would have cut the commitment fee and the amortised upfront cost considerably. She modelled it and agreed the saving would have been roughly $234,000 over three years.
She also modelled the alternative. In month nine, a supplier failure forced Marnwood to pre-buy $9,000,000 of raw material, taking drawings to $21,000,000 for six weeks. Under the smaller facility the company would have been $3,000,000 short at the worst possible moment. In this fictional case the board accepted that the extra fee had bought exactly the outcome it was meant to buy.
Watch out
Common mistakes
- Reading "committed" as unconditional. Conditions precedent, covenant compliance and material adverse change clauses all sit between the promise and the cash.
- Ignoring fees when comparing offers. A lower margin paired with a high arrangement fee and commitment fee can cost more than a higher margin with lighter fees.
- Letting the facility run close to maturity before refinancing. Lenders price renewals far less favourably when the borrower has no time left to shop around.
Questions
People also ask
What is the difference between a committed and an uncommitted facility?
A committed facility carries a contractual obligation to lend, while an uncommitted one is available purely at the lender's discretion and can be withdrawn without notice.
Why do lenders charge a commitment fee?
Because they must hold regulatory capital against the promise to lend, so the undrawn commitment has a genuine cost even when no money moves.
Can a committed facility be cancelled early?
The borrower can usually cancel or reduce it with notice, sometimes with a break cost, and the lender can cancel only on a default or a specified event set out in the agreement.