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What Is an Uncommitted Facility? Definition, Purpose, and Example

Posted on October 19, 2025October 20, 2025 by user

What is an uncommitted facility?

An uncommitted facility is a short-term lending arrangement in which a lender agrees it may make funds available to a borrower but has no binding obligation to do so. The lender can decide whether to extend credit, set the limit, and demand repayment on short notice. These facilities are typically used to address temporary or seasonal cash-flow needs rather than long-term finance.

Purpose and common uses

Uncommitted facilities are designed to cover short-term liquidity gaps. Typical uses include:
* Meeting payroll or other immediate operating expenses
* Financing seasonal inventory or fluctuating revenues
* Paying suppliers to secure trade discounts
* One-off or single transactions that don’t require long-term borrowing

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How it works

  • The lender retains discretion: it may offer advances when requested but can refuse or vary terms at any time.
  • Advances are usually short term and often repayable on demand.
  • Arrangement costs and setup requirements are generally lower than for committed facilities because the lender has no binding commitment.
  • Availability and pricing can be uncertain for the borrower — the lender may change the limit, call in the facility, or impose charges with little notice.

Example: overdraft (working capital facility)

An overdraft is a common form of uncommitted facility. A bank authorizes a borrower to withdraw funds up to an agreed limit. Key features:
* Payable on demand — the bank can require immediate repayment.
* Simple to obtain relative to long-term loans, but availability is not guaranteed.
* Typically used for short-term cash-flow smoothing, not for financing major acquisitions.
* Downsides include potentially high charges, limited borrowing capacity, and little scope to negotiate standard lender terms.

Uncommitted facility vs. committed facility

Committed facility:
* Lender is contractually obligated to provide agreed funds.
* Specifies amount, repayment schedule, interest rate (fixed or variable), and often collateral.
* Suited to long-term needs (e.g., equipment, real estate, working capital) with multi-year repayment.
* Requires a more rigorous approval process and stronger borrower credit.

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Uncommitted facility:
* Lender has no obligation to advance funds.
* Flexible, cheaper to set up, and intended for short-term needs.
* Greater uncertainty and potentially higher fees or limits on use.

Pros and cons

Pros
* Faster and cheaper to arrange than committed facilities
* Flexible for short-term, unpredictable cash needs
* Less initial documentation and negotiation

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Cons
* No guaranteed availability of funds
* Repayable on demand, creating liquidity risk for the borrower
* May carry higher charges and stricter usage controls
* Limited borrowing amounts and little ability to amend standard lender terms

When to use which

  • Use an uncommitted facility for short-term, seasonal, or unpredictable cash-flow gaps where flexibility is more important than certainty.
  • Use a committed facility (term loan or committed credit line) for planned, long-term financing needs where guaranteed availability and predictable repayment terms are essential.

Key takeaways
* An uncommitted facility gives borrowers discretionary, short-term access to funds without a lender obligation.
* It is best suited for temporary liquidity needs but carries availability and repayment risk.
* Committed facilities provide certainty and structure for longer-term financing at the cost of more rigorous approval and often collateral.

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