A working capital revolving line of credit (“LOC”) is fundamental to the success of most businesses and companies. The ability of a company to quickly and easily draw on the LOC to cover short term company expenses is vital for day-to day operations. Banks and other lenders routinely make LOCs available to companies on fairly standard terms; the available amount, interest rate, collateral and other loan terms may vary depending on the needs of the company and the policies of the lender. One important issue that is sometimes overlooked when lenders extend LOCs is whether the LOC is committed or uncommitted.
A committed LOC is one that is available to the company for a set term subject to specific conditions unless an event of default exists. As long as the company complies with the terms of the LOC, the company may borrow. Committed LOCs usually require a commitment or origination fee, and sometimes have requirements such as a borrowing base availability limitation, or a one-month clean up period (zero outstandings for 30 days). If an event of default occurs, the LOC is no longer available and amounts outstanding may be required to be repaid.
Conversely, uncommitted LOCs are advanced at the lender’s discretion, and repayment may be due on demand by the lender. Advances can be denied by lender for any reason or no reason. Compliance with covenants and other loan terms does not change the discretionary nature of the uncommitted LOC. Uncommitted LOCs are usually available for approximately one year (subject to potential demand). While lender’s discretionary rights might give companies concern, uncommitted LOCs are very popular, as they typically do not require fees and are subject to an easier approval process.
When considering a LOC, it’s a good idea to determine whether the LOC is committed or uncommitted.
Kenneth A. Hoffmann, Esq. is a partner in our Banking and Commercial Lending Practice Group and can be reached at khoffmann@certilmanbalin.com
