The Benefit of a Committed Line of Credit

A committed line of credit is different compared to other credit lines because it is a legal agreement that provides much greater protection to a business owner. Once an agreement is signed the lender is required to lend money to the borrower, provided that the borrower does not break any of the agreed upon conditions. The main benefit to a committed line of credit is that a lender is legally bound to provide funds to the borrower. Whereas, an uncommitted line of credit means a lender can suspend a credit line or even cancel a company’s credit line if they believe the market conditions are too risky.

This option puts a company’s access to credit at risk because the lender has the option to suspend or cancel a credit line at any time. One of the best examples of the risks involved with an uncommitted line of credit was during the recent economic downturn. As the financial markets began taking a turn for the worst banks responded to the risky market conditions. All across the country banks slashed and cancelled the credit lines of thousands of business customers without any advanced notice or warning. Many business owners depending on these credit lines had to close their doors; others downsized, moved to a more affordable location, or used personal savings to keep their businesses afloat.

A committed line of credit prevents this from happening to you. An uncommitted line can be withdrawn by a bank without prior notice. The only drawback to a committed line is that it will be more expensive so make sure you consider the pros and cons of each type prior to making a decision. Some lenders offer a committed line for a specific time period and following the end of the term there is a review for renewal. It is important to adhere to the term and conditions of the credit line because it can impact whether or not you will be granted another term.

So before you apply for a line of credit it’s important to be fully knowledgeable on all the types that are available. Whether you have less than perfect credit, a seasonal business, collateral, or strong financials, there may be a specific type of credit line that is better suited to fit your needs and that of your business.