Explain the difference between uncommitted and committed loan facilities provided by banks, and compare and contrast between three types of committed loan facilities

A commited loan facility is when the Terms and conditions are defined by the lender and the requirements the borrower must meet are specified in it. The lender is obliged to lend on borrowers request, given he meets the conditions set forth by the borrower. Types of commited facility are term loans, resolving credit and letter of credit.

An uncommitted loan facility is an agreement between a borrower and a lender to provide loan to the borrower. The lender here can choose whether to provide loan or not and he can call for repayment at any time. Some uncommitted facilities are overdraft, futures market and bank guarantees.

Types of commited facility:

a) Term Loans: This is when a borrower can draw an amount in lump sum. This is to be paid with payment cycles provided, however any amount repaid cannot be reborrowed.

b) Resolving credit: This is when a facility provides a max loan amount. The main difference here is that it can be re borrowed. It also does not have a fix number of payments.

c) Letter of credit: a letter of credit, also known as letter of undertaking is a guarantee by a trustworthy bank from a buyer to the seller. It is a promise that someone meets the conditions required and the loan will be paid. The main reason it is attractive is because it is a guarantee by a creditworthy bank.