Question

a) Contrast a committed line of credit and an uncommitted lin of credit.

b) Explain when an uncommitted line would be recommended and when only a committed line would be advised

Answer 1

1. Committed line of credit is a facility offered by a financial institution, which cannot be suspended by the lender without notifying the borrower. It is a formal written agreement that legally binds the lender to provide the funding. Uncommitted line of credit is used to satisfy the short term financing needs of a business. It is a less formal agreement and is not binding on the bank.
2. It is advised to use committed line of credit to meet sudden expenses that are expected to occur. It is advised to use uncommitted line of credit to meet temporary needs of the business.

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