A loan facility (e.g. a credit line) whereby the two parties (lender and borrower) have a large degree of discretion as to decide their course of action. As opposed to a committed facility, an uncommitted facility is short-term by nature, and is largely subject to the discretion of either party or both.
The lender (creditor), under an uncommitted facility, has no obligation to extend credit to the borrower, while the borrower has no obligation to use, or continue using, the facility and has the right to terminate it at any time. The parties do not have to set clear terms or manifest the ability to the extend/ use the loan. A borrower can benefit from an uncommitted facility or uncommitted credit line to overcome seasonal revenue fluctuations or meet short term payment obligations (e.g. an overdraft facility).
For example, in trade finance, uncommitted trade finance facilities can be used to meet short-term payment requirements, such as purchasing large volumes of commodities to take advantage of price decreases or avail trade discounts on such bulk purchases.
Uncommitted facilities take many forms including overdrafts, bank guarantees, futures market facilities, foreign exchange options (FX options), commodity derivatives, and standby letters of credit (standby L/C).
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