Total commitment: Overview, definition, and example
What is total commitment?
Total commitment refers to the total amount of financial resources or capital that a lender or financial institution is willing to extend to a borrower under a loan agreement or credit facility. It represents the maximum amount of credit available to the borrower during the term of the agreement. In the context of credit lines or syndicated loans, total commitment indicates the total potential loan amount that can be drawn upon by the borrower. This is typically agreed upon in advance and is often used to determine the scope of borrowing capacity in commercial lending or investment agreements.
Why is total commitment important?
Total commitment is important because it defines the limits of a borrower’s access to credit and sets expectations for both the lender and the borrower regarding the financial resources available for the loan. It provides clarity on the borrowing capacity, which is crucial for budgeting, cash flow management, and financial planning. For the lender, total commitment is a key measure of their exposure to risk, as it indicates the maximum amount they could potentially lend. For the borrower, it represents the ceiling for future borrowings under the current agreement, allowing them to plan their financial needs within those limits.
Understanding total commitment through an example
Let’s say a company enters into a revolving credit facility with a bank, with a total commitment of $10 million. This means that the bank is willing to lend the company up to $10 million at any time during the term of the credit facility. The company can draw on this amount as needed, paying interest on the funds used and repaying the balance when possible.
For example, the company might draw $4 million to fund an expansion project. If the company later repays $2 million, they will have $8 million available under the facility. The total commitment remains at $10 million, but the available credit fluctuates based on the outstanding balance.
In another example, a company agrees to a loan agreement with a total commitment of $5 million from a syndicate of banks. The company can borrow up to $5 million under the terms of the agreement. If the company only borrows $2 million initially, they still have the ability to borrow the remaining $3 million if additional funds are needed in the future.
An example of a total commitment clause
Here’s how a total commitment clause might appear in a credit agreement:
“The Lender agrees to provide the Borrower with a Total Commitment of up to $10,000,000, which may be drawn upon by the Borrower at any time during the term of the Agreement, subject to the terms and conditions herein. The total amount available to the Borrower under this facility shall not exceed $10,000,000 at any time.”
Conclusion
Total commitment is a key component of loan agreements and credit facilities, representing the maximum amount of funds a borrower can access during the term of the agreement. It provides clarity for both the borrower and the lender regarding the scope of available credit, which is crucial for financial planning and risk management. By understanding total commitment, both parties can better manage borrowing capacity, repayment schedules, and overall financial obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.