Uncommitted Loan Agreement

A live example is a soybean-focused office at a larger commodity trader. The desk may have at its disposal various unrelated trade finance facilities and decide to use these facilities for various aspects of its trade, which may be defined in its agreement with the Bank and deemed appropriate by the funder. Alternatively, they may get resistance from some funders or have a good relationship with others when it comes to certain transaction cycles. An unrelated facility is used to finance the short-term needs of a business. This can be explained by fluctuations in cash flow, short-term trades, seasonality, wage differentials during the year or a whole host of other problems. Unrelated entities are generally cheaper to arrange, since the credit risk is lower due to the shorter duration of trading and the lender has not committed the capital, which makes him more comfortable. It is also less likely that they have many specific conditions. These facilities are generally used for temporary purposes; Some lenders do not provide them because there are few or no fees incurred if they are not used. Since small businesses may have difficulty having sufficient monthly cash flow, an unrelated entity can help them work until they are more present in the market and increase their annual turnover. Security in non-commodity trade finance facilities varies. However, there is usually the option for the lender to follow in the borrower`s footsteps and execute the transaction if necessary. This allows the lender to have convenience in executing the transaction. Let`s say that XYZ Company needs extra money from time to time because it has huge labor costs every two weeks and less predictable payments from customers.

He turns to ABC Bank about the problem. ABC Bank offers XYZ Company an unconsolidated facility, which means that XYZ Company can borrow money on a very short-term basis if its labor costs do not match its cash flow. In this way, ABC Bank can see to what extent XYZ Company manages its debts and gives ABC Bank an idea of whether it wants to lend to XYZ Company again. A borrower may benefit from an un tied facility or an unsying line of credit to meet seasonal fluctuations in turnover or short-term payment obligations (e.g. B a pension). In the context of trade finance, unrelated trade finance facilities can help overcome short-term payment requirements, for example. B the purchase of bulk goods, where prices could suddenly fall and a commercial discount can be earned for the purchase of larger quantities. The un tied nature of the facility means that a funder is not required to provide loans. Typically, there are “sub-limits” in each document that set maximum limits that a company can borrow for certain types of transactions. However, even if the criteria are met, a bank is still not required to provide loans in the event of an application from a borrower. A maturity loan for equipment, real estate or working capital is repaid within one to twenty-five years by a monthly or quarterly repayment plan.

. . .