STANDBY COMMITMENT Meaning and
Definition
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A standby commitment refers to a financial arrangement in which a lender assures a borrower that it will provide financial support if the borrower faces difficulties in obtaining funds from other sources. This commitment acts as a safety net for the borrower, offering reassurance that the lender is willing to extend credit under certain circumstances.
In this setup, the lender agrees to provide funding to the borrower if specific conditions are met, such as the failure of the borrower's primary sources of financing. It is often utilized in situations where the borrower plans to raise capital from the market, but uncertainties or risks might deter potential investors or lenders.
When a standby commitment is in place, the lender may not initially provide any funds but commits to being available to fulfill the borrower's financial needs if necessary. This form of support can take various forms, such as a standby letter of credit or a standby loan facility.
Standby commitments are common in the business and corporate world, particularly during high-risk ventures, mergers and acquisitions, or when a company requires funding for major projects. It allows the borrower to obtain leverage by assuring the availability of credit, even if traditional financing options are unattainable or insufficient.
Overall, a standby commitment represents a contractual agreement between a lender and a borrower, providing support and financial security to the borrower, especially in situations where access to funds becomes challenging.
Etymology of STANDBY COMMITMENT
The term "standby commitment" is composed of two distinct words: "standby" and "commitment".
The word "standby" originally comes from the combination of the Old English words "standan" (to stand) and "bī" (near), giving rise to the Middle English term "standeby" in the 14th century. The concept behind "standby" is to be ready or available to act or help if needed, often associated with waiting in a state of preparedness.
The word "commitment" is derived from the Latin word "committere", which consists of "com" (together) and "mittere" (to send). From this root, Middle English developed the term "commit" in the 14th century, evolving into "commitment" by the 16th century. It signifies a promise or obligation to do something.
