standby loan

Contingent-capital mechanism under which a lender gives written commitment to advance a specified amount of money at specified terms on demand or on a specified future date. This arrangement is based on a mutual understanding that the loan facility will not be used unless circumstances warrant, and that the borrower can cancel it at anytime. Standby loans are used typically to ensure availability of critical funds following a catastrophe, or to obtain construction financing at a lower interest rate on the assurance that permanent financing will be available when a project is complete and is generating income. Also called special purpose credit or standby commitment.