Delayed Draw Term Loan

A special type of term loan that allows a borrower to withdraw funds in increments over a specified period rather than in a single lump sum.

A Delayed Draw Term Loan (DDTL) is a specialized corporate debt structure that allows a borrower to draw down pre-approved capital in increments over a specified period, rather than receiving the entire loan amount as a single lump sum at closing. This structure is commonly utilized by capital-intensive businesses, private equity sponsors, and companies undergoing strategic expansions or acquisitions. It allows management to secure committed financing upfront while matching actual cash drawdowns with the timing of capital expenditures. During the "draw period"—which typically ranges from several months to a few years—the borrower only pays interest on the portion of the loan that has actually been drawn. However, lenders charge a smaller "commitment fee" (often called a facility fee) on the undrawn portion of the loan to compensate them for keeping the capital available. Once the draw period expires, any remaining undrawn amount is usually canceled, and the drawn balance amortizes like a traditional term loan. For equity and debt investors, a DDTL is a positive indicator of capital efficiency and disciplined liquidity management. It prevents "cash drag"—the phenomenon where a company pays high interest on idle cash sitting on its balance sheet. However, investors must monitor the strict covenants, milestone requirements, and expiration dates associated with the facility. If a company experiences operational setbacks, lenders may block access to the remaining undrawn capital, leaving planned projects underfunded.

Company A secures a $100 million Delayed Draw Term Loan at a 10% interest rate with a 1% commitment fee on undrawn funds to build a new factory over one year. In the first six months, Company A draws down $40 million and leaves $60 million undrawn. During this period, its annualized interest expense on the drawn portion is $4 million ($40 million 10%), and its annualized commitment fee on the undrawn portion is $600,000 ($60 million 1%), totaling $4.6 million in annualized financing costs instead of the $10 million it would have paid if it took the full $100 million on day one.