What it means
An ordinary term loan is funded in a single lump sum on day one, and interest starts immediately on the whole balance. A delayed draw term loan splits the commitment into an initial funding plus one or more later draws available during a set availability period, typically twelve to twenty-four months.
Once that period ends, any undrawn amount is simply cancelled. The point is to match funding to actual spending.
A company planning three bolt-on acquisitions does not know exactly when each will complete, so borrowing the full amount at the start would mean paying full interest on idle cash. Committing the money now and drawing it later keeps the certainty without the carrying cost.
The lender is giving up flexibility, so it charges for the privilege. The ticking fee, often between 0.5% and 2% a year on the undrawn balance, compensates the lender for reserving capital, and it is usually far cheaper than the full interest margin.
Some agreements step the fee up over time to encourage the borrower to draw sooner. Draws normally come with conditions: the borrower must be within its covenants, no default may be outstanding, and the money must go to the agreed purpose.
Lenders also set a minimum draw size to avoid administering lots of small requests. Missing a condition at draw time can leave a borrower with a committed facility it cannot actually access.
These structures are common in leveraged finance, private credit and staged capital projects, and they are close cousins of a revolving credit facility. The key difference is that a revolver can be repaid and redrawn, while a delayed draw term loan, once drawn and repaid, is gone for good.
That makes it a funding tool rather than a working capital tool.
In practice
Real-world examples.
Example
A dental group backed by private capital agrees a $50,000,000 facility, with $30,000,000 funded at completion and $20,000,000 available for two years to buy practices. It draws $7,000,000 in year one and $9,000,000 in year two, and lets the final $4,000,000 lapse when prices rise beyond its target.
Example
A packaging manufacturer arranges a $16,000,000 delayed draw facility to fund a new production line. It draws $4,000,000 each quarter as the engineering firm certifies construction milestones, so interest builds only as the plant is actually paid for.
Example
A software business with a $25,000,000 commitment breaches its leverage covenant before drawing the second tranche. The lender declines the draw request, leaving the company $10,000,000 short of the funding it had assumed was guaranteed.
Formula
Calculation
Ticking Fee Cost = Undrawn Commitment x Ticking Fee Rate x Time Outstanding
An acquisitive company agrees a facility with the following terms:
Total commitment: $20,000,000
Funded at closing: $12,000,000
Delayed draw available: $8,000,000 over 18 months
Ticking fee: 1.00% a year on the undrawn balance
Interest margin on drawn amounts: 9.00% a year
Months 1 to 6, undrawn $8,000,000: $8,000,000 x 1.00% x 6/12 = $40,000
In month 7 the borrower draws $5,000,000, leaving $3,000,000 undrawn
Months 7 to 18, undrawn $3,000,000: $3,000,000 x 1.00% x 12/12 = $30,000
Total ticking fees over 18 months: $40,000 + $30,000 = $70,000
Compare that with borrowing the $5,000,000 at closing. Interest for the six months before the money was needed would have been $5,000,000 x 9.00% x 6/12 = $225,000, against a ticking cost on the same $5,000,000 of $5,000,000 x 1.00% x 6/12 = $25,000. Waiting saved $200,000.Case study
Seen in the real world.
Brightfell Veterinary Group is an invented company used here to illustrate how these facilities work in practice. It agreed a $40,000,000 facility: $24,000,000 funded at closing to refinance existing borrowings, and a $16,000,000 delayed draw available for 24 months to buy clinics, at a ticking fee of 0.75% a year.
In the first year Brightfell drew $6,000,000 at the six-month mark to buy four clinics. Ticking fees for that year came to $60,000 on the full $16,000,000 for the first six months, plus $37,500 on the remaining $10,000,000 for the second six months, a total of $97,500.
In year two, vendors' price expectations rose and Brightfell drew only $4,000,000 more, at the eighteen-month mark, letting $6,000,000 of the commitment lapse. Year two fees were $37,500 plus $22,500, or $60,000, taking the two-year total to $157,500. The finance director's view was that the unused commitment had cost real money but had given the board the confidence to bid quickly against better-funded rivals.
Watch out
Common mistakes.
- Assuming committed money is guaranteed money. Every draw is conditional on covenants and on no default existing, so a struggling borrower may find the facility unavailable exactly when it is needed most.
- Ignoring the ticking fee when comparing offers. A cheap interest margin combined with an expensive ticking fee can cost more overall if draws turn out to be slow.
- Sizing the commitment too generously. Undrawn amounts still cost money every month and usually lapse unused at the end of the availability period.
Questions
People also ask.
How is this different from a revolving credit facility?
A revolver can be repaid and redrawn repeatedly, while a delayed draw term loan is drawn once per tranche and cannot be reborrowed once repaid.
What happens to money that is never drawn?
The commitment simply expires at the end of the availability period, the lender is released, and the borrower owes nothing on the unused portion beyond the fees already paid.
Who typically uses these loans?
Acquisitive companies, private credit borrowers and businesses funding staged capital projects, where the total spend is known but the timing is not.
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