What it means
When a business sets up a credit facility, the bank agrees to lend up to a specific maximum amount whenever the company asks for it. The portion of that money that remains untouched and sitting in the bank account is called the undrawn credit facility.
It gives businesses immediate access to cash without waiting for loan approval, which is vital during unexpected cash flow crunches. Even though the money is not borrowed, lenders usually charge a small fee, known as a commitment fee, just to keep the funds ready and waiting.
This is similar to paying a retainer to ensure a service is available on demand. Because the business only pays interest on the exact amount it actually withdraws, an undrawn facility acts as a flexible, cost-effective form of insurance.
In practice, non-finance managers must understand this metric because it shows true financial agility. It provides peace of mind that payroll can be met or suppliers paid if sales temporarily drop.
However, it is not free money. Lenders review these facilities annually, and if a company's financial health declines, the bank can reduce the available limit, removing that safety net.
In practice
Real-world examples.
Example
TechStart secured a 100,000 pound credit line for unexpected server costs. They have currently spent nothing, leaving their undrawn credit facility at the full 100,000 pounds.
Example
GreenGarden Nurseries has a 50,000 pound overdraft facility. They drew down 10,000 pounds to buy spring seeds, leaving an undrawn credit facility of 40,000 pounds available.
Example
Apex Logistics arranged a 500,000 pound facility to buy trucks. They used 300,000 pounds so far, meaning their undrawn credit facility stands at 200,000 pounds for future maintenance.
Think of it
“An undrawn credit facility is like having a credit card in your wallet with a 5,000 pound limit. You have not spent any money yet, so your balance is zero, but you know you can buy groceries in an emergency.
Formula
Calculation
Undrawn Credit Facility = Total Approved Credit Limit - Total Amount Currently Borrowed
Example:
A company secures a revolving credit facility of 250,000 pounds from its bank.
During the third quarter, the business withdraws 60,000 pounds to cover seasonal inventory purchases.
Undrawn Credit Facility = 250,000 pounds - 60,000 pounds = 190,000 pounds.
The business has 190,000 pounds remaining that it can access instantly without needing further bank approval.Case study
Seen in the real world.
Oakwood Furniture, a mid-sized manufacturer, faced a sudden delay in customer payments just as a large invoice for raw timber arrived. Fortunately, the firm had established a 200,000 pound revolving credit facility with its bank a year earlier, paying a modest 0.5 percent annual commitment fee to keep it active. Because they had only used 20,000 pounds previously for minor equipment repairs, their undrawn credit facility stood at 180,000 pounds. When the timber invoice of 75,000 pounds came due, the finance manager immediately drew down the required funds from the facility. This action prevented a missed payment to the supplier, avoided late fees, and ensured production continued without interruption. Oakwood paid interest only on the newly drawn 75,000 pounds and restored the balance within sixty days once customers settled their accounts. This case demonstrates how maintaining an undrawn credit facility protects everyday operations from the friction of late customer payments.
Watch out
Common mistakes.
- Treating the undrawn amount as free cash that can be spent on everyday expenses without budgeting for repayment.
- Forgetting that banks charge small commitment fees on the undrawn portion, which still impacts cash flow.
- Assuming the bank cannot reduce or cancel the facility if the company's financial performance deteriorates.
Questions
People also ask.
Do I pay interest on an undrawn credit facility?
No, you only pay interest on the money you actually withdraw and use. However, banks often charge a small commitment fee for keeping the funds available.
Is an undrawn credit facility considered company cash?
No, it is available borrowing capacity, not actual cash in the bank. It should not be listed as cash on your balance sheet.
Can a bank take away my undrawn credit facility?
Yes. Most facilities are reviewed annually, and lenders can reduce or cancel the limit if your financial health declines significantly.
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