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.
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.
In practice
Real-world examples
Example 1
TechStart secured a $100,000 credit line for unexpected server costs. It has spent nothing so far, leaving its undrawn credit facility at the full $100,000. The founders see it as insurance against a delayed customer payment or a surprise bill.
Example 2
GreenGarden Nurseries has a $50,000 overdraft facility. It drew down $10,000 to buy spring seeds, leaving an undrawn credit facility of $40,000. After the summer sales, the nursery repays the $10,000 and the full $50,000 becomes available again.
Example 3
Apex Logistics arranged a $500,000 facility to buy trucks. It has used $300,000 so far, so its undrawn credit facility stands at $200,000. The finance director keeps this amount in reserve for maintenance and fuel costs during the winter.
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 1:
A company secures a revolving credit facility of $250,000 from its bank.
During the third quarter, the business withdraws $60,000 to cover seasonal inventory purchases.
Undrawn Credit Facility = 250,000 - 60,000 = $190,000
The business can access the remaining $190,000 instantly without further bank approval.
Example 2 (commitment fee):
The bank charges a commitment fee of 0.5% a year on the undrawn amount.
Annual commitment fee = 190,000 x 0.005 = $950
This is about $79 a month (950 / 12), paid for having the money available even if it is never used.Case study
Seen in the real world
This is a fictional, illustrative scenario. 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 revolving credit facility with its bank a year earlier, paying a modest 0.5% annual commitment fee to keep it active. Because it had only used $20,000 previously for minor equipment repairs, its undrawn credit facility stood at $180,000. When the timber invoice of $75,000 came due, the finance manager immediately drew down the required funds from the facility.
This prevented a missed payment to the supplier, avoided late fees, and ensured production continued without interruption. Oakwood paid interest only on the newly drawn amount and restored the balance within sixty days once customers settled their accounts. The annual commitment fee on the undrawn $180,000 was $900, which the owner now regards as cheap protection. Without the facility, the illustrative company would have needed an emergency loan at a higher rate, or might have delayed production while it waited for customers to pay.
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.