What it means
A revolving credit facility is a bit like a company overdraft with a formal agreement behind it. The bank commits to lend up to a set limit, and the borrower can draw and repay as needed.
The bank earns money from interest on the amount drawn and from a commitment fee on the amount left undrawn. A utilisation fee adds a third layer.
The loan agreement sets one or more thresholds, such as 33% or 50% of the commitment, and when the drawn amount passes a threshold the borrower pays an additional fee. Some agreements charge it only on the drawn balance, while others charge it on the part above the threshold.
Lenders use the fee for two reasons. A heavily drawn facility is more likely to be a sign that the borrower is short of cash, which raises risk, and it also uses up more of the bank's funding and regulatory capital.
The fee also nudges borrowers to use the facility for short-term needs rather than treating it as permanent debt. Borrowers should read the definition of utilisation carefully.
In some agreements, letters of credit and guarantees issued under the facility count as drawn, even though no cash has been paid out. The measurement date also matters, because the fee may be based on the balance on each day or on a quarter-end figure.
The fee is quoted as an annual percentage and is usually paid quarterly in arrears, meaning after the period it relates to. For a treasurer, it is a cost to be forecast alongside interest and commitment fees, and the total cost of a facility changes with how much is drawn.
A company that draws 60% of its facility for a few days a year may pay little, while one that sits above the threshold all year pays much more. It is also worth comparing the fee with other options.
If a business expects to be above the threshold for months, a term loan may be cheaper than a revolving facility with a utilisation fee. Negotiating a higher threshold or a lower fee rate at the outset can save real money.
In practice
Real-world examples.
Example
A manufacturer draws $8,000,000 of a $10,000,000 revolving facility to buy raw materials before its peak season. Because it passes the 50% threshold, its bank charges an additional 0.25% a year on the drawn balance for the days it stays above that level.
Example
A retail chain uses its credit line to pay suppliers before Christmas. Its treasurer plans to repay the borrowing by mid-January, so she keeps the number of days above the threshold low and limits the extra fee.
Example
A property developer expects to need a revolving loan of $20,000,000 at 70% usage for a full year. The finance director compares the facility with a term loan and finds that the utilisation fee tips the cost in favour of the term loan.
Formula
Calculation
Utilisation fee = drawn amount x fee rate x (days / 360), applied when drawn balance is above the threshold
Suppose a company has a $10,000,000 revolving facility. The agreement charges a utilisation fee of 0.25% a year on the entire drawn balance whenever more than 50% of the commitment is drawn. The company draws $6,000,000 for a full year, which is 60% of the limit and above the threshold. The fee is 6,000,000 x 0.0025 = $15,000 a year, or about $3,750 a quarter. If it had drawn only $4,000,000, no utilisation fee would apply.Case study
Seen in the real world.
Brackenridge Industrial is an illustrative, fictional company with a $15,000,000 revolving credit facility. The agreement includes a utilisation fee of 0.30% a year on all drawings whenever usage is above 40% of the limit.
During a year of high raw material prices, the company draws $9,000,000 and keeps it drawn for the entire period. That is 60% of the limit, so the fee is 9,000,000 x 0.003 = $27,000 for the year.
In this illustrative story the finance director realises that the company is using the facility as long-term funding and arranges a $6,000,000 term loan to repay part of it. Drawn usage falls to $3,000,000, which is 20% of the limit, and the utilisation fee disappears.
Watch out
Common mistakes.
- Confusing the utilisation fee with the commitment fee, when the commitment fee is charged on the undrawn amount and the utilisation fee on heavy drawings.
- Forgetting that letters of credit issued under the facility may count as used, which can push the borrower over the threshold.
- Leaving the fee out of the budget, when it can add materially to the cost of a facility that is heavily used.
Questions
People also ask.
Who pays a utilisation fee?
The borrower pays it to the lender, and it is normally charged only when the drawn amount passes a threshold set in the loan agreement.
Is the fee charged on the whole balance or only the excess?
It depends on the agreement, since some charge the whole drawn balance and others only the part above the threshold.
How can a company reduce the fee?
It can negotiate higher thresholds, repay drawings sooner or replace long-term borrowing with a term loan.
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