Unused commitment fee: Overview, definition, and example
What is an unused commitment fee?
An unused commitment fee is a fee charged by a lender to a borrower for the portion of a credit facility or loan that the borrower has not drawn upon or used. It is typically applied to revolving credit lines or loan agreements where the borrower has access to a certain amount of credit but has not yet utilized the full amount. The fee is calculated based on the unused portion of the credit line or loan and serves as a way for the lender to compensate for the availability of funds, even if they aren't being used.
For example, if a business has access to a $1 million credit line but only uses $200,000, the lender may charge a fee on the remaining $800,000 that hasn’t been drawn.
Why is an unused commitment fee important?
An unused commitment fee is important because it allows lenders to earn revenue on the credit they’ve made available, even if the borrower doesn’t use the full amount. For borrowers, it serves as a cost of having access to flexible funding, ensuring that the credit line remains open and available when needed. It can also encourage borrowers to utilize the credit line rather than holding it idle, as they may be charged for keeping it unused.
For businesses, understanding this fee is crucial when managing lines of credit, as it can affect cash flow and the overall cost of borrowing.
Understanding unused commitment fee through an example
Imagine a company has a revolving line of credit worth $500,000, but they only use $100,000 during the year. The lender charges an unused commitment fee of 1% on the unused portion of the credit, which is $400,000. This means the company will owe an unused commitment fee of $4,000 for the year, regardless of the fact that they didn’t borrow the full amount.
In another example, a company has a $10 million credit facility but only uses $4 million. If the unused commitment fee is 0.5%, the company will be charged a fee on the $6 million that remains unused, resulting in a fee of $30,000 for that year.
An example of an unused commitment fee clause
Here’s how an unused commitment fee clause might appear in a contract:
“The Borrower shall pay to the Lender an unused commitment fee equal to [Insert Percentage]% per annum on the average unused portion of the Credit Line, calculated quarterly.”
Conclusion
An unused commitment fee ensures that lenders are compensated for keeping credit available, even if the borrower does not fully use it. For borrowers, it’s a cost of having flexible access to funds, which can be critical in business operations. Understanding and factoring in this fee is important when managing credit facilities, as it can influence the overall cost of borrowing and impact cash flow.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.