Delayed Draw Term Loan

Delayed Draw Term Loan

Delayed Draw Term Loan

What Is a Delayed Draw Term Loan

Explanation of Delayed Draw Term Loans (DDTL)

A delayed draw term loan is a form of loan in which borrowers, often business owners, have the option of requesting additional funds after the initial draw time expires. In advance, the withdrawal times and loan amounts are specified.

Definition of a Delayed Draw Term Loan

Delayed draw term loans (DDTL) are frequently utilized by major enterprises to finance capital purchases, debt refinancing, and acquisitions.

With a DDTL, you can withdraw funds from a predetermined loan amount many times.

Additionally, the withdrawal periods are established in advance.

Note: A “draw period” is the time period during which you can withdraw funds, for example, two years. 1 It is frequently seen on credit lines and credit cards.

DDTLs have historically been employed in the leveraged loan market, which is known for lending to organizations and individuals with low credit or excessive debt.

Delayed draw term loans are typically very large in value. They could range from $1 million to more than $100 million, for example.

Delayed draw term loans may have repayment durations of three or five years, with interest-only periods of six to twelve months.

Withdrawal durations might be as little as a few months or as long as a year.

How a Delayed Draw Term Loan Works

A delayed draw term loan may be included in a business’s lending agreement with a lender.

Additionally, it can be a component of a syndicated loan, which is issued by a group of lenders that pool their resources to provide financing to a single borrower.

If you obtain a DDTL, you will be charged a ticking fee. A ticking charge builds on the portion of the loan that remains undrawn until the loan is fully utilized, terminated, or the commitment period expires.

Along with a ticking fee, you may be charged an upfront fee when your loan is closed. It is very likely that it will be a percentage of the loan amount.

At maturity, you will be responsible for the entire amount of the term loan.

Depending on your lender, you may be required to pay an upfront charge on each DDTL funding date rather than a single sum on closing day.

Additionally, your lender may require that you collateralize a delayed draw term loan with real estate, equipment, or any other fixed asset you own.

Additionally, you will be unable to reborrow the amount of money you repay with a DDTL.

Pros and Cons of Delayed Draw Term Loans

Pros:
Less interest paid
Withdrawal flexibility

Cons:
Strict requirements
Complicated loan type

Pros Explained

Interest savings: Deferred draw term loans can save you a lot of money on interest.

This is because the draw periods will ensure that you only borrow money when necessary.

You will not be charged interest on a lump sum of cash that you will not use for a period of time.

Flexibility of withdrawal: If you choose a DDTL, you’ll have more time to withdraw additional cash and adjust your demands as they change.

There will be no compulsion to withdraw a lump sum prior to the end of the first draw period.

The Drawbacks Explained

Strict requirements: While each lender offering DDTLs is unique, some may require that you have a certain credit score or a certain amount of cash on hand.

Additionally, you may be required to reveal information about your growth and earnings plans or to put up security to secure the loan.

Complicated loan terms: When compared to regular business loans, DDTLs have more complicated loan terms and structures.

Before you take out a loan, you may wish to speak with the lender in detail.

Alternatives to Delayed Draw Term Loans

Businesses frequently employ delayed draw term loans, and they may not be appropriate for individuals or entrepreneurs.

You may want to examine other forms of loans first, such as a personal loan, a home equity loan, or, if you own your home, a home equity line of credit (HELOC).

Microloans, peer-to-peer loans, and invoice finance are all options for small business owners and entrepreneurs. Individuals and small enterprises may also consider cash advances.

The Bottom Line

A delayed draw term loan (DDTL) enables you to make multiple withdrawals from a single loan amount over defined draw intervals.

DDTLs are typically used by firms seeking to raise capital, refinance debt, or acquire other businesses.

While you may benefit from the added flexibility and interest savings, you may be required to adhere to stringent regulations and make sense of intricate loan terms.

Personal loans, peer-to-peer loans, and cash advances are additional lending choices available to individuals and small enterprises.

What is a ticking fee on a delayed draw term loan?

Delayed draw term loans include a “ticking fee” – a fee paid from the borrower to the lender. The fee amount accumulates on the portion of the undrawn loan until the loan is either fully used, terminated by the borrower, or the commitment period expires.

What is a draw on a loan?

Rather than receiving a lump sum check, construction loans pay out the loan amount over the course of the project. The installments are called draws, as the lender draws funds from the account. A draw request is necessary to ensure disbursement of the funds.

Is DDTL a revolver?

Unlike revolvers, DDTLs are considered long-term capital. While revolver terms are typically five years, they are intended for short-term capital needs like working capital and not acquisitions. Revolving credit facilities can be drawn, paid back, and then drawn again.

How does a ticking fee work?

A fee imposed to compensate for lag time, effectively requiring the paying of interest on the cash portion of a deal during a certain commitment period, triggered by various conditions (often regulatory approval) and generally running until the deal’s closing.

How is a ticking fee calculated?

The Borrower will pay to the Agent, for the benefit of each Lender with a Term Loan Commitment, a ticking fee (“Ticking Fee”) equal to 0.375% per annum multiplied by each such Lender’s Term Loan Commitment.

Is ticking fee same as commitment fee?

When the term ticking fee is used to refer to a fee paid to a lender under a syndicated credit agreement for the unused portion of the lender’s commitment (also referred to as a “commitment fee” or an “unused commitment fee”), the advisory indicates that the ticking fee should be allocated in the same manner.

What are commitment fees?

A commitment fee is a fee that a lender may charge a borrower to whom it has agreed to extend credit. Generally charged for lines of credit not yet used, the commitment fee is a way of guaranteeing the bank will keep the funds available.

What is a ticking fee locked box?

Some locked box structures may include a ticking fee concept, which provides seller incremental compensation the longer it takes to close the transaction.

What does end of draw date mean?

End-of-Draw Date (Repayment Period) – The date at which the draw period ends on a HELOC and the beginning of the repayment period. At this time, the borrower begins to repay the borrowed amount for the predetermined term of the loan.

How long does a bank draw take?

Once a draw request has been submitted to the lender, the review process begins. The lender needs to review all the documents, order and approve inspections, and verify that all the work claimed to be completed, has been. This draw approval process ideally takes about seven business days.

What is a multi-draw loan?

Multi-Draw Term Loan Commitment means the commitment of a Lender to make or otherwise fund a Multi Draw Term Loan and “Multi Draw Term Loan Commitments” means such commitments of all Lenders in the aggregate.

What is the difference between term loan A and term loan B?

Term Loan A – This layer of debt is typically amortized evenly over 5 to 7 years. Term Loan B – This layer of debt usually involves nominal amortization (repayment) over 5 to 8 years, with a large bullet payment in the last year.

What is a reverse breakup fee?

Also known as a reverse termination fee or a reverse break fee. A fee paid by the buyer if it breaches the acquisition agreement or is unable to consummate the transaction due to lack of financing and the seller terminates the agreement in accordance with its terms.

What are duration fees?

A duration fee is a periodic fee on the outstanding balance of the bridge loan, sometimes increasing the longer the bridge loan remains outstanding.

What is a draw date?

Draw Date means, in relation to each Loan, the date that such Loan is made or deemed to be made to Borrower pursuant to this Note.

Can I pay principal during draw period?

Typically, you’re only required to make interest payments during the draw period, which tends to be 10 to 15 years. You can also make payments back toward the principal during the draw period. When you pay off part of the principal, those funds go back to your line amount.

What is draw period and repayment period?

During the draw period, you typically have to make minimum payments on the loan, which can often be interest-only. At the end of the draw period, you may be able to renew your line of credit and restart the clock. Otherwise, you’ll enter the repayment period of the loan.

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