A delayed draw term loan is a term loan the lender commits at closing but you draw later, in pieces, usually to fund acquisitions or capital projects during a set availability period. You pay a ticking fee on the undrawn amount, and each draw must meet conditions agreed up front, such as a pro forma leverage test. An accordion is different: it is a pre-agreed right to ask for more debt later, and no lender is obliged to provide it. For a buyer planning several acquisitions, committed capacity is usually worth its cost.
- What it is
- A committed term loan drawn after closing, within an availability period
- Cost while undrawn
- A ticking fee on the unused commitment
- Conditions on each draw
- No default, a pro forma leverage test, a permitted acquisition
- Accordion
- Pre-agreed room to add debt; no lender is obliged to fund it
- Who offers it
- Mainly private credit funds, and some banks, to platform buyers
How a delayed draw term loan works
At closing, the lender agrees to lend two amounts: a term loan funded that day, usually for the first acquisition, and a delayed draw commitment the borrower can call on later. The commitment sits in the same credit agreement, shares the same collateral and guarantees, and has an availability period during which it can be drawn. Any amount not drawn by the end of that period falls away.
Each draw is usually subject to a minimum size and becomes part of the term loan once funded: same maturity, same pricing, and amortization that applies from the draw date, usually on the funded loan's schedule. Unlike a revolver, a repaid delayed draw cannot be borrowed again. It is a term loan whose timing has been left open, not a line of credit.
While the commitment is undrawn, the borrower pays a ticking fee on it. The fee compensates the lender for holding capital ready. It is well below the loan's full interest rate, and it may start only after an initial period, or step up the longer the commitment goes unused. How it is set is part of private credit pricing generally.
The conditions on each draw
Committed does not mean unconditional. The credit agreement lists what must be true when the borrower asks for money, and those conditions are where a delayed draw commitment is won or lost. The common ones:
- No default under the credit agreement, and the borrower's representations still true.
- A pro forma leverage test. Total or senior leverage, calculated on the combined company including the target's earnings, must be at or under a level set at closing. See senior vs total leverage for how each is measured.
- A permitted acquisition. The target must be in the same or a related line of business, usually in the United States, with positive earnings, and under a purchase price cap per deal or in total.
- Diligence delivered. The target's financial statements, often a quality of earnings report, and the purchase agreement.
- Collateral and guarantees. The acquired company joins the credit agreement as a guarantor and grants the lender a lien on its assets.
- Agreed adjustments. How the target's earnings may be adjusted for the leverage test is often negotiated at closing, which is far easier than arguing it deal by deal.
Read the draw conditions as closely as the rate. A commitment you cannot meet the conditions for is an accordion with a fee.
The leverage test is the one that matters most. If it is set tight and the platform's earnings dip, or the next target is more expensive than planned, the commitment is there and unusable. A test calculated with the target's earnings, and with add-backs agreed in advance, gives far more real capacity than one that looks only at the platform. The page on lending on run-rate or pro forma EBITDA covers what lenders will credit.
Delayed draw, accordion and revolver side by side
| Feature | Delayed draw term loan | Accordion | Revolver |
|---|---|---|---|
| Committed by a lender | Yes, at closing | No; a right to ask | Yes, at closing |
| Cost before use | Ticking fee on the undrawn amount | Usually none until exercised | Unused line fee |
| Typical use | Acquisitions, sometimes capital projects | Whatever the agreement allows, usually acquisitions | Working capital; acquisitions only if permitted |
| Pricing | Set at closing | Set when exercised, often with protection for existing lenders if the new debt costs more | Set at closing |
| Re-borrow after repaying | No | Not applicable | Yes |
| Certainty when a deal appears | High, if the draw conditions are met | Depends on the market and lenders' appetite on the day | High, but spends the working capital cushion |
An accordion, sometimes called an incremental facility, pre-approves the documents for additional debt: the credit agreement already allows it, up to a stated amount or a leverage-based amount, so no amendment is needed. What it does not do is commit anyone. When the borrower wants to use it, it asks the existing lenders, and sometimes new ones, to provide the money at terms set then. In a good market, with a performing borrower, that works. In a tight market, or after a soft quarter, the accordion may find no takers, or takers only at a price that also reprices the existing loan.
Using the revolver for acquisitions is the other shortcut. It is committed, but it is also the business's working capital cushion, and a revolver drawn for a purchase price is not available for payroll in a slow month. The comparison of a delayed-draw term loan vs a revolver goes further, and committed vs uncommitted lines explains why the word committed matters in every one of these.
Why committed capacity is worth paying for
A buyer building a platform through add-on acquisitions competes for sellers on certainty. A seller choosing between two offers at similar prices will usually take the one that can close on money already committed. A buyer that has to raise new debt for each add-on starts a lender process every time, with new documents, new diligence on the platform and, if the new lender sits behind the first, an intercreditor agreement. Each of those is a chance for the deal to slip or for the seller to move on.
The cost of that certainty is the ticking fee. In plain numbers: if holding a commitment of 5,000 undrawn for a year costs 50 in ticking fees, the question is whether 50 is less than the cost of losing one add-on, or of financing it later with a separate junior loan at a higher rate. For a buyer with a real pipeline, it usually is.
The trap is over-committing. A commitment sized for an optimistic pipeline costs ticking fees on capacity that is never used, and a very large commitment can make the lender more demanding on the rest of the terms. Size it to the deals you can name and expect to close within the availability period, and rely on an accordion for the ones you cannot yet name.
What lenders need before committing future capacity
A lender committing money for acquisitions that have not been identified is underwriting the buyer's strategy as much as the first company. Expect it to ask for:
- The acquisition thesis: what kind of companies, at what size, bought for what reason, and how many are realistically available.
- A pipeline: named targets where conversations have started, even at an early stage.
- Integration capability: who will run the acquired companies, and whether finance and reporting can absorb them.
- A model with the add-ons in it, showing leverage and coverage after each draw, and what happens if earnings come in lower.
- The buyer's track record, whether a committed fund, an independent sponsor or an owner-operator.
Delayed draw commitments come mainly from private credit funds, which are built to hold growing platforms, and from some banks. Transparent's lender book has 1,148 lenders that write term and private credit. The financing model in the lender package runs the platform with each planned add-on, so lenders can size the commitment and set the draw tests against real figures rather than a promise.
SBA lending works differently. There is no SBA delayed draw facility: each 7(a) loan is approved on its own, and all of a borrower's 7(a) loans together are held to the program's $5 million limit. A buyer planning to grow past that will need conventional debt at some point; financing acquisitions too big for SBA covers the options.
Common questions
- Is a delayed draw term loan the same as a line of credit?
- No. A line of credit can be drawn, repaid and drawn again. A delayed draw term loan can be drawn only during its availability period, becomes a term loan once drawn, and cannot be re-borrowed after it is repaid.
- What happens to the undrawn amount at the end of the availability period?
- It expires, and the ticking fee stops. If the borrower still needs capacity, it has to negotiate a new commitment or use an accordion if the credit agreement has one.
- Does an accordion cost anything?
- Usually not until it is used, which reflects that no lender has committed anything. When it is exercised, the new debt carries its own pricing and fees, and existing lenders often have protection if the new debt is priced above theirs.
- Can a delayed draw term loan fund things other than acquisitions?
- Sometimes. Some are written for capital projects, a new facility or deferred purchase price payments. The permitted uses are listed in the credit agreement, and a draw for anything outside them is not available.
- Do banks offer delayed draw term loans?
- Some do, particularly for established borrowers making acquisitions in their own industry. They are more common from private credit funds that lend to platforms built through acquisitions.