A delayed draw term loan is a term loan the lender commits to at closing but funds later, in one or more draws, during an availability period set in the agreement. Businesses use it to fund acquisitions or capital projects they expect but have not yet closed. Until the money is drawn, the borrower usually pays a ticking fee on the undrawn commitment. Each draw is conditioned: no default, representations still true, and often a pro forma leverage test run as if the draw had already happened. Drawn amounts are repaid like any term loan and cannot be reborrowed.
- What it is
- A committed term loan funded in later draws, not at closing
- Availability period
- The window in which draws are allowed; unused commitment expires at its end
- Cost while undrawn
- A ticking fee on the undrawn amount, often stepping up over time
- Conditions at each draw
- No default, representations true, pro forma leverage within a cap, permitted use
- Common uses
- Add-on acquisitions, new locations, equipment and plant build-outs
- Main alternative
- An accordion: the right to ask for more debt later, with no commitment
How a delayed draw term loan works
At closing, the business signs a credit agreement with two pieces: an initial term loan funded that day, and a delayed draw commitment that sits unfunded. The delayed draw piece has a maximum amount, an availability period during which it can be drawn, and rules for how each draw is requested. Commitments that are not drawn by the end of the availability period simply fall away.
Each draw is a separate funding. The borrower sends a notice some business days ahead, certifies that the conditions are met, and the lender wires the money. Agreements often set a minimum size for a draw and a maximum number of draws, because each one carries administrative work for the lender. Once drawn, the money becomes term debt: it usually bears interest at the same margin as the initial loan, it begins to amortize on the schedule the agreement sets, and what is repaid cannot be drawn again. That last point is the line between a DDTL and a revolving line of credit, which can be drawn, repaid and redrawn.
In the lower middle market, delayed draw facilities show up most often in private credit and unitranche deals backing a buy-and-build plan, and in bank term loans for capital projects, where a lender funds construction or equipment in stages and then converts the total into an amortizing loan. The logic is the same in both: the lender underwrites a plan today, and funds the pieces as the plan happens.
A DDTL is a commitment with conditions. The lender has agreed to lend, but only if the business still passes the tests on the day it asks.
The ticking fee: paying to hold a commitment
A lender that commits capital it has not funded has to hold that capacity aside and earns nothing on it. The ticking fee compensates for that. It accrues on the undrawn commitment, usually paid quarterly, much like the unused line fee on a revolver. It is common for the fee to start after a short grace period and to step up the longer the commitment sits undrawn, sometimes reaching the full interest margin late in the availability period. The stepped structure pushes the borrower to draw what it needs or cancel what it doesn't.
Three terms decide what the fee really costs. When it starts: from closing, or after a grace period. How it steps: whether it climbs toward the full margin, and when. And whether the borrower can cancel undrawn commitments early, without a premium, to stop the fee. A borrower that is unsure of timing should care more about the right to cancel than about the starting level of the fee.
What the lender tests at each draw
The commitment was underwritten on the business as it stood at closing. By the time of a draw, months later, things may have changed. The draw conditions are how the lender re-checks. They are listed as conditions precedent to each funding, and the ones that matter most are these:
| Condition | What it asks | Where borrowers get caught |
|---|---|---|
| No default | No event of default exists, or would result from the draw | A late compliance certificate or a missed covenant blocks the draw even if unrelated to the use |
| Representations true | The representations in the agreement are still accurate | A lawsuit, a lost major customer or a new lien that was never disclosed |
| Pro forma leverage | Total or senior debt to EBITDA, including the draw and the acquired earnings, is under a cap | Trailing EBITDA has slipped since closing, shrinking what can be drawn |
| Permitted acquisition | The target meets the agreement's criteria: same line of business, positive earnings, diligence delivered, purchase price within limits | A target outside the core business, or one above the size needing lender consent |
| Use of proceeds | The money goes to the purposes named in the agreement | Trying to use acquisition capacity for working capital or a distribution |
| Minimum liquidity | Cash or revolver availability above a floor after the draw | Paying the seller in cash on top of the draw leaves too little behind |
The leverage test is where most plans meet reality. Lenders calculate it on pro forma EBITDA: the borrower's trailing earnings plus the target's, with whatever adjustments the agreement's EBITDA definition allows. How much credit the target's add-backs and projected savings receive is set in that definition, and it is worth reading before signing, not at the draw.
A draw, worked through
Take a business with existing debt of 10,000 and trailing EBITDA of 4,000. Its agreement caps pro forma total leverage at 3.5x at each draw, the top of the 2x to 3.5x range senior cash-flow lenders commonly lend to lower-middle-market companies. It plans to buy a competitor earning 1,000 for a price of 6,000, funded with a draw of 5,000 and 1,000 of cash.
At closing of the facility, the plan works: pro forma debt of 15,000 against pro forma EBITDA of 5,000 is well inside the cap, which would allow up to 17,500. Nine months later, a soft year has pulled trailing EBITDA down to 3,200. Now pro forma EBITDA is 4,200, the cap allows 14,700 of total debt, and a draw of 5,000 would take debt to 15,000. The business can draw only 4,700. The remaining 300 has to come from cash or new equity. A seller note does not solve it: it is debt too, and it counts toward the same total leverage cap unless the agreement measures only senior debt.
Nothing in the commitment was broken. The lender agreed to fund acquisitions that kept leverage under a cap, and the business earned less. This is why Transparent's financing model runs every planned draw against a downside case, not only the plan, before a facility is signed.
Delayed draw or accordion?
An accordion gives the borrower the right to ask for more debt later, from existing lenders or new ones, up to a stated amount. Nobody has committed to provide it. When the borrower asks, lenders decide then, on the business as it stands then, at pricing set then, usually with protection for existing lenders if the new money comes in more expensive. A delayed draw term loan is the opposite trade: the lender commits now, and the borrower pays a ticking fee for the certainty.
| Delayed draw term loan | Accordion | Revolver | |
|---|---|---|---|
| Committed? | Yes, subject to draw conditions | No; lenders decide when asked | Yes, subject to availability |
| Cost before use | Ticking fee on the undrawn amount | Usually nothing until exercised | Unused line fee |
| Pricing on use | Set at closing | Negotiated at the time | Set at closing |
| Reborrow after repaying? | No | Depends on the form added | Yes |
| Best fit | A named pipeline in the next year or two | Growth that may or may not come | Working capital swings |
A DDTL beats an accordion when timing and certainty matter more than the fee. The clearest case is an add-on pipeline with targets already in conversation: a seller will take a letter of intent more seriously from a buyer whose debt is committed, and the buyer is protected if credit markets tighten between signing the facility and closing the add-on. It also fits a capital project with a known budget and schedule, where each stage has to be paid when the contractor finishes it.
An accordion is the better tool when the pipeline is speculative, when the business may grow into more debt but cannot say when, or when paying a ticking fee on capacity that may never be used would be waste. Many facilities carry both: a delayed draw piece sized to the deals in view, and an accordion behind it for what might come later. The add-on acquisition page covers how lenders size debt on a combined business.
What to negotiate before signing
- Availability period. Long enough for the pipeline to close, with room for a deal that slips. An expired commitment costs a new negotiation.
- Ticking fee. The grace period, the step-ups, and the right to cancel undrawn commitments without a premium.
- Leverage cap at draw. Set with headroom against a downside case, and measured on an EBITDA definition that credits the target fairly.
- Permitted acquisition criteria. The size of deal that can close without lender consent, the diligence required, and whether targets outside the core business qualify.
- Diligence deliverables. Lenders commonly require a quality of earnings report and the target's latest full year of figures before funding an add-on. Know the list before you sign an LOI.
- Prepayment terms. Whether call protection applies to drawn amounts from their own draw date or from the original closing.
The draw conditions are easiest to shape before the facility closes and hardest to change afterward, when any amendment is a request the lender can price. Transparent sizes a delayed draw commitment from a model of each planned draw, and takes the plan to lenders in its book that write acquisition facilities: 1,148 of the 1,800+ lenders in the book write term and private credit. The capital structure guide to delayed draw facilities goes further into sizing and structure.
Common questions
- Is a delayed draw term loan the same as a revolver?
- No. Both are committed, but a revolver can be repaid and drawn again for as long as it is open, while money drawn under a DDTL becomes term debt that amortizes and cannot be reborrowed once repaid. A revolver funds working capital swings; a DDTL funds specific, larger uses such as acquisitions or capital projects.
- What happens if I don't use the full commitment?
- The undrawn amount expires at the end of the availability period. Until then you pay the ticking fee on it, unless the agreement lets you cancel undrawn commitments early. Negotiating that right is worth more than a slightly lower fee if your timing is uncertain.
- Can the lender refuse a draw?
- Only if a draw condition is not met. The lender has committed, so it must fund if the conditions in the agreement are satisfied. The common reasons a draw fails are a default elsewhere in the agreement, a pro forma leverage test the business no longer passes, or a target that does not meet the permitted acquisition criteria.
- Do SBA loans offer delayed draws?
- Not in this form. An SBA 7(a) loan is approved for specific uses listed in the loan authorization and disbursed for those uses. A buyer planning several acquisitions over time usually looks at conventional or private credit facilities for the later deals, particularly once total borrowing approaches the $5 million 7(a) limit.
- When does interest start on a delayed draw?
- On each draw from the day it funds. Before that, the undrawn commitment carries only the ticking fee. Amortization on drawn amounts starts on the schedule the agreement sets, which can differ from the initial term loan's.