An unused line fee, also called a commitment fee or non-usage fee, is an annual rate a lender charges on the undrawn part of a committed revolving line. It is usually calculated on the commitment minus the average daily balance, accrued daily and paid monthly or quarterly. It compensates the lender for holding capital ready to lend. The rate is quoted in basis points and is far below the interest margin, but on a line that is much larger than the business uses it adds up. Some asset-based lines add a minimum usage requirement instead of, or as well as, the fee.
- Also called
- Commitment fee, non-usage fee, unused commitment fee
- Charged on
- Commitment minus average daily usage
- Paid
- Monthly or quarterly in arrears
- Quoted as
- An annual rate in basis points, well below the interest margin
- Related terms
- Minimum usage requirement, ticking fee on delayed-draw loans
- Best control
- Size the commitment to realistic peak need, and expand through an accordion
Why a lender charges for money you have not borrowed
A committed line obliges the lender to fund any request that meets the agreement's conditions, up to the commitment. To honor that, the lender has to hold capital and liquidity against the whole commitment, not just the part drawn. Banks in particular carry regulatory capital charges on unfunded commitments. The unused line fee is what the lender earns for that readiness.
Uncommitted and demand lines rarely carry one, because the lender has not promised anything; it can decline a draw or call the line. That difference is the trade: the fee buys certainty that the money will be there. See committed vs uncommitted lines and demand vs committed lines.
The same idea appears elsewhere under other names. A delayed-draw term loan usually charges a ticking fee on the undrawn commitment until it is drawn or expires; see delayed draw term loans. The mechanics are the same; only the facility differs.
How it is calculated
The standard calculation is simple. Take the commitment, subtract the average daily balance of loans for the period, and apply the annual fee rate to the difference, prorated for the days in the period. The detail that changes the answer is what counts as usage.
| Item | Usually counts as usage? | Why it matters |
|---|---|---|
| Revolving loans outstanding | Yes | The core of usage |
| Letters of credit issued under the line | Usually, yes | They already carry their own letter of credit fee; if they are not counted, you pay twice on the same capacity |
| Swingline loans | Varies | Short-notice loans made by one lender in a lender group; some agreements exclude them from usage |
| Term loans under the same agreement | No | The fee applies to the revolving commitment only |
| Availability you cannot draw because the borrowing base is lower | No, it is still 'unused' | On an asset-based line, you can pay a fee on commitment the collateral would never let you borrow |
The last row is the one owners miss. On an asset-based line, the fee is normally charged on the commitment, not on the borrowing base. If the business has a large commitment but its collateral supports only part of it, it pays the fee on capacity it cannot use. Some borrowers negotiate for the fee to be charged on the lesser of the commitment and the borrowing base; it is worth asking for.
Rates and minimum usage requirements
The fee is quoted as an annual rate in basis points. It is a small fraction of the interest margin on drawn balances, and it varies with the lender, the size of the facility and how much of it the lender expects to be used. Lenders commonly tier it: a higher rate when average usage is low, a lower rate once usage passes a stated share of the commitment. Some tie it to the same pricing grid as the interest margin.
Asset-based lenders sometimes use a minimum usage requirement instead. The borrower pays interest as if it had borrowed at least a minimum amount, whether or not it did. It serves the same purpose as the fee but costs more for a business that barely draws, because the charge is at the full interest rate on the shortfall, not a small fee rate. Where both a minimum usage clause and an unused fee appear, read them together; the combination can make a lightly used line expensive.
Other fees on the same facility, such as a collateral monitoring fee, field exam charges and early termination fees, belong in the same comparison; see ABL early termination fees and closing fees on a business loan.
Sizing the commitment so the fee does not eat the benefit
The fee is a cost of unused commitment. So the cheapest way to control it is not to negotiate the rate but to avoid a commitment much larger than the business will use. Consider a business whose balance averages 3,000 over the year and peaks at 5,000 in its busy season.
| Option | Commitment | Average usage | Average unused (fee base) | Room at peak |
|---|---|---|---|---|
| Oversized line | 10,000 | 3,000 | 7,000 | 5,000 |
| Sized to peak plus a cushion | 6,500 | 3,000 | 3,500 | 1,500 |
| Sized to peak plus a cushion, with an accordion to 10,000 | 6,500 | 3,000 | 3,500 | 1,500 now; more on request |
| Seasonal commitment: 6,500 in season, 4,000 out of season | Blended | 3,000 | Lower still | 1,500 in season |
The oversized line pays its fee on twice the unused amount of the right-sized one, and the extra room is room the business has never used. The cushion matters, though. A line sized exactly to last year's peak leaves nothing for a customer that pays late or a strong season, and running out of room on a revolver is far more expensive than an unused fee. The aim is a commitment set at a realistic peak plus a margin the business can explain.
Two structures help. An accordion lets the business ask for more commitment later without a new agreement, so it does not pay today for growth it may need in two years. The accordion itself is uncommitted: the increase depends on a lender agreeing to it at the time, so the base commitment still has to cover the needs the business can already see. A seasonal commitment steps the line up for the busy months and down afterwards, which suits businesses with a clear cycle. How lenders size a working capital line covers the other side: what the lender will agree to, which may be less than you ask for.
What to negotiate
- Usage definition: letters of credit and swingline loans count as usage.
- Fee base: on an asset-based line, the lesser of the commitment and the borrowing base, not the commitment alone.
- Calculation: on average daily usage, not month-end balances.
- Tiering: a lower rate once usage passes a stated share of the commitment.
- Minimum usage: no minimum usage requirement where there is already an unused fee, or the other way round.
- Right to reduce: the ability to reduce the commitment permanently, without penalty, if the business finds it has more than it needs.
These are small points individually. Together they decide whether a committed line is a cheap insurance policy or a steady leak. The right comparison between offers is the all-in cost at the usage you actually expect, not the interest margin alone; see interest rate vs all-in cost and the unused line fee guide.
Pay for the line you will use, plus a cushion you can defend. Ask for the rest later through an accordion.
Common questions
- Is the unused line fee charged if I never draw on the line?
- Yes, on a committed line. If you never draw, the whole commitment is unused, so the fee is at its maximum. That is the cost of having the money guaranteed to be available.
- Do letters of credit reduce the unused fee?
- Usually, because most agreements count them as usage. Check the definition; if they are excluded you pay both a letter of credit fee and an unused fee on the same capacity.
- Is an unused line fee the same as a minimum usage requirement?
- No. An unused fee is a small rate on the undrawn amount. A minimum usage requirement charges interest as if you had borrowed a minimum balance, which costs more if you rarely draw.
- Can I reduce the commitment later to cut the fee?
- Most agreements let you permanently reduce the commitment, sometimes subject to a minimum amount or notice period. Asset-based facilities may charge an early termination or reduction fee in the first years, so check before assuming it is free.
- Do uncommitted lines charge an unused fee?
- Rarely. Because the lender can decline any draw, it is not holding capital ready for you, and so it has less reason to charge for undrawn amounts.