An unused line fee, also called a commitment fee, is an annual rate charged on the part of a committed line of credit you are not using. It is usually calculated on the commitment less your average daily balance, accrued daily and paid monthly or quarterly. It pays the lender for holding the money ready. Many agreements lower the rate when usage is higher. Because the fee runs on the commitment, not on what you draw or even what your borrowing base supports, the most effective way to keep it down is to size the commitment to your realistic peak need, not to the largest number a lender offers.
- Also called
- Commitment fee, unused commitment fee, non-usage fee
- Charged on
- Commitment less average daily usage, usually including letters of credit
- Paid
- Monthly or quarterly, in arrears
- Why it exists
- The lender must hold capital and liquidity for money you may draw at any time
- How to lower it
- Size the commitment to peak need; negotiate tiers and the usage definition
Why lenders charge for money you have not borrowed
A committed line of credit obliges the lender to fund whenever you ask, as long as you meet the agreement's conditions. To keep that promise, the lender has to hold capital and liquidity against the full commitment, not only against the balance you have drawn. The unused fee is what you pay for that readiness. It is the price of a line you can rely on in the month you need it.
That is also why the fee marks the line between committed and uncommitted credit. A demand or uncommitted line often carries no unused fee, because the lender has promised nothing: it can decline an advance or call the line. Committed vs uncommitted lines sets out the trade. An owner comparing a line with an unused fee to one without should first check whether the second is really a commitment at all.
How the fee is calculated
The standard formula in a credit agreement reads roughly: the unused line fee rate, multiplied by the commitment less the average daily usage over the period, multiplied by the actual days in the period over 360. The fee accrues daily and is billed monthly or quarterly, in arrears, often debited straight to the line.
Three definitions in that formula decide what you pay:
- Usage. Revolving loans always count. Letters of credit usually count too, because they tie up the lender's commitment; letters of credit under a revolver are then charged an LC fee instead. Swingline loans in multi-lender facilities sometimes do not.
- Average daily balance. The fee runs on the average over the period, so a large draw for a few days at quarter-end does little to lower it. A line drawn steadily lowers it more than one drawn in bursts.
- The base amount. Most agreements charge on the full commitment. A few charge on the lesser of the commitment and the borrowing base, which matters a great deal for asset-based lines.
That last point is the one owners most often miss. On an asset-based line, what you can borrow is capped by the borrowing base. If the base sits below the commitment, the fee is still charged on room you could never have drawn.
| Line item | Amount |
|---|---|
| Commitment | 10,000 |
| Average borrowing base for the quarter | 6,500 |
| Average daily usage (loans and letters of credit) | 4,000 |
| Unused amount charged the fee | 6,000 |
| Of which could actually have been drawn | 2,500 |
| Of which was never available | 3,500 |
Tiered and grid structures
Many lines vary the unused fee with usage. The logic is that a borrower who draws heavily pays interest the lender wants, so it charges less for the smaller undrawn slice. The common shapes:
| Structure | How it works | Who it suits | Watch for |
|---|---|---|---|
| Flat rate | One rate on the unused amount, whatever usage is | Steady users, simple lines | No reward for using more |
| Usage tiers | A higher rate when average usage is below a threshold, often half the commitment, and a lower rate above it | Businesses that draw most of the line through much of the year | Whether the test is measured monthly, quarterly or on the whole year |
| Pricing grid | The unused rate steps with leverage, fixed charge coverage or excess availability, alongside the interest margin | Improving businesses whose metrics are moving the right way | The grid can move against you too |
| Minimum usage or minimum interest | Interest is charged as if a minimum balance were drawn, even when it is not | Lenders protecting their return on small, lightly used lines | Costs far more than an unused fee on the same undrawn amount |
| Facility fee | A fee on the whole commitment, drawn or not | Mostly larger, higher-rated borrowers | Charged on usage and non-usage alike |
A minimum-usage clause deserves special attention. It is more common with non-bank asset-based lenders, and it effectively turns the undrawn portion into paid interest. Bank vs non-bank ABL explains why the two price lines differently. Where a pricing grid applies, check whether the unused rate moves with it, and on which test.
Sizing the commitment to keep the fee down
The unused fee rarely decides which lender to choose. Where it does real work is in deciding how big the line should be. A lender comfortable with your collateral may offer a commitment well beyond what you will draw, and a bigger number feels safer. The fee is what that comfort costs.
Take a business whose average daily usage runs 2,000 in the first quarter, 5,000 in the seasonal second quarter, 3,500 in the third and 1,500 in the fourth, with a single-day peak near 5,500. Compare two commitments at the same fee rate:
| Quarter | Average usage | Unused on a 10,000 line | Unused on a 6,000 line |
|---|---|---|---|
| First | 2,000 | 8,000 | 4,000 |
| Second | 5,000 | 5,000 | 1,000 |
| Third | 3,500 | 6,500 | 2,500 |
| Fourth | 1,500 | 8,500 | 4,500 |
| Year average | 3,000 | 7,000 | 3,000 |
The smaller line still clears the single-day peak of 5,500. The sizing method sets that peak from the working capital cycle: the largest monthly gap between cash going out and cash coming in, plus a cushion for a slow customer or growth. Size to that, then check that the commitment also covers letters of credit and that sublimits do not cut into the peak.
If growth may outrun the line, an accordion feature lets you request a larger commitment later without paying for it now. The increase is not guaranteed, since the lender decides when you ask, but it costs nothing until used. A seasonal commitment that steps up for the busy months does the same job for a predictable peak.
The unused fee is the price of a committed line. Size the commitment to realistic peak need, plus a cushion, and add room later through an accordion rather than paying for it all year.
What to negotiate
- The commitment itself, sized to your modeled peak rather than to the lender's first offer.
- The base for the fee: ask for it to run on the lesser of the commitment and the borrowing base. Most lenders decline, but it is worth raising when the base is likely to sit well below the commitment for much of the year.
- Tiers that reward the usage you expect, measured over a period long enough to smooth seasonal swings.
- The usage definition, so letters of credit count as usage and are not charged both an LC fee and an unused fee.
- No minimum-usage clause, or one set well below your lowest month.
- The right to reduce the commitment during the term without penalty if the business needs less. Many agreements allow permanent reductions on notice; some charge a fee, like the early termination fees on exiting a line.
Compare the whole cost of each line, not the unused rate alone: interest on expected usage, the unused fee on the rest, letter-of-credit fees, field exam and monitoring charges, and any closing fee. How revolver interest is priced covers the largest piece, and interest rate vs all-in cost shows how to put them together.
How Transparent approaches it
Transparent models a line's cost month by month from the business's own working capital pattern, so each proposal is compared on what it would have cost over a real year, unused fee included. The documents are the line-of-credit checklist: an AR aging by customer with days outstanding, an AP aging, a balance sheet, a P&L and year-to-date P&L, a debt schedule and UCC position, and an inventory report where inventory is part of the base. The book holds 235 lenders that write asset-based loans and lines, and Transparent charges nothing before a loan closes.
Common questions
- Is an unused line fee the same as a commitment fee?
- Usually, yes: both terms describe a fee on the undrawn part of a committed line. Some lenders use commitment fee for a one-time fee paid at closing instead, so read the term sheet's definition. A facility fee is different again, charged on the whole commitment whether drawn or not.
- Can I avoid the fee by drawing the whole line and holding the cash?
- You would replace the unused fee with interest on the full balance, and loan interest runs well above the unused rate in almost every agreement. Drawing to avoid the fee costs more than paying it.
- Do demand lines of credit charge an unused fee?
- Often not, because the lender has not committed to fund. The absence of the fee is a sign of what you are giving up: the lender can decline an advance or call the line.
- Are letters of credit charged the unused fee?
- In most agreements letters of credit count as usage, so their face amount is not charged the unused fee; they carry a letter-of-credit fee instead. Check the definition of usage in your agreement.
- When is the unused fee paid?
- Monthly or quarterly in arrears, calculated on the average daily unused amount for the period. Most lenders charge it to the line automatically, so it shows as a small increase in the balance.