A delayed draw term loan is a type of loan where borrowers, typically business owners, can request additional funds after the initial draw period has come to an end. The withdrawal periods and loan amounts are determined in advance.
Let’s take a closer look at what a delayed draw term loan is and how it works so you can determine if it makes sense for your situation.
Definition of a Delayed Draw Term Loan
Delayed draw term loans (DDTL) are often used by large businesses that wish to purchase capital, refinance debt, or make acquisitions. With a DDTL, you can withdraw funds several times from a predetermined loan amount. The withdrawal periods are also determined in advance.
A “draw period” is the amount of time you have to withdraw funds, such as two years. It is often seen on lines of credit and credit cards.
DDTLs have been used in the leveraged loan market, which has a reputation for lending to businesses and individuals with poor credit or excessive debt.
Delayed draw term loans are usually valued at very large amounts. For example, they could range from $1 million to over $100 million. Delayed draw term loans may come in terms of, say, three or five years, with interest-only periods, such as six months to one year. Withdrawal periods could be every few months or every year.
- Acronym: DDTL
- Alternative names: Acquisition/equipment lines
How a Delayed Draw Term Loan Works
A delayed draw term loan may be a part of a lending agreement between a business and a lender. It can also be a component of a syndicated loan, which is offered by a group of lenders who collaborate to provide funds to one borrower.
If you take out a DDTL, you’ll be responsible for a ticking fee. A ticking fee accumulates on the portion of the undrawn loan until you either use the loan entirely, terminate it, or the period of commitment expires.
In addition to a ticking fee, you may be on the hook for an upfront fee when you close on your loan. It will likely be a percentage of the loan amount. At maturity, you’ll owe the full amount of the term loan. Depending on your lender, you may have to pay an upfront fee during each DDTL funding date rather than a lump sum on the day of closing.
Your lender may also require that you secure a delayed draw term loan with collateral such as real estate, equipment, or any other fixed asset you own. And with a DDTL, you won’t be able to reborrow the amount of money you repay.
Pros and Cons of Delayed Draw Term Loans
Less interest paid
Complicated loan type
- Less interest: Delayed draw term loans can save you a great deal of money on interest. This is because the draw periods will allow you to borrow money only when you need to. You won’t have to pay interest on a lump sum of cash that you won’t use for a while.
- Withdrawal flexibility: If you opt for a DDTL, you’ll have more time to take out additional funds and accommodate your needs as they change. There won’t be any pressure to withdraw a lump sum before the first draw period is up.
- Strict requirements: While every lender that offers DDTLs is different, some may require you to have a certain credit score or amount of cash at your disposal. You might also have to share details on your growth and earning projections or put up collateral to secure the loan.
- Complicated loan terms: Compared to traditional business loans, DDTLs come with loan terms and structures that are more complex. You may want to discuss the loan in detail with the lender before you take one out.
Alternatives to Delayed Draw Term Loans
Delayed draw term loans are often used by businesses and they may not be right for individuals or entrepreneurs. There are other types of loans that you may want to consider first including a personal loan, home equity loan, or if you own your house, a home equity line of credit (HELOC). Small business owners and entrepreneurs can consider micro-loans, peer-to-peer loans, and invoice financing. Cash advances may also be an option for both individuals and small businesses
- A delayed draw term loan (DDTL) allows you to withdraw funds from one loan amount several times through predetermined draw periods.
- DDTLs are usually used by businesses that would like to purchase capital, refinance debt, or make acquisitions.
- While you may enjoy the flexibility and save money on interest, you might have to meet strict requirements and make sense of complicated loan terms.
- Other lending options for both individuals and small businesses include personal loans, peer-to-peer loans, cash advances, and more.