Meaning
Financial charge paid by a borrower to a lender for keeping a credit line available. Payment compensates the bank for the capital it must set aside to meet potential loan requests. The commitment fee is typically calculated as a percentage of the undisbursed portion of the facility.
Charges stop applying once the full amount of the loan is drawn or the agreement expires.
Capital Provision
Lenders incur an opportunity cost when they reserve funds for a client. A commitment fee covers the expense of maintaining these liquid reserves. Payments usually occur on a quarterly basis.
Borrower Cost
Interest rates only apply to money already borrowed, but the total cost of credit includes secondary expenses. A commitment fee represents a price for the certainty of future funding. Founders must weigh the cost of this fee against the benefit of having cash on standby for unexpected needs.
If the facility remains unused, the expense accumulates without providing an active return on investment. The fee often appears as a recurring line item in the finance budget of a growing firm.
Lending Rule
Negotiation of the rate often happens during the initial structuring of the credit facility. The commitment fee might decrease if the borrower uses a larger portion of the credit line. Agreements specify the exact calculation method and the payment dates.
