A delayed draw term loan, or DDTL, is a committed financing arrangement that lets a borrower pull money in stages during a defined window instead of taking the full amount at closing. The lender is contractually obligated to fund each draw as long as the agreed conditions are met, and once money is drawn it becomes a permanent term loan obligation. Repaid amounts cannot be re-borrowed. The structure is most common in private credit and leveraged lending, where companies need guaranteed access to capital for planned acquisitions or multi-phase projects but don’t want to pay full interest on money sitting idle.
How It Differs From a Term Loan and a Revolver
A DDTL sits between the two more familiar structures.
A standard term loan funds the entire principal at closing. Interest starts running on the full amount immediately, whether or not the borrower has deployed the cash. That works when capital is needed on day one and creates unnecessary interest cost when it isn’t.
A revolving credit facility lets the borrower draw, repay, and re-borrow up to a set limit for the life of the facility. Repaid amounts become available again, which is what makes it suitable for working capital that swings up and down.
A DDTL allows staged draws like a revolver, but once an amount is drawn it stays drawn. There is no re-borrowing. That one-way quality makes it less flexible than a revolver and more predictable for both sides, and it’s why DDTLs tend to fit discrete, foreseeable capital needs rather than ongoing cash management.
When Companies Use One
The typical use case is a specific capital need with a known or near-known timeline. A company negotiating to acquire a competitor may not know the exact closing date or final purchase price, so a DDTL locks in financing terms now and funds when the deal actually closes. A manufacturer running a multi-phase plant expansion can draw as each construction milestone is reached rather than borrowing the full amount upfront and paying interest while the project is still underway.
Private equity sponsors use DDTLs heavily in leveraged buyouts. A sponsor might fund the initial acquisition with a standard term loan and leave a DDTL in place for 12 to 24 months to finance bolt-on acquisitions after the platform deal closes.
Commitment, Tranches, and the Availability Window
The credit agreement sets the total committed amount, the number of tranches, and the availability period. Availability windows commonly run 12 to 36 months from signing. During that window the borrower has a contractual right to request funding, and the lender is obligated to deliver as long as all conditions are met. The lender cannot redirect the reserved capital to another client or decide it no longer wants to lend. That guaranteed access is the core of what the borrower is paying for.
Minimum Draw Amounts
Most agreements set a minimum per draw request. On larger facilities, minimums of $1 million or more are typical, which keeps the administrative burden manageable for the lender. If you need less than the minimum for a smaller project, you’ll have to bundle the request with another use of proceeds or wait.
Collateral
DDTLs in leveraged deals almost always require security, usually a lien on substantially all of the borrower’s assets. “All assets” rarely means literally everything. Lenders commonly carve out property where perfecting a security interest costs more than it’s worth, such as low-value equipment, foreign subsidiaries, and assets with logistical headaches like vehicle title registrations. The security package is negotiated alongside the credit agreement and typically mirrors whatever collateral supports the borrower’s other senior debt.
Drawing the Money
A signed commitment doesn’t let the borrower draw at will. Each draw request has to satisfy conditions precedent spelled out in the credit agreement. These usually include confirming that representations remain true, that no default has occurred, and that specified financial tests are still being met.
Financial covenants are where this bites. Lenders commonly require the borrower to stay below a maximum leverage ratio (such as total debt to EBITDA) or above a minimum interest coverage ratio. If financial health deteriorates between signing and drawing, the lender has the contractual right to withhold funding until the borrower is back in compliance or the parties renegotiate.1University of Houston Bauer College of Business. EBITDA Addbacks in Debt Contracting
Other conditions can be event-based: proof that a specific acquisition has signed, independent verification of a construction milestone, or evidence that a regulatory approval has been obtained. The credit agreement lists exactly what must accompany each request.
The mechanical step is a formal notice of borrowing to the lender’s administrative agent, typically required at least five business days before the funding date. The notice specifies the amount, the funding date, and a confirmation that all conditions remain satisfied. The agent checks the most recent compliance certificate, confirms no outstanding default notices, and verifies that the request fits within the remaining available commitment before wiring funds.
What It Costs
A DDTL has two layers of cost: what you pay on money borrowed, and what you pay on money the lender is holding in reserve for you.
Interest accrues only on drawn amounts. Most DDTLs are priced at a floating rate tied to the Secured Overnight Financing Rate (SOFR) plus a credit spread reflecting the borrower’s risk profile. The spread varies with leverage, industry, and market conditions at pricing.
On the undrawn portion, the borrower pays a commitment fee, sometimes called a ticking fee. These fees typically run around 1% annually on the undrawn balance, though the exact rate depends on the deal. Some agreements distinguish the two terms, with a commitment fee accruing from signing and a ticking fee starting only after a grace period, but many agreements use the terms interchangeably. Either way, this is the price of optionality, and it adds up: on a $100 million undrawn commitment at 1%, that’s $1 million a year before any borrowing.
Undrawn Commitments at the End of the Window
If the availability period expires with capacity unused, the undrawn portion vanishes. The lender’s funding obligation ends, and the borrower loses access to that capital permanently. Extensions are not automatic, though some agreements let the borrower request one for an additional fee.
Some deals also impose a commitment termination fee on the unused amount when the window closes, often around 1% of the undrawn commitment, as compensation for capital that was reserved but never deployed. Not every DDTL includes this, but it’s common in lender-favorable deals and should be factored into the total cost of the facility.
Repayment After the Window Closes
Once the availability window expires or the full commitment has been drawn, the DDTL converts into a standard term loan with a fixed repayment schedule. Amortization is based on the amount actually drawn, not the original commitment. A $50 million commitment with only $30 million drawn amortizes against $30 million.
Repayment structures vary. Some DDTLs amortize with quarterly principal-and-interest payments over five to seven years. Others carry minimal amortization during the term with a large balloon, sometimes called a bullet, at maturity. The specific structure depends on the borrower’s cash flow profile and what the lender will accept.
Prepayment is often more flexible than on standard term loans. Many DDTL agreements allow voluntary prepayment without penalty, though some include soft-call or hard-call prepayment premiums during the first year or two.
Ongoing Compliance After Funding
The paperwork continues after the money arrives. Borrowers typically have to deliver compliance certificates on a regular schedule, usually quarterly or semi-annually, confirming that all financial covenants are still being met. The certificates are signed by company officers and include detailed calculations of leverage, coverage, and any other required metrics.
The certificate also confirms no event of default has occurred, or describes any that has and the steps being taken to cure it. For periods covered by audited financial statements, the lender may require auditor involvement in the certificate as well. Missing a compliance delivery deadline can itself trigger a default, so DDTL borrowers need to build this reporting into their finance team’s calendar.
Tax Treatment
Interest paid on drawn DDTL amounts is generally deductible as a business expense, subject to the business interest limitation under Section 163(j) of the Internal Revenue Code. For tax years beginning after 2024, a business can deduct interest expense only up to 30% of its adjusted taxable income, plus business interest income and floor plan financing interest.2Office of the Law Revision Counsel. 26 US Code 163 – Interest This can be a meaningful constraint for highly leveraged borrowers with large DDTL balances.
Small businesses with average annual gross receipts of $32 million or less over the prior three tax years are exempt from the cap. For everyone else, disallowed interest carries forward to future tax years, so it isn’t lost permanently, but the timing affects cash flow.
Commitment and ticking fees are generally deductible business expenses, but the timing depends on whether they’re treated as debt issuance costs that must be amortized over the life of the loan. The correct treatment turns on the specific terms of the credit agreement and is worth confirming with a tax advisor.