A delayed draw term loan (DDTL) is a type of business term loan that lets you draw funds several times over the term of the loan. This can be helpful if you plan to expand your business by making multiple acquisitions or capital investments over time. It can also help you handle any unforeseen expenses that crop up in the future.
Delayed draw term loans typically come with strict eligibility requirements and complex loan terms. Read on for a closer look at how these loans work, their pros and cons, plus how they compare to revolving business lines of credit.
Key Points
• Delayed draw term loans allow borrowers to withdraw predefined funds over a set period of time. Unlike traditional small business loans, the entire loan amount is not given to the borrower up front.
• Delayed draw term loans allow borrowers to save on interest, since the interest only accrues on the amount that’s withdrawn as opposed to the entire loan amount.
• Cons of delayed draw term loans include strict eligibility requirements and they can only be used for large loan amounts.
• Delayed draw term loans differ from business lines of credit in that they are designed for acquisitions, whereas business lines of credit are ideal for short-term financing.
• Alternatives to delayed draw term loans include SBA loans, business lines of credit and short-term business loans.
What Is a Delayed Draw Term Loan?
A delayed draw term loan allows borrowers to withdraw predefined amounts of a total approved loan amount over time, rather than receive the full loan amount upfront. The withdrawal periods are set in advance and may occur every three, six, nine, or 12 months.
A delayed draw term loan allows you to draw funds incrementally to meet your company’s funding needs.
How Does a Delayed Draw Term Loan Work?
A delayed draw term loan is structured so that a business can draw funds on specific dates, rather than whenever they want to draw funds. In some cases, the lender will have certain requirements your business must meet (such as reaching certain financial milestones) in order to be eligible for draws. By the time the loan reaches maturity, the entire loan amount (including interest) must be paid off.
A delayed draw term loan generally allows you to pay less in interest compared to a traditional term loan, since you only pay interest on the amount you draw rather than the full amount of the loan. However, these loans often come with fees, including a “ticking fee.” The ticking fee is based on the undrawn amount of the delayed loan, and generally grows over time. Once you draw the entire loan amount (or terminate the loan), you no longer have to pay ticking fees.
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Pros and Cons of Delayed Draw Term Loans
As with all types of small business loans, delayed draw term loans come with both benefits and drawbacks. Here’s a look at how they stack up.
| Pros | Cons |
|---|---|
| May pay less in interest | Strict eligibility requirements |
| Offers withdrawal flexibility | Only available for large loans |
| Can access funds quickly | Terms can be complicated |
Delayed Draw Term Loan vs Revolving Lines of Credit
Both delayed draw term loans and revolving lines of credit are flexible forms of financing. Both allow you to use the funds when you need them and only pay interest on the amount you draw. However, there are some key differences between these loan products.
For one, delayed draw term loans are generally harder to qualify for than business credit lines. In addition, they usually have more complicated loan terms and conditions.
Another distinction is that revolving credit is designed for short-term capital needs like working capital, not for acquisitions. Delayed draw term loans, on the other hand, are considered long-term loans and are often used for acquisitions.
And, while revolving credit allows you to draw funds, repay those funds, and draw them again, delayed draw term loans do not. Once the delayed draw term loan is repaid, the funds are no longer available for use.
| Delayed Draw Term Loan | Revolving Credit | |
|---|---|---|
| Interest | Lower | Higher |
| Flexibility | Less | More |
| Funds renew? | No | Yes |
| Can they be used for acquisitions? | Yes | No |
| Qualifying | Harder | Easier |
| Rules | Simple | Complicated |
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Delayed Draw Term Loan Example Agreement
As an example of a delayed draw term loan, let’s take a computer software company that is looking to borrow money to expand its product line. A lender agrees to give them a $5 million dollar, five-year term loan. However, since the technology is constantly evolving, the company decides they would rather not make a large, one-time acquisition but, rather, several smaller acquisitions over time.
Instead of a traditional term loan, they negotiate a delayed draw term loan that allows them to access $1 million every year, as opposed to $5 million upfront all at once. This allows them to take advantage of purchase opportunities as they come up and pay less total interest over the life of the loan.
Applying for Delayed Draw Term Loans
Generally, delayed draw term loans are only offered to businesses with high credit scores that are interested in getting a large term loan to finance future acquisitions or expansion.
If you think you might qualify, applying for a delayed draw term loan is similar to applying for any business loan. You’ll likely need to provide basic information about your business, your company’s financial statements, information about you and any other owners, and information about collateral, if required.
Alternatives to Delayed Draw Term Loans
Delayed draw term loans are one of many types of business loans that can help you grow your business. Here’s a look at some other options.
SBA Loan
Because SBA loans are guaranteed by the U.S. Small Business Administration (SBA), they represent less risk to lenders than other types of small business loans. As a result, SBA loans generally offer large loan amounts and attractive rates and terms. With an SBA 7(a) loan, for example, eligible businesses can borrow up to $5 million for a range of business purposes.
Term Loan
A traditional term loan is a small business loan in which you receive a lump sum of capital upfront, then pay it back (plus interest) in regular installments over the term of the loan. Term loans are offered by banks, credit unions, and online lenders. The funds can typically be used for any business purpose. Repayment terms can be up to 10 years.
Short-Term Loan
If you need access to cash quickly, you might consider a short-term business loan. These loans are typically easier to qualify for than traditional term loans and can be used for virtually any business purpose. Repayment periods are often between three and 18 months. With some online lenders, qualifying businesses might be able to access funding in as little as one day.
Business Lines of Credit
A business line of credit is a form of revolving credit. You receive access to a set credit limit and can access what you want (up to your credit limit) when you want it. You only pay interest on what you borrow. As you repay the money you owe, you can access that money again throughout the draw period. Once the draw period ends, you can no longer access the credit line. At that point, the repayment period begins.
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When Are Delayed Draw Term Loans a Good Option?
A delayed draw term loan can be a good option if:
• Your business has strong credit.
• You need a large loan to expand your business.
• You want to make several acquisitions or capital investments over time.
Unlike a traditional term loan, you won’t have to pay interest on the full loan amount. You’ll only pay interest on the portion that you borrow.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
What are ticking fees on delayed draw term loans?
Ticking fees on delayed draw term loans are fees that accrue on the undrawn amount of the delayed loan. Once you draw the entire loan amount (or terminate the loan), you no longer have to pay ticking fees.
What is delayed drawdown?
A delayed drawdown occurs when a borrower doesn’t receive all the proceeds of a term loan upfront. With a delayed draw term loan (DDTL), a borrower receives a certain portion of the loan at set intervals, which may be every three, six, nine, or 12 months.
Do delayed draw term loans amortize?
Some delayed draw term loans amortize, but it depends on the lender and the terms of the loan.
Photo credit: iStock/Tero Vesalainen
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