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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, however. 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.
What Is a Delayed Draw Term Loan?
A delayed draw term loan is a special feature in a term loan that 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?
Typically, 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.
Pros and Cons of Delayed Draw Term Loans
As with all types of 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
Both delayed draw term loans and revolving lines of credit are flexible forms of financing. Both allow you to use the funds you need 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
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 these 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.Recommended: Business Loans vs Business Lines of Credit
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.
Small Business Loan Rates With Lantern
If you’re curious about what type of business financing you might qualify for, Lantern by SoFi can help. With our online debt financing marketplace, you can compare small business loan options (including SBA loans, lines of credit, and short-term loans) without scouring the web and checking multiple sites. With one short application, you’ll be matched with a loan offer that meets your company’s needs and qualifications.
Frequently Asked Questions
What are ticking fees on delayed draw term loans?
What is delayed drawdown?
Do delayed draw term loans amortize?
Photo credit: iStock/Makhbubakhon Ismatova
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About the Author
Mike Zaccardi
Mike Zaccardi, CFA, CMT, is a finance expert and writer specializing in investments, markets, personal finance, and retirement planning. He enjoys putting a narrative to complex financial data and concepts; analyzing stock market sectors, ETFs, economic data, and broad market conditions; and producing snackable content for various audiences.
