Delayed draw term loan: All you need to know

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Page written by Chris Godfrey. Last reviewed on October 25, 2024. Next review due October 1, 2025.

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Increasingly popular with organizations both large and small, Delayed Draw Term Loans (DDTLs) provide a powerful financial tool for businesses looking to better manage their cash flow, limit their interest expenses, and seize new opportunities. Whether used for mergers, acquisitions, real estate projects, or capital investments, DDTLs offer excellent flexibility and control over when and how loan funds are used.

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What is a delayed draw term loan?

A delayed draw term loan (DDTL) is a type of business loan that allows borrowers to withdraw portions of their loan proceeds over time, instead of receiving the entire amount upfront. While a DDTL appears similar to a revolving line of credit, there are important differences:

Line of credit: With a traditional line of credit, borrowers can draw down as much as they need whenever they wish, up to their credit limit. This provides flexibility but can also encourage overspending and lead to higher debt levels if not managed carefully.
DDTL: ADDTL sets a schedule for withdrawing funds. For instance, a DDTL might allow a borrower to access $1 million every quarter, with a total limit of $5 million. This structure ensures regular infusions of capital while preventing the borrower from taking on too much debt at once. The key benefit is that the borrower knows they have access to capital on set dates, supporting smoother cash flow and allowing them to pursue business opportunities with greater confidence. By delaying the full disbursement of funds, a DDTL helps avoid premature spending and encourages better financial discipline. Additionally, DDTLs give borrowers the flexibility to wait for favorable market conditions before making significant financial commitments.

In some cases, borrowers may also have the option to repay part of the loan during the term and then re-draw the same amount later, adding another layer of flexibility.

Delayed draw term loans at a glance

Works similar to a revolving line of credit except you receive pre-set amounts of cash from your loan facility on fixed dates instead of withdrawing from an open credit facility at anytime
May provide better cash management than a revolving line of credit
Only pay interest on the withdrawn sum, not the full loan sum
You may pay less interest than you would with other types of business loan

How does a delayed draw term loan work?

When a borrower and lender agree to a DDTL, they negotiate terms regarding the timing and amounts of the withdrawals. These terms are set for the duration of the loan agreement.

The DDTL Process:

The DDTL can either represent the entirety of the loan or only a portion of a larger loan. agreement. For example, a borrower may take out a $5 million loan, with $1 million set as a DDTL and the remaining $4 million as a traditional fixed-term loan.
The borrower decides on the schedule for accessing the funds, typically opting for draws every three to six months.
The borrower only pays interest on the amount they withdraw not the entire DDTL facility. This can reduce the total interest paid.
Throughout the duration of the loan, the borrower receives funds at regular intervals according to the agreed withdrawal schedule.
Withdrawals continue until the borrower has drawn the entire loan, or the draw period ends.
The total amount drawn is usually due for repayment at the end of the loan term. Alternatively, many borrowers choose to refinance their DDTL into a new loan when the agreement ends.

Lenders may impose specific conditions for accessing each draw down, such as meeting agreed performance targets. Lenders may also ensure that each draw aligns with their liquidity needs and capital reserves, setting limits on the frequency and amount of withdrawals.

DDTLs may also come with additional fees:

Upfront Fee: A percentage of the total DDTL amount, paid at the origination of the loan.
Ticking Fee: A fee charged on the undrawn balance of the loan, compensating the lender for keeping the funds available.

Term loan vs. delayed draw term loan

While both term loans and DDTLs provide good financing options, there are notable differences:

Term loan: In a standard term loan, the borrower receives the full loan amount upfront and immediately begins accruing interest on the entire balance. Repayment is typically made in regular installments over a predetermined schedule until the loan is fully paid off.
Delayed draw term loan: With a DDTL, the borrower only draws portions of the total loan amount at scheduled intervals, usually in equal portions. Interest is only charged on the drawn amounts, helping to limit interest costs. The full sum must be repaid by the end of the loan period unless the borrower converts it into a new loan or refinances it.

Using delayed draw term loans

Common uses for DDTLs include:

Mergers and acquisitions: DDTLs provide flexible financing for acquiring new businesses or merging with existing ones.
Business or property purchases: Funds can be drawn to finance real estate deals or to acquire other businesses.
Buy-and-build expansion: Companies looking to expand can use DDTLs to finance strategic growth initiatives.
Capital expenditures: DDTLs can support investments in large capital projects like new equipment, machinery, or facilities.
Leveraged buyouts: Businesses undergoing changes in ownership can use DDTLs to manage the financing needed for buyouts or other restructuring activities.

Types of delayed draw term loans

DDTLs come in different forms, with varying levels of flexibility:

Revolver DDTL: This type of DDTL functions like a revolving credit facility, allowing borrowers to repay and redraw funds multiple times, up to the total loan limit.
Non-revolver DDTL: Once a portion of the loan is repaid, it cannot be withdrawn again. This structure is more rigid but may come with fewer fees.
Balloon DDTL: Borrowers only make interest payments throughout the loan term, with the full principal due at the end of the term. These loans are often refinanced before the final repayment.
Asset-based DDTL: The loan is secured against specific assets owned by the borrower, such as real estate or equipment. The loan amount is based on the value of those assets.
Cash flow-based DDTL: In this case, the loan amount is determined by the borrower’s cash flow or earnings, rather than collateralized assets.

Who would use a delayed draw term loan?

Businesses with irregular cash flow: Companies experiencing seasonal or unpredictable revenues can benefit from the predictable inflows of cash provided by DDTLs. This supports long-term financial planning while reducing the risk of cash shortfalls.
Real estate developers: Developers often fund projects in phases, receiving payments as each stage of construction is completed. A DDTL can be scheduled to align with these timelines, reducing interest costs by allowing developers to draw funds only when needed.
Entrepreneurs: Entrepreneurs looking to expand or take advantage of new business opportunities can use DDTLs to access funds quickly without going through the loan approval process every time they need more capital.

What are the pros and cons of delayed draw term loans?

Pros:

Increased flexibility: Borrowers can draw funds in stages rather than receiving a lump sum upfront, which is ideal for projects with unpredictable costs.
Interest savings: Interest is only charged on the amount drawn down, not the whole DDTL.
Better cash flow management: DDTLs allow businesses to align loan repayments with their cash flow needs, making it easier to manage finances over time.

Cons:

Additional fees: In exchange for flexibility, borrowers may face extra costs, such as ticking fees on undrawn funds.
Limited availability: Not all lenders offer DDTLs, especially smaller banks or financial institutions. Borrowers may have fewer options when shopping around for competitive rates.
Complex terms: DDTLs often come with complicated covenants and conditions. Borrowers may lose access to funds if they fail to meet these terms.
Interest rate risk: If the loan has a variable interest rate, borrowers could end up paying more if market rates increase over time.

Who can qualify for a delayed draw term loan?

Qualification for DDTLs usually depends on strong credit history, sufficient collateral, and a robust business plan. Lenders will typically require balance sheets, income statements, cash flow projections, tax returns and more. A good credit score is essential.

Where can I get a delayed draw term loan?

Obtaining a delayed draw term loan can be difficult. Not only are these types of loan offered by fewer lenders, the terms and conditions of a DDTL can be very complicated. Shopping around before settling on a deal is therefore essential. You can do this by approaching banks, credit unions and online lenders one by one over days, weeks, or even months, or you can use the services of a loan marketplace that can quickly introduce you to a choice of financing offers from a range of lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out a DDTL before.

Alternative financing options

If your business doesn’t qualify for a DDTL, there may be other ways to obtain the funds you need:

SBA 7a loans

SBA 7a business loans are backed by the US Government up to 85% of loan value and can provide up to $5million to qualifying borrowers with repayment terms as long as 25 years. Government backing reduces risk for the banks, credit unions and online lenders who offer these loans

SBA express loan

SBA express loans are a faster alternative to the standard 7a loan program. Offered by the same pool of lenders, express loans can give you up to $500,000 to support your business and you’ll usually get a ‘yes/no’ indication within 36 hours of making your application.

Business term loan

Term loans are the most popular type of business loan. Commonly used for one-off investments where you know exactly how much cash you need. Commercial real estate purchases, plant and equipment investment, and debt repayment and restructuring activities work well with this kind of loan. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Collateral may be required.

Business line of credit

Also known as a revolving line of credit, this is a business loan that functions like a high-value credit card but comes with lower interest rates and fees. Organizations can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing. Collateral may be required.

Invoice financing

Also known as account receivables financing, this type of loan allows you to borrow against the value of your unpaid invoices. The lender will usually provide up to 95% of the invoice value within a few days or even hours of the bill being raised. No added collateral required.

Merchant cash advance (MCA)

MCAs are suitable for businesses that accept customer payments by credit and debit card. Borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the loan back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.

Revenue-based financing

Revenue-based financing functions like a merchant cash advance but with higher borrowing limits. Based on the size and regularity of their total revenues, (not just their credit card sales), businesses typically receive a lump sum and pay it back over a short-term schedule, sometimes by small deductions from their daily sales. This type of loan can usually be secured quickly as qualification rules are less intensive and credit scores are not so critical. No added collateral required.

Equipment financing

Equipment loans use the assets you’re financing as security, similar to a car loan or a residential mortgage. Use the equipment as you pay for it while the lender maintains a lien on the title to the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright. No added collateral required.

Business grants

Business grants are effectively free money – they do not have to be repaid if you spend them properly. The good news is there are literally thousands of grants available across the US and they are provided by federal, state and local governments as well as foundations, non-profits and other organizations. The bad news is that small business grants are usually highly competitive, slow to fund and often come with strict qualifying rules.

Get started with Swoop

Working with business finance experts can make all the difference when applying for a delayed draw term loan. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality DDTL and other business loans from a choice of lenders. Take control of your cash management. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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