Ticking Fee Finance

Ticking fee finance, also known as delayed draw term loans, offers a flexible funding solution for businesses, particularly those with immediate funding needs and anticipated future requirements. Unlike traditional term loans disbursed in a single lump sum, ticking fee loans allow borrowers to draw down funds gradually over a pre-agreed period. This phased disbursement is often tied to specific milestones, projects, or investment opportunities.

The defining characteristic of ticking fee finance is the fee charged on undrawn amounts. This “ticking fee,” typically a small percentage (e.g., 0.10% to 0.50% per annum) of the committed but undrawn capital, compensates the lender for reserving the funds. It represents the lender’s opportunity cost of having the capital available for the borrower, even if not immediately utilized. The fee accrues from the commitment date and is generally paid quarterly or semi-annually.

The primary advantage of ticking fee finance lies in its efficiency. Borrowers only pay interest on the funds they actually use, minimizing interest expenses compared to a lump-sum loan where interest is paid on the entire principal from day one. This makes it ideal for projects with staggered funding requirements, such as construction projects, acquisitions with staged payments, or capital expenditure programs.

For example, a company planning a factory expansion might secure a $10 million ticking fee loan. They only draw down $3 million initially for site preparation, paying interest only on that amount. As construction progresses, they draw down additional funds as needed, avoiding interest charges on the full $10 million until it’s fully utilized. The ticking fee applies to the remaining undrawn $7 million.

Ticking fee loans also offer enhanced flexibility. Borrowers can adapt their funding needs based on evolving project timelines or market conditions. If a project is delayed, the borrower avoids drawing down unnecessary funds and incurring interest. However, the ticking fee continues to accrue on the undrawn balance.

Despite the benefits, ticking fee finance comes with considerations. The ticking fee itself adds to the overall cost of borrowing. Before opting for this structure, businesses must carefully analyze their funding requirements and project timelines to determine whether the savings from only paying interest on drawn funds outweigh the accumulated ticking fees. Accurate forecasting of funding needs is crucial. Furthermore, lenders often require robust financial projections and due diligence to assess the viability of the project being financed.

In summary, ticking fee finance provides a valuable tool for businesses seeking flexible and efficient access to capital. By understanding the nuances of ticking fees and carefully assessing their funding needs, borrowers can leverage this financial instrument to optimize their financing costs and support their growth initiatives.