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A commitment fee is a charge that a lender imposes on a borrower to keep a specified loan amount or credit line available for use. It compensates the bank for reserving capital against a facility that may or may not be drawn down. The typical commitment fee starts at 0.25% of the undisbursed loan amount and can exceed 1.0%, depending on the lender, the borrower's credit profile, and the size of the facility.
Think of it like paying a retainer to an attorney: you are paying to ensure access to their services whenever you need them, not just for work already done.
Banks operate under regulatory capital requirements set by the Federal Reserve and other regulators. When a bank extends a revolving credit facility or a term loan commitment, regulators require it to hold equity capital against the full facility amount, not just the portion currently drawn. A bank that commits $100 million must hold capital against $100 million, even if the borrower has only drawn $30 million.
With only $30 million earning interest income, the bank still allocates equity capital to the entire $100 million. That creates an unacceptably low return on equity. The commitment fee bridges that gap by compensating the bank for the cost of maintaining the undrawn capital allocation.
The most common pricing method charges the commitment fee only on the undrawn portion of the credit facility. Interest is charged only on the amount actually drawn.
Here is a straightforward example: a company has a $40 million revolving credit facility at 3% interest and a 0.75% commitment fee on unused balances. In year one, the company draws $25 million. The commitment fee for year two is calculated on the unused $15 million balance: $15 million multiplied by 0.75%, which equals $112,500. The company also pays interest on the $25 million outstanding balance at the 3% rate.
Some lenders charge a flat fee as a percentage of the total facility rather than only the unused portion. This is called a facility fee, and it applies whether the borrower draws funds or not.
| Commitment Fee | Facility Fee | Origination Fee | |
|---|---|---|---|
| Charged On | Undrawn portion only | Entire facility, drawn and undrawn | Total loan amount at origination |
| Timing | Periodic (monthly or quarterly) | Periodic or upfront | One-time at loan closing |
| Purpose | Compensates for holding unused capital | Compensates for establishing the facility | Covers underwriting and setup costs |
| Common In | Revolving credit facilities, term loan commitments | Syndicated loans, investment-grade credit lines | Mortgages, consumer loans, SBA loans |
Commitment fees also appear in residential and commercial mortgage lending. When a lender issues a mortgage commitment letter, it locks in an interest rate and loan terms for a borrower while the property transaction moves toward closing. That lock typically lasts 30 to 90 days. The commitment fee compensates the lender for the risk of rate movements during that period.
In some jurisdictions, lenders must refund commitment fees if the loan does not close due to specific lender-side failures. Virginia, for example, requires refunds when the commitment period was unreasonably short given market conditions, or when the lender declined to proceed because of an insufficient property appraisal or a credit issue the lender should have identified earlier.
For businesses, commitment fees are generally tax-deductible as ordinary and necessary financing expenses. The IRS treats them as costs of obtaining access to credit, similar to interest expense. However, the specific treatment can vary based on whether the fee is paid upfront or accrued over the commitment period, so businesses should confirm the accounting method with a tax advisor.
Commitment fees are negotiable. Borrowers with strong credit profiles, deep banking relationships, or large transaction volumes have leverage to reduce the fee rate or narrow the scope of the facility subject to the charge. Some borrowers negotiate a free period at the start of a revolving facility during which no commitment fee accrues, giving them time to set up operations before the idle capital charge kicks in.
With deep roots in traditional finance and the digital asset industry, Acquire.Fi operates as a specialist M&A advisory firm. Coverage spans M&A, secondaries, OTC, and capital markets advisory across digital assets and frontier tech. Our team has decades of combined experience across every stage of the deal lifecycle.
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