Compare credit-line offers when unused capacity carries a fee

A revolving facility can charge interest on borrowed money and a separate fee for capacity left undrawn. Ask what enters the unused amount, which dates are measured and how the fee is annualized. Compare the contract definitions before placing two percentages in adjacent spreadsheet cells.

One publicly filed example, West Bay BDC's September 2024 credit agreement, calculates an unused commitment fee from average daily unused commitments and includes letter-of-credit obligations in its usage measure. That is evidence of one negotiated arrangement, not a standard for every lender. Your comparison needs each offer's own fee base and exceptions.

Assume two hypothetical $1 million lines remain available for a full year. Offer A charges 8% on drawn balances and 0.5% on unused capacity. Offer B charges 8.5% drawn and 0.2% unused. Hold rates and balances constant within each case and exclude setup charges, minimum fees and other usage. None of these figures is a market quote.

At $200,000 average borrowing, A costs $16,000 interest plus $4,000 unused fees, or $20,000. B costs $17,000 plus $1,600, or $18,600. At $800,000 borrowing, A costs $65,000 in total and B costs $68,400. The cheaper offer changes with use, so selecting solely by the drawn interest rate can mislead.

Under those simplified assumptions, the offers have equal annual cost at $375,000 of average borrowing, or 37.5% utilization. Below that amount, B is cheaper; above it, A is cheaper. The result is useful only while the specified rates, limits and fee definitions remain unchanged.

Build an expected daily or monthly draw schedule from the operating cash forecast. A seasonal peak does not mean the line stays fully drawn all year. Conversely, a low year-end balance can conceal sustained borrowing during the rest of the year. Use average balances appropriate to the actual fee calculation.

Keep a separate maximum-usage test. An offer can have the lowest expected cost but insufficient capacity during the busiest week. Management needs both the cost of expected use and the amount available when the forecast reaches its largest gap.

Ask whether the quoted limit is committed, how long it lasts and what conditions govern each draw. A borrowing base, sublimit, reserve or existing letter of credit may reduce usable capacity. Paying an unused fee does not itself establish that every undrawn dollar can be borrowed immediately.

Request the full fee schedule, including any facility charge on the entire commitment, minimum interest, renewal cost and reduction or cancellation charge. Do not add a commitment fee twice if a quoted all-in illustration already includes it. Have counsel interpret the availability and cancellation provisions before finance relies on the line as a contingency source.

Run a smaller facility through the same peak-demand test. Reducing unused capacity may save fees while removing funding needed in a credible disruption. State the amount of contingency capacity management is willing to pay for and the events it is intended to cover.

Approve the preferred offer with its expected utilization, peak requirement, total charges and availability conditions. Revisit the calculation if trading changes materially or renewal terms arrive. The objective is to understand the cost of usable capacity across the company's actual cash cycle.