A commitment charge is a fee your lender bills on the part of a credit facility you haven’t borrowed yet. Rates typically run between 0.25% and 1.0% per year, applied only to the undrawn balance and accruing whether or not you ever draw the funds. If you have a $20 million revolver and have drawn $12 million, you pay interest on the $12 million and a commitment charge on the remaining $8 million. It is the price of keeping capital reserved and available.
How the Charge Is Calculated
Three variables drive the math, and all three live in your credit agreement.
The first is the fee rate, quoted as an annual percentage. The specific number depends on your creditworthiness, the size of the facility, and market conditions when the deal is negotiated. The second is the undrawn amount, which is the total facility limit minus what you currently owe. That number moves every time you draw or repay, so the charge fluctuates with it. The third is time. Most agreements accrue the fee daily and bill it monthly or quarterly.
The standard daily formula:
Commitment Charge = Annual Fee Rate × Undrawn Amount × (Days in Period ÷ 360)
Most U.S. dollar credit agreements use a 360-day year, which produces a slightly higher effective cost than a 365-day year would. On a $10 million undrawn balance at 0.50%, the daily charge is roughly $138.89 under a 360-day year versus $136.99 under 365 days. Over a full year, the 360-day convention effectively charges you about 1.4% more than the quoted rate implies. Some agreements do use 365 days, so check the day-count convention in yours before you model the cost.
Flat, Tiered, and Declining Structures
Not every commitment charge is a flat rate. Many modern credit agreements use utilization-based pricing, where the fee rate itself changes with how much of the facility you’re using. A typical structure charges 0.35% when you’ve drawn less than half the facility and drops to 0.20% once utilization crosses 50%. The lender’s logic is simple: the more you draw, the more interest income they earn, so the fee on the remainder can afford to be lower.
Some facilities pair the commitment fee with a utilization fee that kicks in above a threshold, which pushes borrowers to sit in a middle utilization band. These tiered structures are common in investment-grade revolvers.
Revolving credit facilities typically hold a fixed total commitment for the full term. You can borrow, repay, and re-borrow up to the same ceiling, so the undrawn balance swings with your usage. Construction loans work differently. The total commitment usually declines on a predetermined schedule as funds are drawn in stages during the build, and the fee applies only to what remains undrawn under that schedule, so it naturally shrinks as the project progresses.
Commitment Fee Versus Facility Fee
This is where borrowers comparing offers get tripped up. A commitment fee applies only to the undrawn portion. A facility fee applies to the entire committed amount, drawn and undrawn alike. On a $50 million facility with a 0.25% facility fee and $30 million borrowed, the fee is calculated on the full $50 million. Structured as a commitment fee, it would apply only to the $20 million you haven’t used.
Facility fees are more common in investment-grade agreements, where borrowers have stronger negotiating leverage and the fee is paired with lower drawn-funds pricing. The all-in economics can be similar, but the allocation between drawn and undrawn costs shifts. When you’re comparing lenders, compare the total cost across both fee types, not just the headline commitment rate.
Where You’ll See Commitment Charges
Revolving lines of credit are the most common home for these fees. A business that maintains a $15 million revolver for working capital might routinely use only $3 million to $5 million, paying a commitment fee on the $10 million to $12 million of available capacity. That fee buys certainty that the cash is there if a large order lands or a receivable slips.
In syndicated lending, where multiple banks share a large facility, each bank earns its pro-rata share of the commitment fee on its portion of the undrawn amount. On a $500 million syndicated revolver split five ways, each bank collects the fee on its own $100 million share of unused capacity.
Standby letters of credit carry analogous charges, since the issuing bank must reserve capital against the possibility of having to perform. Private equity capital call facilities work similarly: the bank guarantees availability while the fund calls capital from its limited partners on a rolling basis, and the fee compensates the bank for keeping funds on standby.
How the Fee Is Treated for Taxes
This is where the analysis often goes wrong. Commitment fees are generally not deductible as a current business expense in the year you pay them. The IRS treats a commitment fee as the cost of acquiring a property right, specifically the right to borrow money, analogous to paying for an option. If you exercise the commitment by drawing on the loan, the fee must be capitalized and amortized ratably over the term of the loan.1Internal Revenue Service. Memorandum on Loan Commitment Fees
If you never draw on the commitment and the facility expires, you may be entitled to a loss deduction under Section 165 when the right lapses. Courts have consistently upheld this treatment, rejecting taxpayer arguments that commitment fees qualify for immediate deduction as ordinary and necessary business expenses under Section 162.2Internal Revenue Service. Legal Advice Issued by Field Attorneys 20182502f
Practical effect: if you’re paying $75,000 a year in commitment fees on a five-year facility and you draw the loan, those fees don’t cut your taxable income dollar-for-dollar in the year paid. They amortize over the remaining loan term. Documentation of the fee’s character and timing matters, because the IRS scrutinizes whether a labeled “commitment fee” is truly a standby charge or a disguised interest payment.
On the accounting side, fees tied to a revolving credit arrangement are deferred as an asset and amortized ratably over the facility’s term, whether or not the line has any outstanding borrowings. When a commitment fee relates to a term loan used to acquire or construct a long-term asset, the fee is capitalized into the cost basis of that asset and depreciated over its useful life.
What Happens If You Miss a Payment
A missed commitment fee is not a minor administrative issue. Under most commercial credit agreements, an unpaid commitment fee is an event of default. If you don’t cure the missed payment within the grace period, the lender gets the right to accelerate all obligations under the agreement, meaning the entire outstanding balance becomes immediately due.
Acceleration is the real danger. A missed $25,000 commitment fee payment can trigger a demand for repayment of a $10 million drawn balance. Most credit agreements also cross-default with other debt instruments, so a default on one facility can cascade across the borrower’s entire capital structure. Treat commitment fee invoices with the same urgency as principal and interest payments.
Bringing the Cost Down
The most direct move is to right-size the facility. Borrowers often negotiate a credit line based on peak projected need, then use half of it for years. If your history shows you’ve never crossed $8 million on a $15 million facility, cutting the commitment to $10 million reduces your fee by a third while still leaving a cushion.
Utilization-based pricing is another lever. If the lender is offering a flat commitment fee, ask whether they’ll switch to a tiered structure that lowers the rate as your usage climbs. That aligns your costs with how you actually use the facility and can meaningfully reduce total fees if you typically run at moderate to high utilization.
Finally, negotiate the day-count convention. A 360-day year on a 0.50% commitment fee effectively charges you about 0.507% annually. Small in isolation, but the difference compounds on large facilities over multi-year terms, and treasury teams work this alongside every other term because basis points add up when the commitment runs into hundreds of millions of dollars.