What is a Delayed Draw Term Loan (DDTL)

What is a Delayed Draw Term Loan (DDTL)

Definition

A delayed draw term loan is a form of loan in which the borrower, who is often the owner of a firm, has the ability to make a request for extra funding after the initial draw period has reached its conclusion. Both the timing of withdrawals and the amounts of loans are established in advance.

A delayed draw term loan is a form of loan in which the borrower, who is often the owner of a firm, has the ability to make a request for extra funding after the initial draw period has reached its conclusion. Both the timing of withdrawals and the amounts of loans are established in advance.

The meaning of the term “loan” is known as a “delayed draw.”

Large companies that are interested in purchasing capital, refinancing existing debt, or making acquisitions frequently turn to delayed draw term loans, also known as DDTL. You have the ability to make several withdrawals of money from a predetermined loan amount when you use a DDTL. The length of the withdrawal periods is another aspect that is decided in advance.

The time when you can take money out of an investment is called the “draw period.”

It is common to find it on credit cards as well as lines of credit.

 DDTLs have been used in the leveraged loan market, which is known for giving credit to companies and people with bad credit or too much debt. 

The amounts that are associated with delayed draw term loans are typically considered to be quite substantial. For instance, they could run anywhere from one million to more than one hundred million dollars. 

Loans with a delayed draw term may have repayment terms of three or five years, for example, and interest-only periods that last anywhere from six months to a year. Withdrawal episodes could occur once a year, every few months, or even less frequently.

Acronym: DDTL

The Process Behind a Term Loan with a Delayed Draw

A lending agreement between a company and a lender could include the inclusion of a delayed draw term loan for the company. It is also possible for it to be a component of a loan that is issued by a number of lenders working together to provide funds to a single borrower. This type of loan is known as a “syndicated loan.”

If you obtain a DDTL, you will be responsible for paying a ticking charge on a regular basis. The amount of the loan that has not yet been used is subject to a ticking fee, which continues to accrue until either the entire loan is used, the commitment period comes to an end or both.

At the time that you close on your loan, you could have to pay an up-front cost in addition to a so-called “ticking fee.” It is most likely that it will be a percentage of the total amount borrowed. You are going to be responsible for paying back the total amount of the term loan when it comes due. 

Depending on the lending institution that you work with, you may be required to pay an upfront charge at each DDTL funding date rather than a single sum on the day of closing.

A delayed draw term loan may also require you to provide collateral, which might take the form of real estate, machinery, or any other type of fixed asset that you own, depending on the lending institution. In addition, if you have a DDTL, you won’t be able to refinance the sum of money that you pay back.

A Comparison of the Benefits and Drawbacks of Delayed-Draw Term Loans

Pros

  • Interest paid less
  • Flexibility in the withdrawal process

Cons

  • Strict requirements
  • The type of loan that is complicated

The Positives Explained

Less interest: If you take out a loan with a delayed draw term, you could be able to save quite a bit of money on the interest. This is due to the fact that the draw periods will make it possible for you to borrow money only when you actually require it. You won’t be responsible for paying interest on a lump sum of cash because you won’t be needing the money for some time.

If you go with a DDTL, you’ll have more leeway to take out additional cash and adapt to your shifting requirements because you’ll have more time to do so. You won’t be put under any kind of pressure to take out large amounts of money before the initial draw period is through. 

Defining the Drawbacks

Strict requirements: Despite the fact that each and every lender that provides DDTLs is unique, some of them may require you to have a specific credit score or a certain quantity of cash available to you. In order to get the loan, you may additionally be required to provide specifics regarding your business’s growth and earnings expectations or to put up collateral. 

When compared to regular company loans, DDTLs come with loan terms and structures that are more complicated. This is due to the nature of the loans themselves. Before you commit to getting a loan, it’s in your best interest to go over the terms of the loan in great detail with the lending institution.

Possible Substitutes for Loans with a Delayed Draw Term

Companies frequently make use of loans with a delayed draw period, but these loans might not be suitable for sole proprietors or other types of entrepreneurs. Other kinds of loans, such as personal loans, home equity loans, or, if you already own a home, home equity lines of credit, could be better options for you to investigate before looking into the home equity loan option (HELOC). 

Microloans, peer-to-peer loans, and invoice finance are some of the options available to entrepreneurs and owners of small businesses. Cash advances are a type of financing that can be useful for both individuals and small businesses.

Key Takeaways

With a delayed draw term loan, also known as a DDTL, you are able to access the cash from a single loan amount multiple times over the course of predetermined draw periods.

Companies usually use DDTLs when they want to get new money, refinance existing debt, or buy other businesses.

You could be able to enjoy the freedom and save money on interest, but on the other hand, you could be required to fulfill stringent regulations and make sense of complex loan terms.

Other types of loans, such as cash advances, peer-to-peer loans, and personal loans, are also available to borrowers, whether they are individuals or small businesses.

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