Utilization fee: Overview, definition, and example
What is a utilization fee?
A utilization fee is a charge that lenders or financial institutions impose on borrowers for using a certain percentage of a credit line or loan facility. It is typically applied to revolving credit arrangements, such as lines of credit or business loans, where the borrower only pays interest on the amount borrowed. The fee is meant to encourage borrowers to use the credit facility efficiently and ensure that funds are used actively, rather than just keeping the credit line open without borrowing.
For example, if a business has a $100,000 line of credit but only borrows $30,000, a utilization fee may be applied based on the $30,000 that’s been used, rather than the entire $100,000 available.
Why is a utilization fee important?
A utilization fee is important because it helps lenders compensate for the cost of having capital available, even if the borrower doesn’t use the full credit line. This fee encourages borrowers to utilize the credit they’ve been granted actively, ensuring that the funds are contributing to business activity or economic growth.
For borrowers, understanding utilization fees is key to managing costs associated with credit facilities, as these fees can add up if a borrower consistently uses only part of the available credit.
Understanding utilization fee through an example
Imagine a small business with a $100,000 line of credit. The business uses $20,000 of the credit during the year. The lender charges a 1% utilization fee on the amount used. So, the business would pay a $200 utilization fee ($20,000 x 1%) in addition to the interest on the $20,000 borrowed.
In another example, a company with a $1 million revolving credit line only uses $200,000 during the year. The lender charges a 0.5% utilization fee. The company would owe $1,000 in utilization fees ($200,000 x 0.5%) on top of the interest payments on the borrowed amount.
Example of a utilization fee clause
Here’s how a utilization fee clause might look in a loan agreement:
“The borrower will be subject to a utilization fee of 0.5% per annum on any portion of the credit line utilized. The fee will be calculated based on the average daily balance of the drawn amount during the term of the loan.”
Conclusion
A utilization fee is a charge imposed by lenders on borrowers who use part of their available credit. It helps lenders cover the costs of keeping capital available while encouraging borrowers to use the credit efficiently. Understanding how utilization fees work can help borrowers manage the total cost of using revolving credit and avoid unnecessary expenses.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.