Drawdowns and tranches
Understand growth debt and venture debt commitments, tranches, availability periods, milestones, drawdown conditions and fees on undrawn amounts.
In brief
- A facility commitment is a maximum amount subject to the documents; it is not necessarily cash that can be drawn immediately.
- Later tranches may depend on an availability window, performance milestone, equity raise, no-default test or lender discretion.
- Model cash using the amount currently available, and treat milestone-based or discretionary tranches as uncertain until their conditions are met.
- Check how each draw affects fees, interest-only periods, amortisation and maturity, because a late draw can have a much shorter effective term.
In this guide
- The key terms
- Commitment is not cash
- Why facilities use tranches
- Types of tranche condition
- Availability periods
- Conditions precedent
- Conditions for each draw
- The drawdown notice
- A simple £6 million example
- Fees on undrawn amounts
- How tranches affect repayment
- When should the company draw?
- Negotiating the mechanics
- A pre-draw checklist
- The bottom line
- Where to go next
A £10 million facility does not always mean £10 million can be transferred to the company on closing day. The commitment may be divided into tranches, limited by an availability period and subject to conditions that must be met at each drawdown.
Founders and CFOs should model cash that is actually available, not the largest number on the term sheet.
The key terms
| Term | Plain-English meaning | Why it matters |
|---|---|---|
| Commitment | The maximum amount the lender has agreed to make available, subject to the documents. | It is a ceiling, not necessarily immediate cash. |
| Drawdown or utilisation | A transfer of borrowed money requested under the facility. | Interest and repayment obligations usually attach to amounts drawn. |
| Tranche | A separate portion of the commitment with its own timing or conditions. | Later tranches may be less certain than the first. |
| Availability period | The window during which a draw request may be made. | Undrawn amounts may expire or be cancelled when it ends. |
| Conditions precedent | Documents and actions required before closing or an initial draw. | Funding will not occur until they are satisfied or waived. |
| Utilisation conditions | Tests that must be met when a later draw is requested. | A signed facility may still be unavailable on the proposed draw date. |
| Commitment fee | A fee calculated on some or all undrawn commitment. | Waiting to draw can still have a cost. |
Commitment is not cash
The legal commitment is qualified by the facility terms. A first tranche may be available once closing conditions are satisfied, while later amounts depend on time, performance or lender approval.
Distinguish three figures in every board paper: total commitment, amount currently available to draw and cash already drawn. They answer different questions.
Also identify whether the lender's commitment is fully binding or remains subject to credit approval, diligence, documentation or another condition. An indicative proposal or term sheet is not the same as an executed facility.
Why facilities use tranches
Tranches can match borrowing to the company's need. The company avoids paying interest on cash it does not yet require, while the lender limits exposure until agreed progress is made.
A facility might contain an initial tranche at closing, a delayed-draw tranche available for several months and a milestone tranche released only after a commercial, financial or regulatory event.
Tranches can also fund acquisitions or equipment purchases when those transactions occur. The use of proceeds may be restricted to the stated purpose.
Types of tranche condition
| Condition type | Example | Borrower risk |
|---|---|---|
| Time based | Available between two specified dates | The window can close before the cash is needed. |
| Revenue or ARR | Available after a stated revenue threshold is achieved | Definitions, measurement periods and adjustments can create disputes. |
| Equity funding | Available after a qualifying equity round closes | The company depends on two transactions completing in the right order. |
| Customer or commercial milestone | Available after a contract, launch or regulatory approval | Timing may be outside management's control. |
| Lender discretion | Available only if the lender approves the later draw | The amount should not be treated as committed liquidity. |
| No-default test | Available only while no default or potential default is continuing | A separate issue can block funding when cash is most needed. |
Avoid vague milestones such as 'satisfactory growth' or 'material progress'. Define the metric, source data, currency, period, approval evidence and who determines satisfaction.
Availability periods
The availability period begins and ends on dates set by the documents. A draw request delivered after the deadline may be invalid even if the company still satisfies the commercial milestone.
Work backwards from the final draw date. Include the notice period, lender processing time, board approvals, evidence required and any business-day conventions. A deadline on a weekend or holiday may not operate as management expects.
Confirm what happens to unused commitment when the period ends. It may be automatically cancelled, remain available only with lender consent or attract an extension fee if the lender agrees to keep it open.
Conditions precedent
Conditions precedent, often shortened to CPs, are items that must be completed before the lender is obliged to fund. They commonly include signed finance documents, corporate approvals, legal opinions, identity checks, security documents, insurance evidence and repayment of existing debt.
A CP may be satisfied, waived or deferred. A waiver removes it for the relevant purpose; a deferral makes it a post-closing obligation. Neither should be assumed until documented.
Use a closing checklist that records the exact requirement, responsible owner, status, evidence and lender or counsel confirmation. 'Document uploaded' is not the same as 'condition satisfied'.
Conditions for each draw
A drawdown request usually repeats representations and confirms that no default is continuing or would result from the draw. A representation is a statement of fact the borrower makes under the agreement.
The company may also need to meet financial covenants, maintain minimum liquidity, deliver current accounts, show permitted use of funds or provide milestone evidence.
Test these conditions using information available on the planned draw date. A company that signs while compliant can still lose access to a later tranche if performance deteriorates or a representation becomes inaccurate.
The drawdown notice
A utilisation request, or drawdown notice, is the formal instruction asking the lender to fund. It normally states the amount, currency, proposed date, account and relevant tranche.
The request may be irrevocable. Confirm minimum draw sizes, permitted multiples, notice periods and whether the lender can reject an incomplete notice.
Keep authorised signatory lists current. A technically valid facility can be delayed if the person sending the request lacks authority or the receiving account has not passed verification.
A simple £6 million example
Assume a company signs a £6 million term facility.
| Tranche | Amount | Availability | Condition |
|---|---|---|---|
| A | £3 million | At closing | Closing conditions satisfied |
| B | £2 million | For nine months after closing | Annual recurring revenue reaches the agreed threshold and no default is continuing |
| C | £1 million | For twelve months after closing | Lender approval following updated diligence |
On closing, the company can draw £3 million. It should not place all £6 million into its committed cash plan. Tranche B is conditional on performance, and tranche C remains discretionary.
If the company misses the revenue threshold or reaches it after month nine, tranche B may never be available. If the plan needs that £2 million to make payroll, the financing structure contains a serious liquidity gap.
Fees on undrawn amounts
Interest is generally charged on drawn principal. An undrawn commitment can still attract a commitment fee, ticking fee or similar charge because the lender has reserved capacity.
Check the fee base and start date. It may apply to the entire undrawn commitment, only an unconditional tranche or only after a specified date. The percentage may also step up over time.
Include arrangement, legal, monitoring and extension fees alongside commitment fees. A staged facility can reduce cash interest while still creating meaningful cost before every tranche is drawn.
How tranches affect repayment
Each draw may start its own interest-only and amortisation schedule, or all draws may share a final maturity and repayment dates. The difference is important.
If all tranches mature on the original date, a later draw has a shorter effective term. It may move quickly from drawdown to principal repayment, reducing the runway benefit.
Ask for a monthly schedule under every draw scenario: draw all tranches on the earliest dates, draw them on the latest dates, draw only the first tranche and miss a milestone. Include principal, interest and fees.
When should the company draw?
Drawing early increases cash certainty but starts interest and may start amortisation. Drawing late reduces carrying cost but risks expiry, failed conditions or a change in business circumstances.
The right decision depends on the use of funds, forecast confidence, fee structure, covenant headroom and the consequences if the later draw becomes unavailable.
Do not borrow simply because an amount is available. Equally, do not leave essential funding contingent on a fragile milestone to save a few months of interest.
Negotiating the mechanics
- Size the unconditional first tranche to fund the plan through a meaningful milestone with contingency.
- Make later conditions objective, measurable and within a realistic timetable.
- Add cure, grace or alternative evidence where a minor timing issue should not destroy availability.
- Clarify whether lender discretion is absolute or tied to stated criteria.
- Align the availability period with the expected need plus execution buffer.
- Agree whether each tranche has its own repayment schedule.
- Cap or narrow fees on amounts the borrower cannot unilaterally draw.
- Confirm whether unused commitments can be extended and on what terms.
A pre-draw checklist
- Is the tranche inside its availability period?
- Have all milestone definitions been tested against current data?
- Are all representations accurate on the draw date?
- Is any default or potential default continuing?
- Have required accounts, certificates and evidence been delivered?
- Does the use of proceeds comply with the facility?
- Has an authorised person submitted a complete request before the deadline?
- Does the cash forecast include the resulting interest and repayment schedule?
The bottom line
A facility's value is determined by the amount the company can draw when it needs the cash, not just the headline commitment.
Map every tranche, condition, deadline, fee and repayment consequence. Treat discretionary or milestone-dependent amounts as uncertain until the condition is met and the lender is obliged to fund.
Where to go next
- Growth debt repayment structures compares interest-only periods, amortisation and maturity structures.
- Growth debt term sheets explained shows how to read the whole offer before long-form documents.
- How much growth debt can a company raise? explains responsible facility sizing and debt capacity.
- Growth debt due diligence explains what lenders verify and how to prepare for scrutiny.
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