Commitment Fee

Commitment Fee is a common term in international credit and trade finance, referring to a compensatory fee paid by a borrower to a bank or financial institution for not fully drawing down a committed loan facility within the agreed period. It is usually calculated as a percentage (e.g., 0.25%-0.5% per annum) of the undrawn amount, intended to compensate the lender for the opportunity cost of reserving funds. It is commonly used in large-scale medium- to long-term financing arrangements such as export credit, project finance, and revolving credit. Notes: Companies should accurately assess their drawdown plans to avoid extra costs from delayed drawdowns; the calculation base, rate, billing cycle, and payment method of the commitment fee should be clearly specified in the loan agreement. Unlike management fees and agency fees, a commitment fee applies only to the unused portion rather than being charged as a one-time fee; compared with a prepayment fee, the former arises from insufficient drawdown, while the latter arises from early repayment. Foreign trade practitioners should reasonably negotiate commitment fee terms based on cash flow forecasts when signing financing agreements to reduce the total financing cost.