Unused fees can have a material, positive impact on the profitability of your loans, particularly on deals where anticipated usage is low. For example, on a three-year revolving credit with expected utilization of 25%, a fee of just 25 bps on the unused commitment would generate more income than an origination fee of 50 bps on the full commitment.
In addition, unused fees are often an easier sell to the borrower than origination fees, as they can be described as an offset to the bank’s capital costs on unused commitments.
Tips from Relationship Managers who have had success negotiating unused fees:
- As simplistic as it sounds, successful RMs report approaching the situation with confidence, knowing that unused fees are the market standard. They propose an unused fee on all committed revolvers and advise: “Don’t be afraid to ask.”
- RMs describe the inherent costs of unused exposures. Without going into the details of Basel III, RMs explain that capital must be allocated to the unused commitment. Borrowers sometimes say: “If I’m not using the line then it’s not costing the bank anything, so why should I pay?” The answer is: “Whether or not the line is used, the bank still has to set aside capital for an extended period of time, and therefore incurs cost.”
- Perhaps the most effective technique RMs employ, is to offer alternatives to paying the unused fee. For example, the RM might propose right-sizing the line: “I noticed you rarely use more than 50% of the commitment, so let’s reduce availability and eliminate the unused fee.” Or, the RM might suggest that the structure is converted to an uncommitted demand line. In this scenario, the bank would not be making a commitment to lend and would therefore not need to hold capital against the unused exposure. Alternatively, the RM might offer a 364-day term, a seasonal line or an accordion structure.
Quite often, when presenting different options, the borrower’s sensitivities surface. RMs who have proposed reducing the commitment, report getting push-back from borrowers, who say they need the larger line “to sleep at night”. Similarly, even if historical usage has been limited, most borrowers want to know that the credit is a “commitment” rather than an uncommitted line. Typically, after hearing the various options, borrowers opt to keep the loan structure intact and pay the unused fee. The best tip is to put the borrower in the driver’s seat and let them make the decision after fully explaining the rationale for assessing the fee.
- See Pricing A Revolving Line Of Credit for more information on how to enter an unused fee in PrecisionLender.
- Regulatory Capital Requirements for Line of Credit Products