What Is a Utilization Fee?

A utilization fee is a periodic fee that some lenders charge borrowers whose outstanding balances exceed a certain percentage of their available credit. Utilization fees are most common on revolving lines of credit and term loans for businesses.

How Utilization Fees Work

Some loans are structured in a way that makes a certain amount of money available to the borrower, but the borrower doesn't have to take it all at once in a lump sum. A line of credit is one example. A borrower might be granted a line of credit for, say, $20,000, but take only $5,000 at the outset. That leaves them another $15,000 to draw from as needed in the future. The borrower will only owe interest on the amount of debt they have outstanding at any given point. Loans with a utilization fee impose an additional charge, typically if the borrower takes out more than a certain amount of money. The reason is that lenders are counting on their borrowers, as a group, not to max out on their loans because of the capital demands that would put on the lender. If all of their borrowers used nearly the full amount of the credit that's available to them, lenders could be strained to come up with the money. By charging utilization fees, a lender can create another stream of revenue to sustain its operations, while also giving borrowers an incentive to reduce or eliminate their outstanding balances in order to avoid paying these costs.

Typical Utilization Fee Terms

If a loan or other form of credit involves utilization fees, that (and any other fees) should be spelled out in the lending agreement. The specific terms can vary from one lender to another and according to the type of credit in question. Payment may be required annually or quarterly, with the fee based on a quarterly or even daily assessment of the borrower's outstanding balance relative to their available credit line. Some clauses set the threshold for the outstanding balance at 33.3% of the total commitment, while others may set it at 50% before any utilization fees will be triggered. In some cases, utilization fees can be charged against the outstanding balance regardless of the percentage it represents.

Other potential charges that may be part of lending agreements include origination fees, commitment fees , and facility fees.

Example of a Utilization Fee

Say a business borrower has a $2 million line of credit with a utilization fee clause that sets a 50% threshold and that for three days their outstanding balance exceeded $1 million. Under many loan contracts, they would owe a utilization fee based on that period. If their outstanding balance remained below the threshold for the entire time, they would generally not owe a utilization fee at all.

The Bottom Line

Utilization fees are one of an assortment of fees that lenders can write into their loan agreements. That's one reason borrowers should read these contracts carefully and not focus solely on the interest rate that they are being charged. Even if a loan contract has a provision for utilization fees, a borrower may be able to avoid them if they keep a close eye on their outstanding balance and are careful not to exceed the threshold at which a utilization fee would be triggered.