What is a drawdown?

The borrower prepares a drawdown notice in the form the facility agreement prescribes, usually by email or portal, giving the amount, the proposed drawdown date and the nominated account. The lender checks it against the facility limit and the conditions precedent. Once the documents are in and the facts confirmed, the lender issues a drawdown confirmation and instructs payment through the banking channels.

Funds move on the drawdown date, and interest on the drawn amount starts from that date or the day the funds arrive, depending on the agreement. The borrower then applies the funds as the contract requires, the lender updates its ledgers, and the repayment schedule and amortisation of the balance run from there. Bank cut-off times and clearing rules can shift that date, so it pays to confirm them.

Conditions precedent come in two kinds: documents you hand over, and facts that must be true on the day. The documents are usually the signed facility and security paperwork, proof the security interest is registered on the PPSR, a director's certificate or board minutes, and insurance certificates. The facts are things like the business being solvent, no default running, and nothing serious having changed since you signed.

The loan documents also set out the mechanics. They say what form the drawdown notice takes and how much notice you have to give, when the money can be drawn, and whether it comes in one payment or in stages. They also cover how the funds must be used, when interest and default interest apply, the repayment schedule, the fees, and what happens if you do not draw by the date you nominated.

A term loan may be drawn in a single disbursement or in stages from a committed amount. A revolving facility lets you draw, repay and draw again while the facility is available, as long as you still meet the lender's tests. A construction loan releases progress drawdowns against milestones, progress certificates and retention arrangements.

In asset and equipment finance the lender withholds the final drawdown until the vehicle or machine is delivered, inspected and its security interest registered on the PPSR. Bridge finance may have minimal documentary conditions and a quicker drawdown, but higher pricing. Whatever the facility, the borrower typically pays the establishment, legal and registration costs unless the agreement says otherwise.