A draw request, also known as a disbursement request or loan advance request, is a formal request made by a borrower to draw down funds from a debt facility that has been previously set up with a lender.
Debt facilities like term loans, revolving credit facilities, and project finance loans are commonly established between a lender and a borrowing entity to provide access to capital over a period of time. These facilities indicate a maximum loan amount that the borrower can access, the purposes the loan can be utilized for, the costs and fees involved, the repayment schedule, and other terms and conditions associated with the debt funding.
Once a facility agreement has been executed, the borrower can make requests to the lender to withdraw or “draw down” portions of the available funds as per their needs and the facility terms, instead of taking the full amount as a lump sum on day one. This is done by formally submitting draw requests to the lender.
Elements of a Draw Request
A draw request letter or form will typically contain some key details, such as:
- Borrower details – Name of borrowing entity and authorized signatories
- Debt facility details – Reference number, amount, date of agreement
- Amount requested – Clearly stating the precise amount to be drawn
- Drawdown date – Proposed date fund transfer is requested
- Purpose of drawdown – What the funds will be utilized for
- Supporting documentation – Invoices, purchase orders, etc. to back up drawdown
- Declarations & authorizations – Borrower confirmation of compliance with facility terms
There can be slight variations in the exact requirements and formats preferred by different lenders, but these elements provide the core information required for the lender to process and approve the drawdown of funds to the borrower.
Drawdown Methods and Timing
Two of the most common ways that borrowers can draw down money from a committed debt facility are:
- Drawing separate tranches at different times as needed during the availability period. For example, a $10 million working capital facility could be drawn in $2 million increments over a year rather than taking the full $10 million on day one.
- Establishing the loan as a revolving credit line, allowing repayment and redraws of different amounts within the approved credit limit. For instance, a $5 million revolving loan could be drawn, repaid, and drawn again multiple times as long as the amount outstanding does not exceed the $5 million cap.
The exact frequency, amounts, and timing of drawdowns will depend on the specific terms in the facility agreement, as well as operational factors on the borrower’s side related to cash flows, activity levels, upcoming needs, etc. Some facilities permit flexible drawdowns while others restrict when and how much borrowers can access based on milestones or schedules.
Most facility agreements will also specify a maximum availability period, such as a 1-year working capital facility permitting drawdowns anytime over the next 12 months. Any undrawn amounts would expire after that period. This gives borrowers flexibility while providing lenders more predictability.
Reasons Lenders Require Draw Requests
Lenders incorporate draw requests as part of the loan process for multiple reasons, including:
Maintaining Control Over Disbursements
By requiring borrowers to formally request funds via draw requests, the lender retains authority and control over how much and when money is released from the committed facility.
Tracking Facility Usage
Analyzing each draw request helps the lender monitor overall usage of the facility and ensure funds are being deployed as per the debt facility agreements, as well as forecast future repayments.
Catching Potential Issues
Scrutinizing draw details enables lenders to spot problems early, such as overutilization or assets outside of the approved criteria.
Confirming Compliance
Draw requests contain declarations from the borrower asserting their ongoing compliance with all covenants and terms tied to the debt facility agreement. Non-compliance could have consequences including restricted drawdowns.
Building an Audit Trail
Proper recordkeeping of all draw requests and supporting papers creates an audit trail that lenders can refer back to over the facility term, especially important in case of disputes.
Easing Administration
Automating draw requests streamlines the drawdown process for both lenders and borrowers compared to manual alternatives like emails or phone calls, ensuring consistency.
In essence, enforcing formal draw requests allows lenders to monitor behavior, mitigate risk, trigger periodic obligation checks, and create documentation around facility use – providing oversight and accountability.
The Draw Request Process
While the exact steps can vary, the process to make a draw request under a debt facility typically follows a flow like this:
1. Preparing Request
Borrower assembles request communicating amount to draw plus purpose and required attachments. Proper internal authorizations should be obtained.
2. Submitting to Lender
Request submitted to lending organization per contact and delivery method specified, either directly or via intermediaries like lawyers.
3. Reviewing Documentation
Lender reviews completeness and compliance of the request, ensuring accuracy, approvals, supporting paperwork, declarations, etc.
4. Approval Decision
Based on documentation and criteria review, lender decides to approve full amount, partial amount, require clarifications, or decline the draw request.
5. Informing Borrower
Lender communicates the draw approval decision, timing, and next steps to the borrower.
6. Releasing Funds
After greenlighting the request, lender releases the drawdown amount to the borrower or directly to supplier accounts on the agreed date.
7. Ongoing Monitoring
Lender continues monitoring facility usage and borrower financial standing during term.
A requests timeline can range from several days to a couple of weeks depending on complexity. Draw requests are an pivotal component allowing borrowers to access funding from lenders under pre-arranged debt facilities, enabling mutual tracking and compliance enforcement.