Commitment Fee

A term used in many contexts, the most common being by banks and other sources of lending for a charge made to a potential creditor for reserving funds for a pre-approved loan. In essence if, for example, a bank agrees in principle to lend a large sum of money to a potential borrower if certain conditions are met, to be drawn down at the borrower’s demand over a period of time, the bank must set aside funds to meet that lending obligation, usually at a relatively low rate of interest. The commitment fee compensates the bank for the lost profit that results from reserving these funds. Commitment fees may also be charged in other areas, for example, in professional services and consulting, or contract manufacturing, where a party agrees to hold a limited resource available for another party. Commitment fees are usually non-refundable. A pre-paid ‘retainer’ can be seen as a form of commitment fee.

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