What is the difference between 'no-draw' and 'true-up' in lines of credit?

• A. No-draw refers to a facility remaining undrawn; true-up is an adjustment at renewal or covenant testing to align commitment with actual needs or risk profile.
• B. True-up is an adjustment at renewal or covenant testing to align commitment with actual needs or risk profile.
• C. No-draw is a penalty.
• D. No-draw applies to term loans, not lines of credit.

Answer: (A)

The main idea is how a bank distinguishes unused funding capacity from a mechanism that adjusts the facility to match actual needs and risk.

No-draw refers to the portion of a line of credit that is available but not yet used. It’s the unused capacity of the facility, and lenders often charge a commitment fee on that undrawn amount to keep the line available even though you haven’t drawn on it.

True-up is an adjustment that happens at renewal or during covenant testing to align the committed amount with the borrower’s real needs and risk profile. If the business’s financing needs or risk has changed, the lender may increase or decrease the credit limit to reflect that, rather than keeping a fixed size that no longer fits.

So, no-draw is about an unused, available amount at a point in time, while true-up is a future adjustment to the facility size based on actual usage and risk. The undrawn concept isn’t a penalty, and true-up isn’t just about penalties—it’s a renegotiation of the line’s size to fit current conditions. Also, no-draw is specifically relevant to lines of credit, not term loans.