How Credit Funds Recognize Facility Fees: Commitment, Origination, and Closing Fee Basics

Direct lending arrangements generate multiple fee streams beyond interest income. Commitment fees, origination fees, and closing fees each follow specific recognition rules that determine when income hits the books, and getting this wrong can create audit issues and investor reporting problems.

A Simple Example

A fund closes a $50 million term loan and collects a 2% origination fee ($1 million) at funding. The fund also incurs $200,000 in direct costs, legal fees, credit analysis, and loan officer time. Under ASC 310-20, the fund nets these amounts ($1 million fee minus $200,000 costs = $800,000) and amortizes that $800,000 over the loan's five-year term as additional yield, not as fee income on day one.

What Types of Fees Do Direct Lenders Earn?

The most common fee categories in private credit include:

Commitment fees: Charged on undrawn portions of a facility, compensating the lender for reserving capital
Origination fees: Upfront charges for underwriting and closing the loan
Closing fees: One-time payments at funding, sometimes called facility or arrangement fees

Each fee type has distinct characteristics that affect its accounting treatment. The key question is whether the fee represents additional yield on the loan (deferred and amortized) or compensation for a specific service (recognized when earned).

What Does ASC 310-20 Require?

Under ASC 310-20, loan origination fees and direct loan origination costs are generally deferred and recognized as yield adjustments over the loan's life. The standard requires lenders to:

Offset origination fees received against direct origination costs incurred
Defer the net amount and amortize it using the effective interest method
Recognize the amortization as an adjustment to interest income, not as a separate fee line

Why it matters: If the fund in the example above recognized the full $1 million fee at closing, it would overstate income in Year 1 and understate it in Years 2-5. Deferral creates a constant effective yield over the loan term.

How Are Commitment Fees Treated?

Commitment fees on undrawn facilities follow a different path depending on whether the commitment is expected to be exercised:

If exercise is probable: Fees are deferred during the commitment period and become part of the loan's effective yield once funded
If exercise is remote: Fees may be recognized as service income over the commitment period on a straight-line basis
If the commitment expires unexercised: Any remaining deferred fees are recognized in income at expiration

Example: A fund provides a $30 million revolver with 50 bps annually on undrawn amounts. If the borrower typically draws $20 million and leaves $10 million undrawn, the fund earns $50,000 per year on the unused portion. Because the borrower retains the right to draw, these fees amortize over the revolver term, even during periods when the facility sits undrawn.

What Costs Offset Fee Income?

Not all costs incurred during origination qualify for deferral. ASC 310-20 limits deferred costs to "incremental direct costs", expenses that would not have been incurred had the loan not been originated.

Qualifying costs include:

Loan officer commissions paid only upon successful closing
Third-party legal fees directly attributable to the transaction
Credit analysis and due diligence costs for that specific loan

Costs that must be expensed immediately:

General overhead and administrative costs
Salaries only indirectly related to origination
Marketing and advertising
Unsuccessful loan origination efforts

How Does Fair Value Election Affect Fee Recognition?

Funds that elect the fair value option under ASC 825 follow a different path entirely. For loans measured at fair value, upfront costs and fees are recognized in earnings immediately, not deferred and amortized.

The practical impact: Two funds holding identical loans could recognize fee income on very different timelines depending on their accounting election. A fund using amortized cost spreads a $1 million origination fee over five years. A fund using fair value books it all in Year 1.

What Should Finance Teams Track?

Effective fee accounting requires maintaining schedules that capture:

Original fee amount by position
Direct costs incurred and netted
Net deferred balance
Cumulative amortization to date
Remaining unamortized balance

When loans prepay or are sold, the remaining unamortized balance accelerates into income, making accurate tracking essential for forecasting quarterly results.