Amortisation

Definition

Amortisation is the gradual repayment of a loan through scheduled instalments, each of which clears part of the outstanding principal alongside the interest due. By the final instalment, the debt is fully repaid and nothing remains owing. The same word also describes spreading the cost of an intangible asset (such as software or goodwill) across its useful life in your accounts — but for borrowing, it is about how a loan winds down to zero.

In plain terms

Picture a loan as a staircase you walk down. Early on, a larger slice of each payment is interest, because interest is charged on a bigger balance. As the balance falls, more of each payment chips away at the principal. The instalment itself often stays the same, but the split inside it shifts. A loan that fully amortises leaves no lump sum at the end — unlike a balloon or interest-only arrangement, where a large amount falls due at maturity.

Why it matters to your business

An amortising facility gives you predictability. You know the instalment, the term and the date the debt clears, which makes business loan repayments easy to build into a cash-flow forecast. It also means you are steadily building a clean balance sheet rather than carrying a balloon you must refinance later. The trade-off is that monthly outgoings are higher than interest-only structures, so the facility needs to sit comfortably within your trading margin.

• Fixed, plannable instalments
• Debt clears on a known date
• No surprise lump sum at the end

Worked example

Say a company borrows £60,000 over 12 months on a fully amortising basis. It repays roughly £5,000 of principal each month, plus interest on the balance still outstanding. In month one, interest is calculated on the full £60,000; by month eleven it is calculated on around £5,000. The headline instalment is broadly level, but the proportion going to interest shrinks each month. By month twelve the balance is £0 and the facility is closed. These figures are illustrative and exclude any fees.