How Repayment Schedules Are Structured on Business Term Loans

Straight-line amortisation

Under a straight-line amortising schedule, the same amount of capital is repaid in each instalment throughout the term. Because interest is calculated on the declining balance, the total monthly payment falls over time — early instalments carry a higher interest component and later ones are mostly capital. This is the simplest structure to model and the one most commonly used for straightforward term loans.

Straight-line amortisation reduces the lender's outstanding exposure steadily, which lowers credit risk over time. For the borrower, it means the largest cash-flow obligations fall at the start of the facility when the business may still be deploying the borrowed capital.

Interest-only periods and deferred capital

Many commercial facilities, particularly those financing construction, fit-out, or investment projects with a lead time before revenue is generated, include an interest-only period at the outset. During this phase the borrower pays only the accruing interest, with no capital reduction. Capital repayment begins once the interest-only window closes, at which point instalments increase materially.

Directors should calculate the full-service cost once the capital repayment phase begins and confirm the business will have adequate cash flow at that point. Lenders stress-test this transition as part of affordability assessment and may require evidence of contracted revenue or pre-sales before granting an extended interest-only period.

Bullet and balloon repayment structures

A bullet loan requires the entire principal to be repaid in a single payment at maturity, with only interest paid during the term. A balloon structure is similar but involves a large — though not necessarily the entire — lump sum at the end, with smaller instalments during the term. Both structures carry refinancing risk: if the borrower cannot refinance or sell the underlying asset at maturity, default becomes a real prospect.

Bridging finance and development loans frequently use bullet or balloon structures because the exit strategy — sale of the asset or refinancing onto a term mortgage — is the primary repayment mechanism. Lenders assess exit viability as a core part of the credit decision for these products.

Sculpted and cash-flow-matched schedules

For businesses with predictable but uneven cash flows — seasonal retailers, agricultural operations, or project-based contractors — lenders can agree a sculpted repayment schedule in which instalments vary in size across the term to mirror the borrower's cash flow profile. Higher payments fall in peak-revenue periods; lower payments or payment holidays are permitted in lean months.

Sculpted schedules require more detailed cash flow projections from the borrower and closer monitoring by the lender. They are typically used in the mid-market and above, rather than for smaller facilities where the administrative overhead is disproportionate.