Understanding Loan Amortisation and Repayment Structures

The main amortisation structures

Under straight-line amortisation, equal slices of capital are repaid each period. Because the outstanding balance falls, the interest component of each payment also falls, so total monthly payments decrease over the term. This structure suits businesses that expect improving cash flow and want predictable debt reduction.

Annuity (level payment) amortisation keeps the total monthly payment constant. Early payments are predominantly interest; later payments are predominantly capital. This is the most common structure for commercial mortgages. Total interest paid is higher than under straight-line for the same rate and term.

Bullet and balloon structures

A bullet facility is interest-only throughout the term, with the entire principal repaid in a single payment at maturity. This maximises cash flow during the term but requires the business to refinance or generate the lump sum at maturity — concentration risk that lenders assess carefully.

A balloon structure amortises partially during the term, leaving a specified residual balance (the balloon) at maturity. It is common in asset finance, where the balloon may reflect the estimated residual value of the underlying asset.

Choosing the right structure for your business

The right repayment structure depends on the purpose of the borrowing and your cash-flow profile. Acquisition finance and property finance often use bullet or balloon structures because the exit is a planned refinancing or sale. Working-capital facilities are typically revolving with no fixed amortisation. Equipment finance tends to amortise fully over the asset's useful life.

• Match the loan term to the asset life or the revenue cycle it is funding
• Model the bullet or balloon refinancing risk explicitly — do not assume refinancing will be available at comparable terms
• Confirm whether voluntary prepayment reduces future instalments proportionally or shortens the term