Mechanics
Amortisation
Amortisation is the schedule on which you repay principal. It decides how much cash the facility takes each year, which covenant binds you, and how large a refinancing you face at maturity.
Also called repayment profile · bullet repayment · balloon payment · capital repayment · amortising loan
The same £5m facility leaves very different amounts outstanding at maturity. The bullet defers the whole problem.
| Profile | Outstanding at maturity |
|---|---|
| Fully amortising | £0 |
| Balloon (50%) | £2.5m |
| Bullet | £5m |
Illustrative on £5m over five years: full amortisation, 50% balloon, and bullet. Derived arithmetic.
The three shapes
A term loan is drawn at completion, or in tranches during a short availability window, and from then on it only shrinks. How it shrinks is the amortisation profile, and there are three shapes.
A fully amortising loan repays in instalments across the term, so nothing is left at maturity. A part-amortising loan repays instalments with a balloon falling due at the end, commonly leaving a substantial share of the original principal outstanding. A bullet repays no principal at all until maturity, when the whole amount falls due on one day.
Tenor at this size is commonly three to five years across all three shapes, which means the choice is not about how long you have the money but about when you give it back.
What the profile costs in cash
This is the difference borrowers feel every quarter. On a £5m facility over five years, full amortisation takes £1m of principal a year before any interest. A 50% balloon halves that to £500k. A bullet takes nothing until the end.
That is not a saving, it is a deferral, and the deferred amount accrues interest throughout. But the cash flow difference is real and it is the reason bullet structures command a premium: £1m a year retained in a business with £2m of EBITDA is the difference between funding an integration internally and not being able to.
The bullet keeps cash in the business through the years when it is most needed, which is the feature acquirers pay for, and they do pay: fund debt runs materially wider than bank debt, and the premium only earns its keep where the flexibility is used.
What a bullet buys is annual cash. Full amortisation on £5m takes £1m a year of principal before a penny of interest.
| Profile | Principal per year |
|---|---|
| Fully amortising | £1000k |
| Balloon (50%) | £500k |
| Bullet | £0 |
Illustrative annual principal on £5m over five years. Interest excluded. Derived arithmetic.
Bank against fund
The two lender types default to opposite ends of this spectrum, and understanding why makes the trade clearer.
Bank term facilities usually amortise. A bank is funding from deposits with regulatory capital against the exposure, and a shrinking balance reduces both the risk and the capital held against it. Fund facilities, and unitranche in particular, usually run bullet and stretch to 4 to 4.5 times EBITDA, occasionally five for a strong credit. A fund has a defined investment period and is compensated by margin rather than by amortisation.
So the choice between a bank package and a fund package is partly a choice of repayment profile, and it is worth pricing that way. A bank facility at a tighter margin that takes £1m a year of principal is a different proposition from a fund facility at a wider margin that takes none, and which is better depends entirely on what else the business needs the cash for.
How it drives the covenant
The profile decides which covenant binds, which is the connection borrowers most often miss.
Debt service cover measures cash against interest plus scheduled principal. On a bullet facility there is no scheduled principal, so the test converges on interest cover and rarely binds. On a fully amortising facility the principal sits in the denominator every quarter, and with DSCR covenants typically set a little above 1.0x, it becomes the tightest test in the package.
That has a practical consequence at term-sheet stage. Negotiating the amortisation profile does more for DSCR headroom than negotiating the ratio itself, because it reduces the denominator directly rather than moving the line. A borrower struggling to model a passing DSCR should be asking for a slower profile before asking for a lower covenant.
The profile decides which covenant governs. Heavy amortisation makes debt service the binding test.
| Profile | What binds |
|---|---|
| Bullet | Leverage and sweep |
| Balloon | Mixed |
| Straight-line | DSCR bites |
| Front-loaded | DSCR governs |
Market convention at £3-15m. Structures vary.
Capital holidays and sculpting
Two adjustments sit between the standard shapes and are worth asking for where the business case supports them.
A capital repayment holiday defers the start of amortisation, commonly for the first six or twelve months. It is most defensible where a specific and time-limited event absorbs cash: an integration following an acquisition, a capex programme, a site move. Framed against that event it is a reasonable request; framed as a general preference it is usually declined.
Sculpting shapes the instalments to the business rather than dividing the principal evenly. A seasonal business repaying more after its strong quarter and less after its weak one carries the same total principal with far less strain on any single test date. It requires the lender to engage with the cash cycle, which is more work, so it is asked for less often than it should be.
The maturity risk a bullet defers
A bullet does not remove the repayment, it concentrates it. At the end of a five-year £5m facility the entire principal falls due on one day, and unless the business has accumulated the cash, that means refinancing.
Refinancing risk is not distributed evenly through time. It depends on what credit markets look like in that particular quarter, on where the business's own performance sits, and on whether the sector is in or out of favour. A borrower who would have comfortably refinanced in year four may face a materially worse market in year five, and the facility gives no discretion about when to find out.
The practical mitigations are to start the refinancing conversation twelve to eighteen months before maturity rather than three, to use the cash sweep constructively so the balloon shrinks even without scheduled amortisation, and to apply any sweep in reverse order of maturity, which reduces the final payment rather than every instalment.
How it interacts with the sweep
On a structure with little or no scheduled amortisation, the cash sweep is doing the deleveraging work instead, and the two mechanisms should be read together.
A bullet facility with an aggressive sweep is not really a bullet: the balance falls whenever the business performs, just unpredictably rather than on a schedule. That is better for a borrower in a weak year and worse in a strong one, which is a reasonable trade for a business with volatile earnings.
Where both a full amortisation schedule and a sweep apply, check whether swept amounts reduce future scheduled instalments or sit on top of them. A structure that takes £1m of scheduled principal and sweeps 50% of what remains can consume more cash than the model showed, particularly in the years the business performs best.
Common questions
What is the difference between an amortising loan and a bullet loan?
An amortising loan repays principal in instalments across the term, leaving nothing at maturity. A bullet repays no principal until maturity, when the whole amount falls due at once. A part-amortising or balloon structure sits between, repaying instalments with a substantial lump at the end.
Is a bullet loan better for a borrower?
It is better for cash flow and worse for refinancing risk. On £5m over five years, full amortisation takes £1m of principal a year while a bullet takes none, which can be the difference between funding an integration internally and not being able to. But the whole £5m then falls due on one day, in whatever credit market happens to exist that quarter.
How long is a typical term loan?
Commonly three to five years at £3-15m, across all three repayment shapes. So the choice of profile is not about how long you have the money, but about when you give it back and how much falls due at the end.
Why do banks want amortisation when funds do not?
A bank funds from deposits and holds regulatory capital against the exposure, so a shrinking balance reduces both its risk and the capital held against it. A fund has a defined investment period and is compensated through margin rather than repayment, which is why unitranche facilities usually run bullet and stretch to 4 to 4.5 times EBITDA.
How does amortisation affect my covenants?
Directly, through debt service cover, which measures cash against interest plus scheduled principal. On a bullet facility there is no principal in the denominator so the test rarely binds. On a fully amortising facility it usually becomes the tightest covenant in the package. Negotiating a slower profile does more for DSCR headroom than negotiating the ratio itself.
Can I get a repayment holiday?
Often, where a specific and time-limited event absorbs cash: an integration after an acquisition, a capex programme, a site move. Six or twelve months is the usual ask. Framed against the event it is reasonable; framed as a general preference it is usually declined.
What is loan sculpting?
Shaping the instalments to the business rather than dividing the principal evenly. A seasonal business repays more after its strong quarter and less after its weak one, carrying the same total principal with much less strain on any single test date. It requires the lender to engage with the cash cycle, so it is asked for less often than it deserves.
How do I manage the refinancing risk on a bullet?
Twelve to eighteen months before maturity is when the conversation still has options in it; three is not. A cash sweep used constructively so the balance falls even without scheduled amortisation, and ask for swept amounts to be applied in reverse order of maturity, which shrinks the final payment rather than reducing every instalment slightly.
The full treatment sits in the guide: rcf vs term loan.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.