Why interest-only loan matters to a first-time founder
Lower payments at the start can protect cash while a business grows, but the debt itself does not shrink during the interest-only period. Founders must plan for the later principal repayment, refinancing or higher instalments. Treating the initial payment as the full long-term cost can create a serious cash shortfall.
Examples of interest-only loan
A company borrows £120,000 at 9% annual interest, with interest-only monthly payments for one year. It pays £900 a month, assuming no fees and a fixed balance, but still owes £120,000 after twelve months. If the principal then amortises over three years, monthly payments rise sharply.
Common misunderstanding
Interest-only does not mean interest-free, and it rarely means no repayment obligation. The borrower pays the financing cost while postponing principal reduction. Some loans require a final lump-sum payment, called a balloon payment; others switch to combined principal and interest instalments. Terms and risks vary by product and jurisdiction.
When to use it
Consider this structure only when the temporary cash benefit matches a credible repayment plan, such as a contracted receivable or planned asset sale. Stress-test delays, higher rates and failed refinancing before signing. Review the maturity date, security, fees and default terms with a qualified adviser where the exposure is material.