Growth debt repayment structures

A growth debt repayment schedule determines when cash leaves the business. Two facilities with the same interest rate and total commitment can have very different effects on runway if one starts repaying principal early and the other delays it.

Principal is the amount borrowed and not yet repaid. Interest is the charge calculated on that outstanding amount. The schedule should show both, because a low rate does not make a large principal payment easier to fund.

The main repayment structures

Interest-only periods

During an interest-only period, the borrower pays interest and any applicable fees but does not make scheduled principal repayments. The outstanding principal therefore normally stays unchanged unless the company voluntarily prepays or another term requires repayment.

Interest only does not mean payment free. Cash interest, commitment fees, monitoring fees and other charges may still be due. It also delays rather than removes the principal obligation.

The end of the interest-only period can create an amortisation cliff: a noticeable jump in scheduled payments when principal repayments begin. The finance plan should model that date before signing, not shortly before it arrives.

Amortisation

Amortisation means repaying principal in instalments. Straight-line amortisation divides the amount to be repaid into equal principal instalments. Because interest is usually calculated on the declining balance, the total monthly payment may reduce gradually.

Other schedules may be stepped or sculpted. A stepped schedule increases principal payments later. A sculpted schedule is shaped around an expected cash flow profile. Both can suit a business whose cash generation is expected to improve, but they also depend on that improvement arriving.

Bullet and balloon repayments

A bullet repayment makes most or all principal payable at maturity, the contractual end date of the loan. A balloon is a large final payment left after some earlier amortisation.

These structures protect near-term runway, but they create a maturity wall: a large amount that must be repaid or refinanced on a known date. The company needs a credible source of repayment, such as operating cash, a sale, new equity or replacement debt. None should be treated as guaranteed.

A simple £3 million example

Assume a company draws £3 million on day one. The examples below ignore interest, fees and day-count calculations so that the principal timing is easy to see.

The first example starts using £125,000 of cash each month for principal after month 12, before interest and fees. The bullet example preserves that cash during the term but concentrates repayment risk at maturity. The third spreads some repayment while leaving half the original principal for the final date.

How repayment changes runway

Runway is the period for which a company can fund operations before cash runs out. Debt repayments reduce cash just like payroll, suppliers and taxes, but they may be less flexible.

Build a monthly model showing opening cash, operating cash flow, interest, fees, principal repayments and closing cash. Include the exact first amortisation date and maturity date. A quarterly model can hide a payment cliff inside the quarter.

Test at least a base case, a slower-growth case and a downside case. If the plan only works when revenue, margins and the next equity round all arrive on schedule, the repayment structure may be too aggressive.

Drawdowns can have different schedules

A facility may be available in tranches, meaning separate amounts that can be drawn at different times. Confirm whether each tranche receives its own full interest-only period and repayment schedule or whether all tranches share the original facility dates.

A late draw under a shared maturity date can have a shorter effective term and faster amortisation than the first draw. That detail can materially change the usefulness of an undrawn commitment.

Cash-pay and PIK interest

Cash-pay interest is paid in cash on scheduled dates. Payment-in-kind, or PIK, interest is added to principal. PIK can reduce current cash payments, but the company then pays or refinances a larger balance later and may pay interest on the added amount.

Check whether PIK is automatic, optional or only permitted after a condition is met. Also confirm whether choosing PIK increases the rate, affects covenants or requires lender consent.

Prepayment

Voluntary prepayment lets the borrower repay early. The documents may impose a minimum repayment amount, notice period, prepayment premium, make-whole amount or restriction on redrawing.

Mandatory prepayment requires repayment after specified events, such as an asset sale, insurance receipt, new debt or excess cash flow. Definitions, thresholds and reinvestment rights determine how much operating flexibility remains.

Ask how payments are applied. They may reduce the final instalments, shorten the term or reduce every remaining instalment. The answer changes future cash flow.

Matching the structure to the use of funds

Questions to ask before signing

1. 1What is the scheduled principal payment for every month after each possible draw?
2. 2When does interest only end, and what is the payment immediately before and after that date?
3. 3How much principal remains at maturity in the base case and downside case?
4. 4Do later tranches receive separate repayment periods?
5. 5Can the company prepay, what does it cost, and can it redraw?
6. 6Which events trigger mandatory prepayment?
7. 7Is any interest added to principal, and does that amount itself accrue interest?
8. 8Can expected operating cash flow meet repayments without relying on an uncommitted equity round or refinance?

The bottom line

Repayment structure is part of the cost and risk of growth debt, not an administrative detail. Interest only and bullet payments can preserve runway today, while amortisation reduces the balance and refinancing risk over time.

The right structure matches repayments to a realistic source of cash. Model every payment date, include downside cases and treat any future equity raise, sale or refinance as uncertain until it is committed.

Where to go next

• Growth debt interest rates and costs builds a complete view of cash cost, fees and equity-linked value.
• Drawdowns and tranches explains when committed cash is actually available.
• Revolver vs term loan compares reusable working-capital capacity with term debt.
• Managing growth debt after closing turns the signed facility into a practical operating process.