Amortization is the repayment schedule: the number of years over which principal is spread to calculate each payment. Maturity is the date the loan ends and whatever is still owed must be repaid. If the two match, the last scheduled payment clears the loan. If amortization is longer than maturity, payments are smaller but a lump sum, a balloon, is due at maturity. Amortization drives annual debt service and therefore debt service coverage; maturity drives when you have to refinance, sell or pay off the rest.
- Amortization
- The schedule used to calculate principal payments
- Maturity
- The date the whole remaining balance is due
- Balloon
- What is left at maturity when amortization runs longer
- Drives
- Amortization sets debt service and DSCR; maturity sets refinancing risk
- Also called
- Maturity: term or tenor. Amortization: schedule or payback period
Two numbers, two questions
Amortization answers "how big is each payment?" Maturity answers "when does this loan have to be gone?" A lender can set them independently, and the combination tells you most of what you need to know about a loan's shape.
| Shape | How it is written on a term sheet | What you pay | What is left at maturity |
|---|---|---|---|
| Fully amortizing | Term and amortization the same length | Level payments that repay everything | Nothing |
| Balloon | Maturity shorter than the amortization schedule | Smaller regular payments | A large lump sum |
| Light amortization | A small fixed share of the original balance repaid each year | Mostly interest | Most of the principal |
| Interest-only, then amortizing | No principal for an initial period, then a schedule | Interest first, then principal and interest | Depends on the schedule after the pause |
| Bullet | No scheduled principal at all | Interest only | The entire principal |
Banks tend toward the top of that table. Unitranche and other private credit lenders sit lower: light amortization and a large amount due at maturity, on the expectation that the loan is refinanced or repaid from a sale. Junior and mezzanine debt is usually a bullet.
Why the terms get confused
Three things make these words slippery. First, "term" is used both ways. A lender who says "a ten-year term" may mean a ten-year maturity or a ten-year schedule, and on some loans those are different. Ask for both numbers in writing.
Second, "amortization" means something else in accounting. The A in EBITDA is the non-cash write-down of intangible assets such as acquired goodwill or customer lists. It has nothing to do with repaying a loan. After an acquisition, a buyer's financial statements can show large amortization expense while the loan's amortization, the principal it repays, is a separate figure in the debt schedule. Lenders add accounting amortization back to reach EBITDA; they subtract loan amortization as part of debt service.
Third, the payment method is a separate choice. Mortgage-style amortization uses level payments, so early payments are mostly interest and principal falls slowly at first. Straight-line amortization repays equal principal each period, so total payments start higher and decline. Two loans with the same schedule length can have different payments in year one and different balances at maturity depending on which method applies.
When you read a term sheet, find three items: the maturity date, the amortization schedule, and whether payments are level or equal-principal.
How amortization drives debt service and DSCR
Lenders size loans on coverage: cash flow available for debt service divided by the year's scheduled principal and interest. On the schedules of ten years or less that most business loans carry, principal is usually the larger part of that payment, so the length of the schedule can move coverage more than the rate does. Conventional bank lenders commonly look for debt service coverage of at least 1.25x.
| Amortization schedule | Principal per year | Interest in year one | Year-one debt service | Against cash flow of 200 |
|---|---|---|---|---|
| 7 years | 143 | 60 | 203 | Short: cash flow does not cover the payment |
| 10 years | 100 | 60 | 160 | Covers it with 1.25x |
| 20 years | 50 | 60 | 110 | Covers it comfortably |
That is why a longer schedule raises how much a business can borrow, and why lenders tie the schedule to what the loan pays for. A lender will stretch the schedule on real estate that lasts decades; it will not stretch it on goodwill or working capital beyond what the asset supports. How much debt a business can carry works through the sizing in full.
Where balloons come from, and the risk they carry
A balloon appears whenever the lender wants the benefit of a long schedule for your payments but does not want to hold the loan that long. A conventional real estate loan written with a five-year maturity on a 20-year schedule is the standard example. In the table above, a loan of 1,000 on a 20-year straight-line schedule has repaid only 250 after five years, so 750 is due at maturity. On a mortgage-style schedule the balance left would be higher still, because early payments are mostly interest.
The risk is not the payment; it is the date. At maturity you must refinance, sell or pay cash, in whatever credit market and at whatever rates exist then, with whatever results the business is showing then. A business that has had a weak year going into a balloon maturity can find that the loan it easily qualified for five years earlier is now hard to replace. Refinancing ahead of a balloon maturity covers when to start and what lenders will ask.
- Put every maturity date in the debt schedule, with the balance expected at that date.
- Start the refinancing well before maturity, while the loan is current and the results are the most recent full year.
- Watch for maturities that fall close together across several loans, and for cross-default clauses that link them.
Reading the choice on your own deal
A longer schedule lowers today's payment and raises what you owe later. A shorter maturity lowers the lender's risk and raises yours, because you carry the refinancing. Neither is right in the abstract. A business that expects to grow and deleverage can live with light amortization and a balloon; a business with steady, modest cash flow is usually better served by a loan that repays itself.
The comparison is worth making on the company's own figures: payments, coverage against historical and projected results, and the balance left at maturity, for each shape on offer. Loan term vs amortization period sets out the trade in general. The financing model is one of the four parts of Midas Partners's lender package, alongside the lender presentation, blind teaser and underwriting memo.
Common questions
- Can a loan have a 20-year amortization and a 5-year maturity?
- Yes, and it is common on conventional real estate loans. Payments are calculated as if the loan ran 20 years, but whatever is still owed after five years is due in one balloon payment.
- Do private credit loans have balloons?
- Usually. Unitranche and other private credit term loans commonly carry light scheduled amortization, so most of the principal is due at maturity and is expected to be refinanced or repaid from a sale. Bank term loans are more often fully or mostly amortizing.
- Is amortization in EBITDA the same as loan amortization?
- No. EBITDA's amortization is the accounting write-down of intangible assets, a non-cash expense that lenders add back. Loan amortization is the principal you repay, which lenders count as part of debt service.
- Which matters more for qualifying: rate or amortization?
- Often amortization. On a schedule of ten years or less, principal is usually the larger part of annual debt service, so a longer schedule raises coverage more than a modest rate difference does.
- What happens if I cannot pay the balloon at maturity?
- Failing to repay at maturity is a payment default. Lenders sometimes extend a maturing loan, usually on new terms, but you should not count on it; start refinancing well before the date.