TL;DR: An interest-only period is a phase of a loan during which the borrower pays only interest, with no principal repayment. It keeps early monthly payments low and preserves cash for the business. The period may cover part of the term or, in some structures, the entire term.
During an interest-only period, the borrower services interest on the drawn balance but does not pay down principal. The outstanding balance stays flat. This lowers monthly cash outflow compared with an amortising loan, where each payment also chips away at principal from the start.
In venture debt, an interest-only period is often used at the beginning of a facility, typically 6 to 18 months, after which the loan begins to amortise. The early relief gives a company room to deploy capital into growth before principal payments begin.
Some facilities are interest-only for their entire term. In that case, no principal is repaid until maturity, when the full balance comes due in a single payment, a structure known as a bullet. Full-term interest-only maximises the cash a company keeps working in the business during the term, in exchange for concentrating repayment at the end.
Flow Capital provides full interest-only facilities over a 2-to-3-year term with bullet repayment at maturity and no amortisation. Interest is paid monthly at a fixed or floating rate and may include a PIK component. The full principal remains available to the business throughout the term and is repaid at maturity, commonly through refinancing, a new equity round, an exit, or accumulated cash flow.
What happens when the interest-only period ends? In a partial interest-only loan, the facility begins to amortise and monthly payments rise to include principal. In a full-term interest-only loan, the principal is repaid as a bullet at maturity.
Is interest-only riskier? It concentrates repayment later rather than spreading it out, so it requires planning for the eventual principal repayment from the outset. The benefit is significantly more cash available for growth during the term.
Related terms: Bullet Loan · Amortisation · Venture Debt · Cash Runway
