What an interest-only period does to the later loan payments

An interest-only period postpones principal payments. Ask whether the lender then increases installments, extends the repayment term, leaves a balloon balance or combines those approaches. The phrase six months interest only does not answer that question. Compare the complete schedule through the contractual maturity before judging the first payment.

BDC describes an initial interest-only period as a feature some lenders offer and gives an example in which amortization extends. That is one possible structure. Your proposed loan may keep its original maturity, leaving fewer months to repay the same principal. Have the lender confirm which arrangement its illustration assumes.

Assume a hypothetical $240,000 loan at a nominal annual rate of 12%, calculated as 1% each month. Payments occur at month-end, the rate stays constant and the loan finishes after 24 months. Ignore fees and taxes. Fully amortizing from the start requires approximately $11,297.63 each month, with the final payment adjusted for rounding.

If the first six months are interest only, each costs $2,400 and the principal remains $240,000. Repaying that principal over the remaining 18 months requires approximately $14,635.69 monthly. The deferral provides about $53,386 of cash relief in the first six months but raises the later monthly payment by about $3,338.

Identify what the $53,386 would fund and when that spending is expected to produce cash. A delayed opening, customer implementation or equipment installation can create an early gap. The decision needs evidence that the proposed deferral covers the gap and that repayment capacity improves before the higher installment begins.

Avoid treating the lower initial payment as a permanent reduction in the operating cost base. Show the deferral separately from ordinary operating cash generation. If management uses all the relief for recurring hiring, those wages may continue into the same months in which principal payments increase.

Measure the balance immediately before the first higher payment. A forecast that ends after month six can make the deferral look successful while omitting the obligation it created. Carry the model far enough to include a full seasonal cycle after amortization begins.

Move the expected cash benefit later while keeping the loan's payment dates unchanged. Calculate the additional reserve or spending reduction needed. Do not automatically postpone the lender payment whenever the operating project slips; that would assume a concession the lender has not granted.

If another offer extends maturity instead, model that schedule separately. An unchanged later installment may be attractive for near-term liquidity while keeping debt outstanding longer. Compare interest, final repayment date and any refinancing exposure, using equal net proceeds. There is no single interest-only advantage independent of what follows it.

Require a payment calendar identifying the last interest-only date, first principal payment, any rate reset and final maturity. Ask the finance owner to report progress toward the cash benefit before that transition. Choose an earlier review date while there is still time to adjust discretionary spending.

Record why the company accepted the additional interest or later obligation. Have counsel review the contractual deferral and any conditions that can end it. The approval should establish how the business will service the post-deferral loan, as well as what it intends to accomplish with the initial relief.