Bullet loans have gained popularity in recent years. In reality, market demands require tools adapted to real needs. For this reason, alternative business financing solutions are increasingly being used.
In this post we share with you what bullet loans consist of, what their main characteristics are and in which cases they are useful.
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What is a bullet loan?
A bullet loan is a type of financing in which the borrower amortizes interest in regular installments and the loaned capital is returned on the maturity date. In other words, they are loans that apply an American amortization system, just like bonds.
Bullet loans are also known as “ballon loans” or “maturity loans.”
As you can see, the difference with respect to a traditional loan is that the fees are significantly reduced, but it is also necessary to make a large disbursement at the end of the life of the loan.
In Spain, loans are generally repaid through the French amortization system, which makes a calculation so that the installments are constant throughout the life of the loan, although the part destined to amortize interest and capital varies in each installment.
Operation and characteristics of bullet loans
Basically, a bullet loan requires a contracting process similar to that of any other type of financing (application, negotiation of conditions, prior approval, income verification, study of the credit situation and solvency, etc.).
However, they are characterized by providing greater flexibility, since it is possible to adapt the conditions to the financial capabilities of the company; although this issue also depends on the policies established by the lender.
One of its greatest advantages is the possibility of improving the company's liquidity position. Financial burdens are reduced while the loan is active because it is not necessary to repay the principal (interest only). It is how to get a grace period that extends throughout the duration of the loan.
However, there is also the risk that, when maturity comes, the company will not have the necessary capital, since this is when a considerable disbursement is made. However, some bullet loans allow refinancing when the term runs out.
As a general rule, this type of loan has a short repayment period (between 1 and 8 years). On the one hand, this is an advantage, since in this way the total interest cost is reduced; In addition, the risk is reduced and this leads to obtaining financing on better conditions.
However, a shorter term also requires accumulating the capital necessary for its repayment sooner.
When are they convenient?
Due to their amortization system, bullet loans can be used in the field of business finance to finance acquisitions and entrepreneurial projects, with the expectation that they will begin to generate cash flows in the short or medium term.
In this way, the company gains the time necessary to obtain the necessary capital and amortize the principal through the returns generated by the project itself. The funds generated can even be used for other investments while the term until maturity is not exhausted.
However, the company must have sufficient liquidity to pay the interest while the initiative starts and take into consideration that this type of product usually has a shorter repayment period than other categories of loans.
It is necessary to find an entity that offers a bullet loan adaptable to your needs, as well as pay close attention to the terms and conditions expressed in the contract. At Alter Finance we are specialists in alternative financing for companies and we can help you in this regard.