Short answer
An interest-only period is the first stretch of a venture debt loan, typically 6–18 months, when the company pays interest but no capital. It keeps cash in the business while it grows towards its next milestone. When the period ends, repayments step up because the company starts repaying capital as well as interest, usually in equal instalments until the loan matures.
Key facts
- Typical length: 6–18 months
- During it: interest only, on the amount drawn
- After it: capital + interest, monthly or quarterly (amortisation)
- Repayments can more than double when it ends
Why do venture debt loans start interest-only?
Venture-backed companies borrow to grow, not to fund existing profits. An interest-only period lets the money go into hiring, product and sales before repayments start. Ideally, by the time capital repayments begin, the company is closer to breakeven or has raised its next round.
How long does an interest-only period last?
Most run 6–18 months. The length is negotiated: a longer period costs more in total interest but gives more breathing room. Some agreements extend the interest-only period automatically if the company hits a milestone, such as a revenue target or a new equity round.
What happens when it ends?
The loan starts to amortise: each month or quarter, depending on the agreement, the company repays part of the capital plus interest on what remains. Payments step up sharply.
Illustrative example. A company borrows £2m over 36 months at 12% a year, with 12 months interest-only and monthly repayments. During the first year it pays about £20,000 a month in interest. From month 13 it repays the £2m over 24 months: roughly £94,000 a month in equal instalments of capital and interest, nearly five times the interest-only payment.
How to plan for the step-up
- Model the repayment schedule in your forecast from day one, not just the interest-only months.
- Check that the forecast shows cash covering repayments even if the next round is six months late.
- Know what your agreement allows: some lenders will discuss extending the interest-only period if a round is close.
Related: Venture Debt →
Related questions
Do I pay interest on the full facility during the interest-only period?
Usually only on the amount drawn, though some lenders charge a small fee on undrawn amounts.
Can the interest-only period be extended?
Sometimes, either by a milestone built into the agreement or by agreement with the lender.