Amortisation has two related but distinct meanings in a business context. In lending, it refers to the process of paying off a loan balance through regular scheduled payments, each of which covers both interest for the period and a portion of the original principal. By the end of the agreed term the balance is fully repaid. In accounting, amortisation describes the systematic writing-down of an intangible asset (such as a patent or licence) over its useful life — the intangible equivalent of depreciation for physical assets.
How an amortising loan works
With a fully amortising loan, each instalment is calculated so that the outstanding balance decreases smoothly to zero at maturity. In the early payments, a larger share goes towards interest (because the balance is higher); as the balance falls, the interest component shrinks and the principal repayment component grows. This pattern is sometimes shown in a repayment schedule or amortisation table, which sets out the breakdown of every payment over the term.
Amortising loans versus interest-only arrangements
Some business facilities are structured on an interest-only basis, where periodic payments cover only the interest accrued and the full principal is repaid in a lump sum (a bullet payment) at maturity. Interest-only arrangements can ease monthly cash flow but require the business to be confident it will have the capital or refinancing in place at the end of the term. A Credicorp Business Loan is a fixed-sum facility over a short fixed term; the repayment structure for any specific facility is set out in the agreement.
Amortisation of intangible assets
Under UK GAAP and IFRS, intangible assets with a finite useful life — goodwill acquired in a business combination, customer lists, software licences — must be amortised over that life. The annual amortisation charge reduces reported profit, which is why EBITDA (which adds back both depreciation and amortisation) is often a preferred measure of operating cash generation for lending purposes.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: What is a financial covenant in a business loan?, What is a facility agreement in business finance?.