Bullet loan (repayment of the loan in a single payment at maturity)

This page was last modified on 20-09-2013

The objective of a bullet loan is to finance long-term investments in movable or immovable assets using a medium to long-term bank loan, thereby allowing for the creation, improvement or development of a business activity.

It differs from a traditional investment loan in that the borrower only pays the interest over the period of the loan and repays the full principal amount at maturity. In principle there are therefore no interim principal repayments.

It is possible to combine a bullet loan with a standard investment loan with regular repayments. This combination means that a higher amount can be borrowed, while bearing in mind the company’s ability to repay.

Objective: it is used to finance the acquisition of land, industrial buildings, storage buildings, production tools, machinery, vehicles and intangible assets (such as business assets, patents, licences, etc.).

Who is concerned

Available to the self-employed and any type of business, a bullet loan applies to:

  • those that do not have sufficient resources of their own to finance an investment, but who will have some capital in the future (sale of a property or business assets, capital to inject following the payment of a life insurance policy of a partner/shareholder, etc.);
  • growing companies for which the amount of the investment is too large compared to their current ability to repay but whose forecast budget anticipates the generation of significant profits after a few years, allowing the loan requested to be repaid in a lump sum (single payment).

Prerequisites

Documentation or description of the business

  • copy of the company’s articles of association;
  • group structure if the company is part of a more complex group;
  • last 3 audited balance sheets of the borrower and, if applicable, the latest available trial balance;
  • order book (where applicable);
  • list of customers and their relative contribution to turnover;
  • list of suppliers.
  • forecast balance sheet or business plan in the case of a new business activity or a major expansion plan.

Presentation of the project

  • detailed description (including figures) of the planned investment and, where applicable, a market study;
  • financing plan;
  • calculation of feasibility and return and calculation of the breakeven point;
  • appendices:
    • land: preliminary sale agreement, cadastral map, building permit;
    • building: preliminary sale agreement, construction plan, building permit, specifications, quotes, photos (if any), lease, etc.;
    • machinery: list of investments, replacement of existing equipment, additional equipment, purchase orders or invoices;
    • company: preliminary sale agreement, due diligence, audited accounts, etc.;

Guarantees

The guarantee required by all banks before granting a loan is the solvency of the borrower and the profitability of the project to be financed. In addition, the bank will inform the beneficiary of the bullet loan of the tangible, personal or moral guarantees deemed necessary to guarantee the loan granted.

The most common guarantees requested for a bullet loan are:

  • mortgage registration;
  • mortgage mandate;
  • pledge on business assets;
  • assignment of rental income;
  • assignment of a fire insurance policy (for a building);
  • surety of the parent company or of the partners/shareholders;
  • various moral guarantees.

When the partners/shareholders of a business have to stand surety for the company, the bank should be provided with the details of their financial situation.

How to proceed

Duration and amount

Duration

  • medium to long-term;
  • up to 20 years (depending on the amortisation period of the asset to be financed).

Amount

As a general rule, financing of 70 % to 80 % of the value to be financed.

Interest rate

  • interest rate depending on the quality of the client, the project and the guarantees offered;
  • fixed or variable rate;

Repayment

Balloon payment at maturity of the loan and monthly, quarterly, semi-annual or annual interest payments.

Set-up times

The reviewing and processing times depend on the complexity, size and urgency of the case.

Advantages, disadvantages and risks

Advantages

  • freeing up of resources and reduction of financial charges (therefore available for other projects) throughout the period of the loan;
  • financing of sustained growth allowing the business to generate significant recurring profits in the future and the loan to be repaid in a lump sum at maturity;
  • planning facilitated as the interest expense is the same throughout the period of the loan (in the case of a fixed rate);
  • debit interest is tax deductible, allowing the taxable amount to be reduced and therefore less tax to be paid.

Disadvantages

  • Interest rate
    • fixed rate: early repayment penalty to be paid;
    • variable rate: no protection against the risk of interest rate increases;
  • guarantees may need to be provided to the bank;
  • the principal amount is to be repaid in full at maturity of the loan – savings therefore have to be made throughout the period of the loan.

Risks

Risk of the company becoming over-indebted if the profitability analysis was not carried out meticulously.

Full repayment of the principal amount at maturity and thus risk of not being able to repay said amount if the triggering event does not take place as expected.

Example

Purpose

Building

Machinery

Expected life

20 years 7 years

Investment amount

2,000,000 500,000

Amount of investment loan

1,600,000 400,000

Duration of loan

15 years 5 years

Indicative fixed interest rate

6.00 % 7.00 %

Annual interest

96,000 28,000

Balloon payment

1,600,000 400,000