Amortization schedule of a lending crowdfunding loan: how it works and which one to choose

Each loan has an amortization schedule: a program that determines how and when the principal received is to be repaid, together with accrued interest. This also applies to the lending crowdfunding, where the company borrows money from a plurality of investors through an online platform. 

The presence of a plurality of lenders does not change the rationale for the amortization plan, which simply becomes one more element to be properly communicated to a lay audience. 

The amortization schedule is a crucial choice because it affects the internal cash flow management: defines future maturities, payment weight, and consistency between the financed project and the company's ability to generate cash.

The choice between a principal repayment at maturity, a phased repayment, or an intermediate structure depends on the type of project, the duration of the financing, and the time frame in which the company expects to collect the resources needed for repayment. 

In this article we see what is the amortization schedule of a loan, what are the main options available, How repayment of principal and disbursement of interest work operationally in lending crowdfunding and which solution may be most suitable depending on the type of business project. 

What is the amortization schedule 

The amortization schedule Is the repayment schedule for a loan. It indicates how the company agrees to repay the amount received and accrued interest. 

It is a paper that answers the following questions:

• When do the payments start?
• How often are they carried out?
• Is the capital paid back little by little or all at the end?
• Is the interest paid during the loan or at maturity?

In addition, it serves the company to answer another question: How much does each payment weigh on cash flows? Therefore, the amortization schedule is not a technical detail to be left in the background. It is an essential part of the financial structure of the loan transaction. 

Principal, interest and term of the loan 

The main components of the amortization schedule are principal, interest and term.

The capital is the amount received as a loan, in our case through a lending crowdfunding campaign. It corresponds, of course, to the amount to be repaid to investors: each person will have to be repaid the amount he or she has contributed, so the individual repayments are all different.

The interest rate is the remuneration paid to those who lend money to the enterprise and is expressed on an annual basis. Thus, the total interest to be paid will depend on the rate and term of the loan.

La duration of the operation is chosen by the company based on its liquidity needs and the time required to develop the project financed with the loan. The longer the term, the more interest the loan accrues.

In lending crowdfunding, the duration is usually quite short: between 12 and 18 months.

The amortization schedule puts these elements together and turns them into an orderly sequence of maturities.

Why the amortization schedule is important for the company 

For the enterprise, the amortization schedule is first used to understand whether and how the loan is sustainable. 

Raising capital can provide oxygen for growth, finance a project, cover a temporary need or accelerate an investment. But each loan generates a future obligation. If repayment is not aligned with the company's cash flows, financing risks becoming a problem instead of a solution. 

A simple example: if a company takes out a loan to purchase a piece of machinery that will start generating revenue gradually, it might make sense to provide for a repayment spread over time. If, on the other hand, it finances an operation that will generate cash only eventually, a progressive repayment might be more difficult to sustain in the early stages. 

For this, Before launching a lending crowdfunding campaign., the company should be clear not only about the amount it wants to raise, but also where the resources to return it will come from. 

Moreover, the chosen plan must be clearly communicated to investors: it is a sign of seriousness and transparency and an important decision-making element in investment choices. Usually, however, this aspect of communication is taken care of by the platform, displaying the amortization plan on the campaign page.

The main options: bullet and amortizing amortization

The main options to choose from for the amortization schedule of a lending crowdfunding loan (but not limited to) are the bullet plan and the amortizing plan.

Bullet plan: principal repaid at maturity 

The bullet plan requires the company to return the capital received in a lump sum at the end of the loan. 

For interest, however, there are two possible ways:

1. Periodic payment of interest dues in monthly, quarterly, semi-annual installments
2. Payment of interest at maturity together with the principal.

Amortizing plan: principal repaid gradually 

The amortizing plan Instead, it stipulates that the principal is repaid gradually over the term of the loan. 

A frequency is established for installment payments, which include:

• an interest share
• a capital share

In varying proportions. 

You can also choose to change the Proportion of interest share to principal share over time, such as starting with installments consisting mostly of principal and increasing the interest portion as you go forward in the term of the transaction, or vice versa.

Intermediate solutions: pre-depreciation and hybrid structures 

In between bullet and amortizing, there can also be intermediate solutions designed to tailor repayment to the project's business cycle. 

One of the most common is the pre-depreciation, that is, an initial phase in which the company pays only the interest and does not yet repay the principal. At the end of this phase, two scenarios may open up.

In the former case, a gradual repayment of principal begins after the pre-amortization period. The structure then becomes similar to amortizing, but with a lighter initial phase for the enterprise.

In the second case, the principal is still repaid in full at maturity. In this situation, the structure coincides with one of the two bullet options: during the life of the loan, the company pays interest, while the principal is repaid in one final lump sum.

Pre-amortization can be useful when the project requires a start-up period before generating revenue. 

How loan repayment works operationally

When and if the lending crowdfunding campaign closes successfully, after due operational verification the capital raised is made available to the company, and from then on, the loan follows the planned repayment schedule.

The timing and modalities depend on the platform, internal procedures, and technical parties involved in payment processing. 

La crowdfunding platform does not directly manage money movements: except in rare cases, platforms are not licensed financial intermediaries, so they rely on Authorized entities or payment service providers. 

The company can decide to set up automated payments or authorize disbursement at each due date. 

Please note: Of course, the company does not have to manually make individual and all different transfers to each investor. At each due date the company pays (either automatically or manually) the total amount due, then the platform through its payment service takes care of the allocation among individual investors, based on the amount invested by each and tax compliance.

Each investor provides a checking account at the time of investment, and the company's deposits are routed directly to that checking account. In some cases, there is an intermediate step to a digital wallet, from which investors must then download the money to the c/c.

Which amortization plan to choose 

The choice of amortization plan should start with a simple question: When will the financed project generate the cash needed to repay the loan? 

When to choose the bullet plan

The bullet plan may be suitable when the financed project has a concentrated payback at the end of the operation. 

The company uses the capital raised to complete an activity that does not immediately generate enough cash to repay the loan in installments. Repayment of capital then occurs when the expected economic event occurs: a sale, collection, refinancing, closing of a job order, or other significant revenue. 

A case in point is the real estate transactions.

Other typical examples may include:

• Purchase and subsequent resale of an asset;
• cash advance in anticipation of an already scheduled collection;
• bridge financing Waiting for another source of capital;
• Operations with concentrated financial output at the conclusion of the project.

In all these cases, the bullet plan allows the company not to overburden cash flows during the execution phase of the project. Capital remains available for the project and is returned when the operation should have generated the necessary resources. 

For the company, the benefit is obvious: during the life of the loan, cash outflows are lighter, because the capital does not have to be repaid in installments. But the enterprise must ensure that it arrives at maturity with the liquidity needed to repay the entire principal.

When to choose amortizing plan

The amortizing plan may be more suitable when the financed project generates cash gradually. 

In this case, the company can sustain periodic payments from the flows produced by the investment. 

This structure can be consistent, for example, with projects such as:

• Purchase of machinery that increases production capacity;
• Investment in a new line of business;
• Commercial development with revenues distributed over time;
• Operational interventions that improve margins or volumes incrementally.

The main advantage is Avoid concentration of principal to be repaid in a single maturity. The company gradually reduces the debt and does not have to reach the end of the loan with the entire principal still to be repaid. 

The disadvantage is that cash outflows start earlier. This is why amortizing requires careful planning: the company must make sure that the expected flows are sufficient to support the installments without compressing operating liquidity too much. 

The most popular solution in lending crowdfunding

In lending crowdfunding, the most popular solution is the bullet plan, that is, repayment of principal in a lump sum at the maturity of the loan.

This prevalence depends on the nature of many transactions financed through lending crowdfunding. These are often Loans with relatively short terms, linked to circumscribed needs (bridging loans, refinancing, liquidity crisis) and/or Projects that include a final liquidity event: a sale, a collection, an enhancement or the completion of an intervention, a job order, a work or a production line.

This does not mean that the choice is forced. Choosing the repayment plan of a lending crowdfunding loan is part of the strategic campaign planning and must be consistent with the company's industrial plans.