Two loans with the same rate can be very different to live with. One may require principal every month; another may let interest accrue until maturity. One may be repayable at any time; another may charge a premium for early repayment. These are the terms that shape a borrower’s cash flow and a lender’s return. Our strategy page describes them as structural creativity: “Interest reserves, earn-outs or payment-in-kind components can be shaped to a borrower’s real cash flow, inside a senior secured structure.” This entry explains how each works in the market generally.
Amortization
Amortization is the scheduled repayment of principal over the life of the loan.
| Pattern | How it works | Where it is common |
|---|---|---|
| Interest-only | No scheduled principal; the full balance is due at maturity (a bullet) | Short-term bridge and construction loans; NAV loans |
| Fixed amortization | A set percentage of principal paid each quarter or month | Corporate term loans; equipment loans |
| Mortgage-style | Level payments of principal and interest over an assumed schedule longer than the term | Stabilized real estate |
| Cash sweep | A share of excess cash flow repays principal | Royalty and contract monetization; turnaround loans |
| Collateral-driven | Principal repaid as collateral is sold or collected | ABL revolvers; lender finance; condominium inventory |
Short-term transitional loans, such as most of the loans we make with terms of 12–36 months, are often interest-only, because the plan is to repay from a sale or refinancing rather than from operating cash flow. Corporate term loans more often amortize, which reduces the balance as the business pays down debt from earnings. Equipment loans typically amortize faster than the asset depreciates, so the collateral cushion widens over time.
Cash sweeps
A sweep requires a share of excess cash flow, or of specific receipts such as asset sales, insurance proceeds or royalty collections, to prepay the loan. In royalty monetization, the sweep can be 100% of collections until the loan is repaid. Project Meridian is a case study.
Prepayment and call protection
A borrower usually wants freedom to repay early, for example after a sale or a cheaper refinancing. A lender that has spent time and money on origination, and expected a certain return, wants to be compensated if that return is cut short. Call protection balances the two.
| Form | How it works |
|---|---|
| Lockout | No prepayment at all for an initial period; rare in short-term private lending |
| Prepayment premium (soft call) | A declining premium, such as 2% in year one and 1% in year two, then none |
| Minimum interest or minimum multiple | The lender earns at least a set number of months of interest, or a set multiple of principal, whenever the loan is repaid |
| Make-whole | The present value of the interest the lender would have earned to a set date, discounted at a Treasury-based rate |
| Exit fee | A fee on repayment whenever it occurs, which works as a floor on return rather than a penalty |
Terms are set loan by loan; none of the examples above is a Caldrion standard. Common exceptions that borrowers negotiate include prepayment from casualty or condemnation proceeds, a sale to an unaffiliated buyer after a certain date, and partial releases of collateral for set release prices.
Illustrative arithmetic: minimum interest
The following is illustrative arithmetic only. A $15M loan at 11.00% has a 12-month minimum interest provision and is repaid after 7 months. Interest paid to date is about $962,500 ($15M × 11% × 7 ÷ 12). The minimum is $1,650,000 ($15M × 11%). On repayment, the borrower pays the shortfall of about $687,500.
Payment-in-kind (PIK) interest
PIK interest is not paid in cash; it is added to the principal and accrues interest itself. It is useful when the borrower’s cash flow is temporarily weak, such as during a turnaround, a lease-up or a construction period, and the lender is comfortable that the collateral and the exit will cover the growing balance.
Common forms:
- Full PIK: all interest accrues.
- Split coupon: part cash, part PIK, for example 8% cash and 4% PIK.
- PIK toggle: the borrower may elect PIK for a limited number of periods, often at a higher rate.
Illustrative arithmetic: PIK accrual
The following is illustrative arithmetic only. A $10M loan carries 4.00% PIK interest compounding quarterly for two years, alongside cash interest.
| Quarter end | PIK added | Principal balance |
|---|---|---|
| Q1 | $100,000 | $10,100,000 |
| Q2 | $101,000 | $10,201,000 |
| Q4 | $103,030 (approx.) | $10,406,040 |
| Q8 | $107,214 (approx.) | $10,828,567 |
After two years the balance is about 8.3% larger than the original advance. The lender must underwrite the loan to that larger balance: a loan at 60% loan-to-value on day one can be at 65% at maturity if the collateral value stays flat. That is why PIK belongs only where there is a clear reason and real collateral coverage. Project Anvil is a case study of a turnaround term loan with PIK.
Interest reserves
An interest reserve is part of the loan, held back at closing, that pays interest during a period when the asset does not yet produce enough income, typically during construction or lease-up. The reserve is sized to the business plan with a margin for delay.
Illustrative arithmetic: sizing an interest reserve
The following is illustrative arithmetic only. A $25M bridge loan at 10.50% funds a property that will generate $1.0M of net operating income in year one and $2.2M in year two, against annual interest of about $2.6M.
| Year | Interest | NOI available | Shortfall |
|---|---|---|---|
| 1 | $2.63M | $1.00M | $1.63M |
| 2 | $2.63M | $2.20M | $0.43M |
| Total | — | — | $2.06M |
A lender might size the reserve at the total shortfall plus a contingency for slower lease-up, and cover any further gap with a carry guarantee. A reserve funded from loan proceeds increases the loan balance, so it counts against loan-to-cost; see Leverage: loan-to-value, loan-to-cost and debt multiples.
Extensions
Our published term is 12–36 months, with extension options. In the market generally, extension options are subject to conditions such as no default, a minimum debt yield or debt service coverage, a maximum loan-to-value, renewal of any rate cap and payment of an extension fee. Whether those conditions are objective tests or require lender approval is one of the most important points in a term sheet.
Choosing the right structure
- If repayment comes from a sale or refinancing, interest-only with a reserve is common.
- If repayment comes from cash flow, amortization or a sweep aligns the loan with that cash.
- If cash flow is temporarily weak, PIK or a reserve can bridge the gap, provided the collateral cushion survives the accrual.
- If early repayment is likely, negotiate the prepayment terms as hard as the rate.
See also Pricing, fees and OID and Coverage and liquidity tests. For the rest of the chapter, see the overview of loan terms and documentation. To discuss a structure, contact us.
This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.