Bullet Transaction

A loan with 100% of the principal paid upon maturity, and interest-only payments during the life of the loan.

Steve wanted to buy his queen (and fiancée), Cathy, a McDonald’s franchise that cost $200,000. He didn’t have enough money, though, and knew that the location would need to sell a lot of burgers before he’d be able to repay the money he’d have to borrow.

Being a Shmoop grad, he also knew that once that breakeven point was reached, the free cash flow would scale quickly. In need of a means of financing that would buy him the time required to ramp up the business, he entered into a bullet transaction with a 5% interest rate over 10 years. At just $10,000 per year of interest, he was able to service the loan, put aside money to pay off the entire $200,000 balance in Year 10, and save money to buy himself a snazzy Ford Mustang. That's a whole lot o' chicken nuggets.