Debt Fund Raise · Question

How does a moratorium period work in a term loan?

Short answer

A moratorium is an initial stretch of a term loan during which you do not repay principal, so a new plant or project can be built and start earning first. Interest usually still accrues during this stretch, and lenders may ask you to pay it or add it to the loan. Repayment of principal begins only once the moratorium ends.

In more detail

Imagine borrowing to build a factory. Until construction is finished, machines are installed and sales begin, the unit earns nothing. Asking you to repay instalments in that gap would force you to find the money elsewhere. The moratorium solves this by pushing principal repayment to a later date, set by the lender based on the project schedule.

Interest is where borrowers are often surprised. In many project loans the interest during construction is treated as part of the project cost and funded through the loan, which is why the loan balance can grow before repayment starts. In other arrangements you pay interest as it falls due. Which applies is stated in the sanction terms, so read that section carefully.

When the moratorium ends, the repayment schedule starts in earnest. Because the same principal is now spread over fewer remaining periods, instalments are larger than they would have been with no holiday. The total interest paid over the life of the loan is also higher, since principal stays outstanding longer.

Lenders generally link the moratorium to realistic project timelines. If the project is delayed, the length may need to be revisited, and lenders may treat such requests cautiously, so raise any delay early and with reasons rather than at the last moment.

Do not assume it extends automatically

A moratorium is a term of the sanction, not a cushion you can stretch. Missing a due date once it ends is treated like any other default.

Key points

A moratorium defers principal repayment while a project is built or ramps up.
Interest usually keeps accruing and may be paid or capitalised into the loan.
Instalments after the moratorium are larger because fewer periods remain.
Total interest cost rises with a longer moratorium period.
Delays should be discussed with the lender early, not at the due date.

Who this applies to

Promoters borrowing for a new plant, warehouse or expansion.
Finance heads checking sanction terms on a project loan.
First-time borrowers confused by the gap before repayments start.

Last reviewed 3 October 2026

This answer is general information, not advice on your particular case. Terms, eligibility, and requirements change, so check the current position with the relevant institution or authority. Lalsar Holdings' financial advisory and financing work is advisory and facilitation only. Lalsar Holdings is not a lender. Sanction and disbursement of any credit facility is at the sole discretion of the partner bank, NBFC, or financial institution involved, subject to their own eligibility criteria and credit policy.