Balloon payment

Definition

Principal due at the end of a loan its payments did not repay.

Why It Matters

An SBA 7(a) loan avoids one by amortizing fully, so a balloon on a bank or seller note is a date you must be ready to refinance or pay off. That date is a real risk to underwrite, because refinancing depends on the business performing and on credit conditions years from now, neither of which you control. Model whether the company could carry a replacement loan at a higher rate, and treat a near-term balloon as a reason to negotiate the term rather than a detail buried in the note.

In numbers: A $900k note amortized over ten years but due in five still owes about $565k at maturity, because early payments are mostly interest; that $565k is the balloon, and the plan for it is part of the deal.