A balloon payment is one structure to consider for promissory note repayment. Read about the pros and cons of this type of loan, so you can make the choice that makes the most sense for your business.
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updated September 1, 2023 · 2min read
Promissory notes with balloon payments are a financing option you may be considering for your business. These types of loans may be secured by collateral or not, but they always end their repayment schedule with a big payment, known as the balloon payment. Reviewing the pros and cons of this scheme can help you make a decision about what may be best for your business.
A promissory note is a loan agreement between a lender and a borrower. The lender provides money to the borrower, who promises to pay it back.
Some promissory notes are secured, which means that collateral is placed against the loan (for example, a car loan has the car as collateral). With a secured note, a piece of property serves as security for the loan—your business could use a piece of equipment as collateral. If the borrower does not pay the loan back, the lender can take possession of the property.
Promissory notes can also be unsecured, which means there is no collateral backing the loan.
Conventional loans are set up so that the borrower makes regular payments throughout the life of the loan, made up of interest and principal (amortized to create equal payments). When the final payment is made, the entire loan is paid off.
When a loan has a balloon payment, it means that the regular payments are generally made up of interest only—which makes the payments smaller—and the very last balloon payment on the loan is the entire principal of the loan.
Balloon payment promissory notes do have some advantages to consider:
There also are drawbacks to balloon payment promissory notes that should be considered:
When your business makes the balloon payment on your loan, it is the final payment and the loan will be completely satisfied. The lender should give you a final payment letter or final payment release form, showing that the loan has been paid.
Promissory notes with balloon payments can be a good source of funding for your business if you carefully weigh the pros and cons. Be sure to consider a variety of options before choosing funding for your venture.
by Brette Sember, J.D.
Brette Sember, J.D., practiced law in New York, including divorce, mediation, family law, adoption, probate and estat...
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