Balloon Payment
What It Means
A Balloon Payment refers to a large payment due at the end of a loan term.
Why It’s Important
Some Buyers may seek to include Seller Financing with Balloon Payment terms in the financing structure for an acquisition. Often, the value of these Balloon Payments represent most or all of the original principal balance of the loan. Buyers seek these terms in the hopes that they will be able to cover the cost of these Balloon Payments through operational cash flows or Recapitalize the debt in the future.
Balloon Payment terms are common, but they can be risky. If the business fails to grow or generate the cash flows required to cover the Balloon Payment, or if the capital markets dry up before the Buyer can restructure the debt, the Buyer may find themselves in default on the loan and unable to repay the remaining balance.