Advantages of Balloon Loan for Seller Financing?

by a searcher from Stanford University

3 years ago

I've been looking at balloon debt for seller financing, but I don't see a strong benefit IF one also uses an SBA loan so I wanted to quickly check with the community here in case anyone has done differently. 

With an SBA loan for bank debt, you are restricted from paying the seller note until Year 3. From that point on, you could do a straight-line payment term over how many years you negotiated with the seller. However, if you don't have pre-payment penalties, then you have the flexibility to choose when you want to completely pay off the loan. You essentially have a balloon debt, just with the added flexibility of choosing when to pay.

Sure, you may be able to get lower monthly payments with balloon debt, but it seems the majority of deals have the balloon come due in Year 5, thus, you're really only realizing that benefit in Years 3 and 4. 

What am I missing?

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3 comments

searcher from University of Vermont

Depending upon the interest rate for the balloon debt, which may be very low, if anything, it's almost always better to pay as far out into the future as possible. Theoretically, a dollar is worth more today in your pocket than tomorrow.

3 years ago | like reply | 1 like

searcher from IESE Business School

Unless requiring a balloon payment makes you concede on other parts of the negotiation (and assuming you have no pre-payment penalties), I think the flexibility is good to have. While not necessarily a high probability, you never know what will happen in Year 3 and 4. Also, I'm not sure if the SBA restriction is a hard one or one required by the specific bank. Moreover, you could always try to negotiate a longer term on the seller note than 5 years.

3 years ago | like reply | 0 likes

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