Balloon payment: what it means for business borrowing

A balloon payment is a larger final payment at the end of a finance agreement. Part of the amount borrowed is deferred to the end, so the monthly instalments are lower than on a fully repaying agreement over the same term. It is common on business hire purchase and some commercial loans.

01An example

A haulier finances a £120,000 tractor unit on hire purchase over four years. Without a balloon, the whole £120,000 (less any deposit) is repaid in equal instalments. With a £30,000 balloon, only £90,000 of capital is spread across the monthly payments, so each instalment is lower, and £30,000 is due with the final payment. Interest is charged on the full balance outstanding throughout, so a balloon usually increases the total interest paid.

02Why businesses choose one

• Lower monthly payments while the asset is earning.
• A good fit for assets that hold their value, where the balloon can be met by selling or part-exchanging the asset.
• Cash flow that is expected to grow over the term.

03The risks

• You owe the balloon whatever the asset is worth at the end. If the residual value is lower than expected, you make up the gap.
• Total interest is usually higher than without a balloon.
• If you plan to refinance the balloon, that depends on lenders' appetite at the time.

04How it affects borrowing

Lenders set balloons with the asset's expected value in mind, and some cap them. Plan from day one how you will pay it: from cash, by selling the asset, or by refinancing it with asset refinance. Our business hire purchase page explains balloons in context, and the asset finance calculator shows how a balloon changes the monthly cost. Any broker fee depends on the lender, with nothing to pay upfront.

05Related terms

• Residual value
• Hire purchase
• Finance lease

06Sources

• GOV.UK: Annual Investment Allowance (tax relief on equipment bought on HP)