How balloon payments work (and should you use one?)

Balloon payments are a popular loan structure for businesses that want to keep their monthly repayments low—especially when financing vehicles, equipment, or other depreciating items. It's important to know that while they can offer short-term cash flow benefits, they also come with a large lump sum at the end of the business loan term that you’ll need to plan for.

In this guide, we’ll break down how balloon payments work, the key advantages and drawbacks, and what your options are when the final payment is due—so you can decide if it’s the right fit for your SME.

What is a balloon payment?

A balloon payment is a lump-sum payment that’s due at the end of a loan term—commonly used in equipment finance, business car loans, and chattel mortgages. This payment is typically significantly larger than prior ones, helping business owners maintain financial flexibility and cover the balloon amount with future earnings.

Let's say a business takes out a $50,000 loan to buy a piece of equipment, with a 5-year term and a $15,000 balloon at the end. Instead of paying off the full $50,000 evenly, the business makes smaller monthly repayments based on $35,000, then pays the $15,000 balloon at once at the end of the term.

What are the benefits of getting a balloon payment?

A balloon payment structure offers several financial advantages for business owners:

• It reduces your monthly repayments, freeing up short-term cash flow
• You can use the savings from the lower repayments to invest in other areas of the business
• There's flexibility at the end of the term, and you typically have a few options when the balloon payment is due (more on this later)
• Balloon payments are useful for depreciating assets, as they align with asset usage

What are the risks of having a balloon payment on a loan?

Balloon payments can be a smart strategy, but they’re not without risks:

• There's a large lump sum payment at the end, which could strain your finances if you're not prepared to cover it
• Some lenders may charge higher interest rates on balloon loans, though this isn’t always the case—so be sure to compare offers carefully
• There's a risk of negative equity, meaning the asset may be worth less than the balloon amount when it’s time to sell or trade it in

When is a balloon payment a good idea?

In a nutshell, a balloon payment can be a smart move if you're confident in your future cash flow and want to lower your short-term repayment burden. It may suit your business if:

• You're in a growth phase and expect cash flow to improve (even if it is tight now)
• You're planning on selling or trading in the asset before the balloon is due (because you can use the sale proceeds to cover the final payment)
• You need to reduce monthly payments and have the flexibility to reinvest in other areas of the business

Are balloon payments more common in certain industries?

Yes, balloon payments are more common in industries where cash flow varies or assets depreciate over time:

• Business owners seeking equipment or car finance—such as tradies, logistics companies, or fleet operators
• Seasonal and project-based businesses—think construction, retail, agriculture, and hospitality‍
• Start-ups and expanding businesses

What are your options at the end of the business loan?

When a balloon payment is due, you’re not locked into a single path. Depending on your financial situation and business goals, you may have the option to:

Pay off the balloon in full

If you’ve saved up for it during the loan term, want to own the asset outright with no further debt, and had a strong cash flow period, a suitable option is to make the final payment in one go.

Doing so does require a large upfront cash outlay, so you want to make sure you're prepared to take it on, or your finances could suffer.

Refinance or roll over the balloon

If you can't pay the full amount upfront, don't worry, there are a few alternative routes. One is to refinance the balloon payment into a new loan. This means you take out another loan in order to pay for the balloon amount, with repayments starting again, often over a new term.

There are some risks to watch for here—particularly the fact that you'll extend your overall debt period and could end up paying more in interest over time.

Trade in or sell the asset

If you no longer need the item (or are planning to lease or finance a new one), it may make sense to sell it or trade it in and use the proceeds to pay off the balloon.

This is common for vehicles or equipment that depreciate over time and can be a practical way to transition into new assets without tapping into working capital.

Return the asset

In some instances, particularly with leases or novated leases, you may be able to return the asset to the lender instead of paying the balloon. Keep in mind that this option isn't always available, and when it is, it is typically specified in the contract.

In this case, you won't own the asset, and you may still owe something if the asset’s market value is less than expected. Plus, you may incur wear-and-tear or usage penalties.

Does a balloon loan affect my credit score?

A balloon loan can impact your business's credit score, both positively and negatively. If you make your repayments on time and pay or refinance the balloon without default, your credit score may improve.

On the other hand, missing repayments, failing to manage the balloon payment, or defaulting on the business loan can negatively impact your score.

Can I negotiate a balloon payment with my lender?

Balloon payments are typically negotiable. Your lender may provide options for adjusting the balloon amount, the term length, or the final payment alternatives. It’s advisable to communicate your financial position, asset usage, and exit strategy from the start to customise the loan to fit your requirements.

What is the minimum amount for a balloon payment?

There isn’t a standard minimum amount applicable to all lenders; however, balloon payments usually fall between 20% and 50% of the overall loan amount. The specific percentage will vary based on the lender’s guidelines, the asset being financed, and your credit profile.

Can I make extra payments to reduce a balloon payment?

In many instances, yes—you can make extra or early payments to lower the final balloon amount.

However, some lenders might impose restrictions or fees, so it’s essential to verify this when establishing the loan. Paying down the balloon early can alleviate financial pressure at the end of the term and reduce your total interest costs.