Test a balloon loan against the cash available at maturity

A five-year amortization schedule does not necessarily give the business five years before repayment is due. A loan can calculate installments over that period while requiring the remaining principal after three years. Identify both dates and the payment due at maturity. The smaller installment is only one part of the commitment.

BDC's explanation of balloon loans describes structures that repay some principal during the term and structures that defer all principal until the end. It also discusses refinancing the final amount. Refinancing is a possible funding route, not evidence that a replacement lender will be available on acceptable terms.

Consider a hypothetical $500,000 loan at an unchanged nominal annual rate of 8%, using a monthly rate of 8% divided by 12. Assume month-end installments calculated over 60 months, with maturity immediately after the 36th regular payment. Ignore fees, taxes and rounding differences in the underlying calculation.

The regular installment is about $10,138.20. After 36 installments, approximately $224,161 of principal remains. That amount becomes the assumed balloon, in addition to the regular payment already included for month 36. Confirm the lender's presentation so the final installment is neither omitted nor counted twice.

A loan's remaining balance cannot be estimated by subtracting every installment from original principal because each installment includes interest. Use the contractual rate and payment dates, and reconcile the result to the lender's proposed schedule. A rate reset or extra principal payment requires a revised calculation.

Suppose the maturity forecast shows $150,000 in company cash after the final regular installment and all other forecast payments. If management needs $50,000 to continue operating, only $100,000 is available toward the balloon. Against $224,161 due, the unfunded amount is approximately $124,161. Calling the whole bank balance available would understate the gap.

Distinguish unrestricted cash from deposits, customer money or other amounts the business cannot use for this repayment. Identify any cash held in another entity that cannot simply be transferred. Have the relevant advisers assess restrictions rather than assuming every balance on a consolidated report funds the borrower.

Model a proposed replacement loan as gross proceeds less fees, required payoffs and retained amounts. Then test a smaller advance and a later closing. In an illustrative downside, $150,000 of refinancing less $4,000 of closing deductions supplies $146,000. With $60,000 of available company cash, total funding is $206,000, leaving about $18,161 uncovered.

Attach evidence to each external source: indicative discussion, approved offer, signed commitment and remaining conditions. Do not silently convert a conversation into cash in the base forecast. If an asset sale is another route, model net proceeds, release requirements and a completion date before maturity, with a delayed-sale case.

Ask whether the same operating weakness would reduce both company cash and the lender's willingness to refinance. That connection matters more than adding an arbitrary haircut to every source. A plan dependent on improved trading and a larger loan should make both assumptions visible.

Work backward from maturity using the time needed to obtain finance, sell an asset or accumulate cash. Assign an earlier date for management to judge whether the chosen route is progressing. Review any extension right with counsel, including notice, fees and conditions; an extension request is not an extension already granted.

The approval file should state the balloon, operating reserve, supported funding sources and remaining gap. If the gap has no credible response, reconsider the repayment structure or commitment size before signing. A manageable monthly installment does not resolve an unsupported final payment.