Balloon Loan

by Investing School on August 29, 2009

A corporation or individual wants to purchase a company that has the potential to generate substantial profits or is at least a viable money making entity, but the corporation or individual is unable to raise the money necessary to make the purchase. One possibility for solving this problem is to agree to a balloon loan.

A balloon loan is a loan that often comes with a low interest rate but with a set deadline for repayment in one lump sum. A seller usually offers such an arrangement when having a difficult time unloading a property or when wanting a particular individual or corporation to own the company. Sometimes this happens within a family group.

The downside to purchasing a property with such a loan is that, if the payment deadline is not met and an extension on the repayment is agreed to, interest rates could skyrocket. If the buyer has agreed to a set deadline with no grace period extended, the potential buyer could lose the property entirely.

If the buyer defaults on such a loan, the seller, who has been relieved of the responsibility of maintenance and operating the company during this time, can now seek out another buyer. If the value of the company has increased, a higher selling price can be sought.

For the seller in such an arrangement, it is a win-win arrangement unless the value of the company has decreased during the loan period, but even then, during a short takeover by the parent company usually the business can be rejuvenated.

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