What is a Bullet Loan?
A bullet loan is also known as a balloon loan. They can allow a borrower to either put off paying principal and interest until the loan matures or to make minimal payments until maturity. At the end of the loan term, the borrower pays a large lump sum for the entire loan balance.
You’re probably wondering why anyone would use this type of loan. There are always pros and cons regarding specific business financing options. There are some benefits and disadvantages to using a bullet loan:
Three Advantages of Bullet Loans
Those who do not qualify for traditional business loans tend to find the approval for a bullet loan easier. Bullet loans tend to have a shorter term and are generally riskier.
You would most likely only have to pay for the interest accruing throughout the loan, giving you time to ramp up your business and save up the total amount down the road.
At the end of the term, you most like will be given an option to refinance to a traditionally amortized loan. You may qualify for a loan with a lower interest rate and more favorable terms.
Being the risker loan, bullet loans tend to have higher interest rates. Usually, borrowers who opt for bullet loans have projects that are considered more unpredictable and settle for the less favorable terms.
Depending on the maturity rate of the loan, you could have a rate hike and have to see if you qualify all over again. This means you could refinance at an even higher rate than before.
The large payment at the end of the loan term is a lingering threat to some borrowers. You want to anticipate the price and have a strategy for repaying it. Being unable to repay can lead to monumental problems.
Is it a Bullet Loan Worth it?
So, should you take out a bullet loan for your business? If you need a fast infusion of a large amount of cash, you may want to consider a bullet loan. Whether you are looking into buying land, equipment, or facility, it’s an excellent loan for getting your funds now and allowing you to make low payments over the shorter term.
First Union Lending is Here to Help
First Union Lending offers numerous financing programs designed with small businesses in mind. Our business loans are fast and flexible, with financing options ranging from $5,000 to $2 million.
Call today to learn more about our various financing solutions to help your business grow and become successful.