A fully amortizing loan spreads principal and interest evenly across the term so the balance reaches zero at maturity; a balloon loan makes smaller periodic payments but requires a large lump-sum principal payoff at maturity — creating refinancing risk that FASB ASC 470 requires borrowers to classify as a current liability if refinancing is not already secured.
Fully amortizing loan: Each payment includes both a principal component and an interest component, sized so the balance is exactly zero at the end of the loan term. A standard SBA 7(a) term loan is fully amortizing — 10 years of equal monthly payments that leave a zero balance at month 120. The benefit: no refinancing required at maturity, predictable payments, and no residual debt risk. Balloon loan: Periodic payments cover only interest (or interest plus minimal principal), with the remaining principal balance — the 'balloon' — due as a lump sum at the end of the term. Example: a 5-year balloon with a 20-year amortization schedule makes payments sized for a 20-year payoff, but at month 60, the remaining ~80% of principal comes due all at once. Balloon structures are common in commercial real estate bridge loans, certain equipment financing arrangements, and short-term working capital bridge facilities.
The primary risk of a balloon loan is refinancing risk: when the balloon comes due, you need either the cash to pay it off or a new loan to replace it. If credit conditions tighten, your financial profile deteriorates, or the market for your collateral shifts, refinancing may not be available on terms you can afford — or at all. This risk is serious enough that FASB ASC 470-10 (Debt — Modifications and Extinguishments) requires that if a balloon debt maturing within the next 12 months has not been refinanced by the financial statement date, the full balloon amount must be reclassified as a current liability on the balance sheet — which can trigger debt covenant violations and materially worsen key financial ratios used by lenders.
Fully amortizing is right when: You want payment certainty, you're financing an operating business (not an asset play), you don't have high confidence in your ability to refinance or sell at term. Balloon is right when: You're confident the underlying asset will be sold or refinanced well before balloon maturity (real estate development, bridge-to-permanent-financing scenarios), your business model generates a lump sum at a predictable future date (contract completion, inventory liquidation), or you need lower periodic payments to preserve operating cash flow during a growth phase and accept the refinancing risk. Never take a balloon loan assuming refinancing will be easy — underwrite as if refinancing won't exist.
Fully amortizing: $500,000 at 7.5% for 10 years → monthly payment ≈ $5,939; balance at maturity: $0. Balloon (10-year balloon, 25-year amortization): same $500,000 at 7.5% → monthly payment ≈ $3,693 (sized for 25-year payoff); balance at month 120 (balloon due): ≈ $435,000. Monthly savings: $2,246 — but that $435,000 must be refinanced or paid in full at month 120.