How do the due date and a balloon payment work in a vendor take-back note?

No source read for this page sets a standard length for a seller-financing term, so this page does not offer one. What the federal Bills of Exchange Act does say is how a note fixes its due date. Section 176(1) requires a promissory note to promise payment on demand or at a fixed or determinable future time, of a sum certain in money. The balloon payment is a commercial term: for what it means in practice, see the glossary entry on a balloon payment.

How the Act fixes the due date

Section 22(1) says a bill is payable on demand if it is expressed to be payable on demand or on presentation, or if no time for payment is expressed in it. Section 186(1) applies the provisions on bills to notes, with such modifications as the circumstances require, subject to Part IV and the rest of section 186. Section 23 says a bill is payable at a determinable future time if it is expressed to be payable at sight or at a fixed period after date or sight, or on or at a fixed period after the occurrence of a specified event that is certain to happen, though the time of happening is uncertain. Whether a note that leaves its due date to a decision by the buyer alone meets either test is a question for a lawyer, so have one read the wording.

Instalments and a final lump sum

Section 27(1) says a sum is a sum certain even though it is payable by stated instalments, or by stated instalments with a provision that the whole becomes due on default in any instalment. The section does not mention balloon payments by name. Whether a particular schedule of instalments ending in a larger final payment is properly stated is for the lawyer drafting the note.

What BDC says about payment terms

BDC says vendor financing payment terms are usually less rigid than traditional bank financing, which can mean no payments for several months or interest-only payments for a set period. It also says vendor financing is, in almost all cases, junior debt subordinate to bank loans. If the bank’s loan documents limit payments on junior debt, ask the bank how that sits with the take-back schedule and the final payment date.

Where the Interest Act applies

Section 8(1) of the Interest Act bars a fine, penalty or interest rate on arrears that increases the charge beyond the rate payable on principal not in arrears, but only for arrears of principal or interest secured by a mortgage on real property or a hypothec on immovables. Section 8(2) adds that the section does not prohibit a contract for interest on arrears at a rate not greater than the rate payable on principal not in arrears. Section 8 is relevant only if the take-back is secured that way. For how the structure fits the wider deal, see typical deal structure in Canada.