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Taking out a business loan could be just the opportunity your small business needs to grow, purchase new equipment, invest in real estate, or simply have working capital available on hand to manage the day-to-day costs of doing business. But how much down payment is needed for a business loan?
The short answer: It depends. And that’s not always a very satisfying response, particularly if you’re running a cash-strapped or very young business. As you consider whether taking out a loan is the right choice for your business, the upfront cost of financing might be a major concern—a large down payment might make it impossible to even consider a business loan.
Luckily, there are business loan options for every type of business and at every range of affordability. Some types of business loans don’t even require a down payment. At all.
The best thing you can do, as always, is homework. A lot of it. Let’s start by taking a look at the types of loans that require a down payment. And if those aren’t an option for the financials of your business, we’ll help you figure out some alternatives that could work for you, too.
If only there were a simple answer! Each type of business loan—and there are many—has unique requirements for, if, and how much of a down payment is required.
To make better sense of exactly how loan down payments work and whether they’ll be a factor in your business financing journey, let’s explore the different types of business loans available, the types of businesses those are best for, and if and how much down payment is required.
We’ll examine each of the most common types of business loans and their required down payments. These include:
There are a few important characteristics to keep in mind when evaluating how much down payment will be required for your business loan.
Some business loans require a set down payment, meaning it’s a predetermined percentage of the total amount of loaned funds. For other loan types, the down payment amount will fluctuate depending on a few factors:
All of these factors are evaluated by the lender during the loan application process. The stronger your borrowing and financial history, the lower your interest rates and the lower the required down payment will be.
For borrowers with poor credit history, the penalty might be a higher down payment.
One of the most sought-after and desired types of business loan is SBA loans. SBA loans are offered for a range of businesses by the Small Business Administration, an agency of the U.S. federal government, and their lending partners.
The SBA pairs with traditional banks as lending partners to give small business owners a low-interest, long-term loan option. There are few loans that can beat the value of an SBA loan. This is also means that the eligibility requirements to be approved for an SBA loan are the most stringent, making it difficult for most businesses to receive approval.
Yes, most of the time.
Although there are many types of SBA loans, the two most common SBA loan programs are the SBA 7(a) Loan and the CDC/SBA 504 Loan. Both of these types of SBA loans do require a down payment.
On the other hand, there are SBA loans that don’t require down payments:
Most of these SBA loan options are for specific types of applications and business owners. These SBA loans will have a lot of restrictions on who can be approved as well as how the funds are used. You should investigate if you’re eligible for any of these loan types.
The majority of business owners will be more interested in the SBA 7(a) and CDC/SBA 504 loans.
There’s an SBA loan for almost every type of business. Whether you’re a newer startup or have been in business for ages, there’s an SBA loan for you.
The real determining factor in what type of business an SBA loan is right for: business credit score. Because SBA loans are highly sought after, lenders can be choosy about who gets approved. Only businesses with strong borrowing histories qualify for SBA loans.
No matter your business type, length of time in business, or annual revenue—as long as you have a great financial history—there’s an SBA loan for you.
One of the most common reasons businesses seek a loan is to purchase commercial real estate. This is also one of the biggest financial investments a business can make. Fortunately, there are many options when it comes to commercial real estate loans.
Yes, most commercial real estate loans require a downpayment. Here are a few of the many types of commercial real estate loans and their estimated required down payments:
For most businesses, commercial real estate is one of the biggest purchases they’ll ever make. Saving up the cash to have a down payment for a commercial real estate loan takes time and planning.
A commercial real estate loan is a broad category of loans. With so many types of commercial real estate loans, there really are options for every type of business.
If your business is looking to purchase commercial real estate, you’ll likely need one of these types of commercial real estate loans. Every type of commercial real estate loan will require a down payment, so it’s important to set aside some cash and begin saving before applying for a loan.
If your business is in need of new equipment, you should consider commercial equipment financing. Equipment financing enables your business to purchase the equipment it needs right away and pay it off over time.
One of the benefits of commercial equipment financing is that the lender considers the purchased equipment collateral. This means that you, as the borrower, might not have to put down any money or collateral to receive approval for the loan.
It depends. (Are you sensing a theme here?)
Whether or not a down payment is required for equipment financing depends on the amount of the loan, the equipment being purchased, and your financial history. Some equipment financing loans require no down payment, so you can receive 100% financing for your equipment.
Because the equipment purchased with the loan funds is considered to be collateral, the lender doesn’t require any down payment for commercial equipment financing.
If the borrower defaults on payments, the lender can collect the collateral (the equipment purchased with the loaned funds) as repayment for the loan. Collateral is the lenders protection that they won’t lose money on the loan.
Other times, a borrower can only receive 80% financing for the loan. This leaves up to 20% of the loan to be paid by the borrower in the form of a down payment.
Technically, any loan can be used to purchase commercial equipment. The benefit of specifically applying for and using equipment financing to purchase equipment is that some lenders will provide 100% financing and use the equipment as collateral. And, as a collateralized loan, equipment financing can sometimes also be done at a cheaper rate than a standard term loan. For traditional loans, there’s more likely to be a down payment required.
If your business needs new gear, then equipment financing is right for you. Equipment financing offers a quick solution to getting cash to purchase equipment. Some businesses are even eligible for 100% financing.
All this makes equipment financing great for businesses that are new and need equipment to get started, and also for businesses that are growing and need updated equipment or a makeover.
A business line of credit is simply an amount of capital that is available to a business. When capital is needed, you use some—only as much as you need. The amount used is paid back over time plus interest.
Think of a business line of credit like a credit card, but (often) with lower APRs and (always) access to cash.
A business line of credit doesn’t require a down payment and you only pay interest on the funds that are used. A business line of credit sometimes requires collateral, but is also a great way to build up a strong financial history and credit score.
There are no specific requirements on what types of businesses are eligible for business lines of credit. The lender will look at your credit score and financial history, but qualification for this type of loan isn’t limited to certain types of businesses.
For businesses that invoice customers, one of the major headaches they experience is cash-flow slowdowns. Whether because of strong seasonal fluctuations in your business revenue or due to customers who don’t pay their invoices on time, invoice financing can help to resolve their cash-flow issue.
Most invoice financing lenders follow this simple process:
Invoice financing is fast. Most businesses can get cash in hand within one to five days of their application.
No down payment is required for invoice financing because the financed invoices act as collateral for the loan. Also, most invoice financing lenders don’t loan 100% of the invoice total, but closer to 85%. Some lenders to offer 100% financing, but that’s pretty rare.
The only invoice financing qualification limitation on invoice financing is that your business must invoice their customers. Some invoice financing lenders work only with B2B or B2C borrowers, but that’s designated by the lender, not the type of loan.
We’ve lumped these two types of loans together, because while different, short-term loans are essentially term loans, just over a shorter period of time.
A term loan is a traditional loan, just-what-you-think-it-is kinda loan. You’re loaned a lump sum of cash, which you pay back plus interest over a period of time set by the lender. Payments are typically collected monthly. And a short-term loan is very similar. You receive a lump sum of cash that’s paid back with interest. The difference is that payments are made daily or weekly over 3 to 18 months.
Term loans and short-term loans don’t require a down payment. The caveat here is that you’re only approved for what they lender thinks you can afford. So if you want to make a $100,000 purchase, but the lender thinks you can only repay $80,000, that’s what they’ll loan you.
So even though term loans and short-term loans don’t require a down payment, it doesn’t mean you’ll be approved for the full amount that you need. That’s up to the lender, who evaluates your profile and qualifications when you submit your app. The business still might need to contribute toward the desired purchase.
Because term loans and short-term loans are the bread and butter of loans, there’s an option for every type of business, every type of purchase, and for every price point. Each lender has a specialty, but if you’re in need of a loan, you’ll find an option out there that’s right for your business.
There are options! Really. Really really.
If you’ve decided that the best loan option for your business is one of the types that requires a down payment but you don’t have any cash saved up, there are still options.
You can consider:
Yep, these acronyms do mean something:
ROBS stands for Rollover for Business Startups. The way this works is that you can access some of the funds within your 401(k) or IRA, without penalty, to start a business.
Essentially, you can borrow up to $50,000 from your retirement account penalty-free to start a new business. You pay no withdrawal penalties, taxes, or interest on the funds you use.
A HEL or home equity loan uses the equity you own in your home as collateral for a loan. The downside to these loans is that if you can’t repay them, your house can be repossessed. This type of loan can be used to fund a startup or an existing business.
A HELOC or home equity line of credit is slightly different than a HEL. Instead of a loan, this offers a line of credit that functions similarly to a credit card. You can use some or all of the funds offered, and you only pay interest on the funds that are used.
Even if you’re currently without enough cash or savings to afford a down payment for your loan, there are still options.
Just because a down payment isn’t required, doesn’t mean you shouldn’t put some money down if it’s available, or have cash set aside and saved up to help with prepayment. This protects you from over-reaching what you can afford.
Taking out a loan is a big step for any business, and there are major consequences for not being able to repay the loan. It’s important to take time to research all of the available loan options and study your business’s finances to make sure you fully understand just how much of a loan you can afford.
Many businesses have bitten off more than they can chew when it comes to loans, and they have been forced into default because of it. Before committing to a loan product, make sure it’s within your budget.
So, the big takeaway here is that the majority of loans don’t require a down payment from the borrower. And that’s good news for businesses that are looking for a loan to help with cash flow. Most loans—including the very common and popular term loans and short-term loans—don’t require a down payment.
But one of the best loans on the market, the SBA 7(a) loan, does require a 10% to 20% down payment. It’s worth it if you can qualify, though—in return, your business will receive lower interest rates and longer repayment terms.
Whichever type of loan you decide is right for your business, remember that a down payment isn’t always a bad thing. A down payment helps to lower your overall cost and to plan ahead and save for the repayment of the loan. Even if a down payment isn’t required, you might decide it’s the right decision for your business to pay some of the loan cost up front.