At their very best, small business loans work wonders to alleviate a business’s financial burdens. But for a business with cash-flow issues, getting a small business loan with a down payment actually adds to the stress. Because if a loan requires a down payment, you need to provide that cash, stat, in order to receive your loan at all. That’s why many borrowers hope to find no money down small business loans.
Lucky for the cash-strapped, there are plenty of loan options available that truly help, rather than hurt, your business’s liquidity.
Get started on no money down business loans with this complete guide.
When you’re looking into how to finance a business with no money down, be aware that no loan comes for free, though. Some no money down small business loans require a borrower to offer up collateral, which lessens the lender’s risk and raises the stakes for the borrower to honor their loan commitments. That’s not to mention the potential for additional fees attached to your loan, and the guarantee of added interest. (To truly understand the cost of your loan, you’ll need to look at its simple interest rate vs. APR—something you should definitely master before signing any contract.)
That said, it’s entirely understandable why a borrower would want to avoid the additional cost of a down payment. If you’re that kind of borrower, there are options for no money down small business loans—and one of them might work for you.
Not every type of small business loan requires a down payment. Most often, the lenders that do require money down are extending really large loans, like SBA loans and commercial real estate loans.
Larger loan amounts equal greater potential risk, both for the lending institution and for the borrower. (But mostly for the lending institution.) Which makes sense—the more money loaned, the more potential to not be repaid.
So, having upfront cash in hand slightly mitigates that risk for the lender. A down payment locks the borrower into the loan deal even tighter, too. When a borrower has “skin in the game,” that demonstrates to lenders that the borrower also has a lot to lose—and, ostensibly, that the borrower is that much more intent upon repaying their loan bills.
Not every business loan is for millions of dollars—after all, not every small business needs, or is capable of repaying, millions of dollars. So, there are lots of no money down small business loan options. Not that it’s easy to secure a loan with no down payment—especially since lenders need to use other methods to protect their interests.
A lender’s first line of defense, of course, is only approving the borrowers whom they’re confident can, and will, repay.
Then, if a lender approves your business loan application, they’ll only offer you a loan amount that they know you can afford, and at interest rates contingent upon your perceived riskiness. Higher-risk borrowers are typically subject to higher interest rates, because the lender needs to be really sure that they’ll receive the money they’ve loaned, even (or especially) if a risky business defaults or shutters.
→TL;DR (Too Long; Didn’t Read): Down payments on large loans demonstrate to lenders that a borrower has skin in the game, and that parties have a lot to lose if the borrower defaults.
Just because a loan might not require a down payment, that doesn’t mean a borrower is totally off the hook if they default.
In lieu of a down payment, some no money down small business loans require the borrower to put up collateral. (And some require both.) If a borrower is unable to meet their loan payments, the lender will seize and liquidate the borrower’s collateral to make up for those missing payments, or as much of that capital as they possibly can.
Down payments and collateral aren’t quite a one-to-one comparison: If your loan requires a down payment, you need to give up that money in order to secure your loan in the first place. But you don’t necessarily need to sacrifice your assets on a collateralized loan—and the intent, of course, is that you never will.
Like a down payment, though, collateral mitigates the risk to the lender, and it functions to show the lender that you, too, have a lot to lose if you fail to repay your loan bills.
There are different types of collateral a borrower can choose to put up for a small business loan (or that a lender requires from a borrower). Some forms of collateral include:
…or whatever assets are easily liquidated. In some cases, a lender will impose a blanket lien, which gives them the right to seize any and all of a business’s assets to recoup their debt. The exact type of collateral required for a small business loan depends upon the lender, the type of loan they’re offering, and the loan amount.
Offering up collateral makes qualifying for loans a little easier on borrowers, because it lessens the lender’s risk while also demonstrating seriousness about repaying their debt. In turn, secured loans generally carry lower interest rates, higher amounts, and longer repayment terms than unsecured business loans without collateral.
→TL;DR: Not all small business loans require a down payment, but they might require collateral or a personal guarantee. Some do require both.
If you’re hoping to skirt a down payment requirement, you have lots of financing options:
Term loans are the most common type of loan on the lending market, and they don’t require a down payment to secure.
However, there’s a chance that you’ll need to put up collateral to secure a term loan. Your lender might specify the type of collateral they want to see, but you’re more likely to find a general lien or personal guarantee attached to a collateralized term loan.
You might also need to pay a few upfront loan fees to secure a term loan. An origination fee, for instance, is a one-time fee, expressed as a small percentage of your loan, that covers the costs of processing and servicing your loan. As is always the case, though, the exact requirements of your term loan depend upon the lender you work with, as well as your business’s financial profile.
One of the most common reasons to seek a small business loan is to relieve cash-flow issues—which would make a small business loan that requires a down payment a non-starter.
Luckily, one of the best cash-flow loans doesn’t require a down payment at all. Business lines of credit work similarly to business credit cards: Your lender assigns you a specific amount of capital, which they determine based on your business’s credentials. You can use that cash whenever you need it, in whatever amount you need. Your line of credit replenishes to its original amount once you repay what you’ve used, plus interest.
Be aware that business lines of credit can be either secured or unsecured. Secured business lines of credit are easier to qualify for and may carry lower interest rates than their unsecured counterparts. The trade-off, of course, is that you’ll need to offer up either a specific type of collateral, or provide a personal guarantee.
Like a business line of credit, invoice financing is a quick way for businesses to free up a stagnant cash flow, and it requires no down payment to secure.
In this instance, though, you’ll release the cash that’s currently tied up in your clients’ unpaid invoices by selling those invoices to a lender. That lender will usually front you cash, in the amount of about 85% of your chosen outstanding invoices, and charge fees on the remaining 15%. You’ll receive that 15% of your cash when your customers fulfill their payment.
Clearly, invoice financing is only a viable option for businesses that bill their customers through invoices, and some invoice finance lenders only work with B2B businesses.
On the plus side, invoice financing companies are mostly concerned with the reliability and profitability of a potential borrower’s customers, rather than a borrower’s own financial profile—it’s contingent upon the customer, not the borrower, to pay up so the lender can make their money back. So, as long as their customers are profitable and timely with their repayments, lower-credit borrowers might find luck acquiring an invoice financing loan.
SBA loans, which are funded through a bank or alternative lender but are partially guaranteed by the government, can offer borrowers some of the biggest loan amounts on the market. Their two most popular loan programs, the SBA 7(a) loan and the SBA CDC/504 loan, can offer eligible borrowers loans worth millions of dollars. As you can imagine, these SBA loans do require a down payment, worth 10 to 20% of the total amount you’re borrowing.
But the SBA offers several no money down small business loan programs, including the SBA Microloan. As you can guess from its name, borrowers will receive smaller loans through the microloan program—the SBA allows intermediary lenders to fund microloans of up to $50,000, but the average amount is $13,000.
Unlike other SBA loans, though, the government does not guarantee any portion of an intermediary lender’s microloans. That gives those intermediary lenders more leeway to determine their own borrower requirements. But most microloan lenders look to accommodate borrowers in underserved communities, female-, minority-, or veteran-owned businesses, environmentally friendly businesses, or certain nonprofits.
Regardless of which intermediary lender you work with, you won’t need a down payment to secure a microloan. However, you’ll need some form of collateral to qualify for this type of loan.
Equipment loans may or may not require a down payment.
Here’s the deal: If your quote is approved, an equipment financing company will front you up to 100% of the cash you need to purchase a piece of equipment, and they’ll use the equipment they’re financing as collateral in case your business defaults. That inherent guarantee of debt reconciliation makes equipment loans less risky for lenders, so it’s usually easier for borrowers to be approved for these types of loans than others.
Sometimes, though, a financing company will only agree to front you 80% of the cash you need for your equipment, which renders the remaining 20% a down payment on your end. The amount of cash that a financing company agrees to front is mostly based on the value of the equipment they’re financing, since that’s what they’ll need to sell off if their borrower defaults down the line.
If you’re unable to qualify for any of the above small business loans, look toward a business credit card as an alternative financing solution that requires no money down.
You might not think to equate a business credit card with a small business loan. But when it comes down to it, these two products follow the same financing model: A lending institution allows you access to an assigned amount of resources, whether that’s a credit line or cash, with the promise of repayment according to the terms of your agreement.
Unlike small business loans, however—which are best used for large, one-time purchases—business credit cards are the best way to fund your business’s smaller, everyday purchases, and earn rewards in the process. Like those super-sized small business loans, some of the most highly coveted business credit cards and charge cards require something of a “down payment.” In this case, though, you can think of a card’s annual fee as a kind of down payment.
However, there are lots of great no fee business credit cards. You may not get the supercharged spending power of a business loan (or even a charge card) with a no-fee card, but you’ll still receive a higher credit line than your personal card, as well as valuable perks like cash back or miles. And, more importantly, you won’t be locked into a $95+ annual fee.
And, on the whole, business credit cards are easier to qualify for than other types of small business loans. Just be aware that every card has a minimum credit score requirement you’ll need to hit in order to be eligible to apply. You’ll also need to sign a personal liability on your business credit card, which makes you personally responsible for your business’s credit card payments if it defaults.
→TL;DR: You have options for no money down small business loans that can get you different types of working capital. You might need to be a little flexible with your expectations, and should expect to put up collateral, too.
If you’re looking for a no money down small business loan, consider the following loan options first:
Equipment loans might not require a down payment, as long as your lender agrees to front you 100% of the cash you need to purchase your equipment. Chances are, though, that they’ll fund closer to 80% of your equipment, which leaves the remaining 20% up to you to pay.
And if you can’t qualify for any of the above loans, or if locking yourself into a loan isn’t the right move for your business at the moment, apply for a business credit card with no annual fee. As long as you don’t carry a balance from month to month and subject yourself to high APRS, business credit cards may be a cheaper financing solution for you. They’re a lot easier to qualify for than other types of small business loans, too.
Keep in mind, though, that a down payment is just one condition of a small business loan that you’ll need to consider. And even without a down payment requirement, every small business lender will have their own methods of vetting their borrowers, as well as a contingency plan in place in case a borrower defaults.
Ultimately, your best small business loan is the loan that you can truly afford. Whether that’s a no money down small business loan—or not!—depends entirely upon your unique needs.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.