What You Need to Know About SBA Loan Down Payments
- SBA loans that typically require a down payment
- SBA 7 (a) loan
- CDC / SBA 504 loan
- SBA loans that don’t require a down payment:
- SBA microloan
- SBA CAPLines Program
- SBA Export Loans
- SBA Disaster Loans
Do you need a down payment on an SBA loan?
Exact SBA loan down payment requirements depend upon what type of SBA loan you’re seeking, the program and lender you’re working with, and how you plan to use the funds from your SBA loan.
The most common SBA loans, SBA 7(a) loans and CDC/504 loans, require a down payment equal to 10% of the total amount you’re borrowing. Given the average SBA 7(a) loan sizes in 2019, this down payment size could start at around $44,000. The rest of the SBA loan product suite do not require a down payment.
Whether your small business is seeking to renovate your structure, purchase another business, or buy real estate, you may have heard that obtaining business loans through one of the U.S. Small Business Administration’s loan programs could be a great resource to get the funds you need.
It’s true that SBA loans are among the lowest cost loans available on the market—and because these loans are partially guaranteed by the federal government, they tend to be more accessible to small business owners than traditional bank loans.
Yet as you learn more about the Small Business Administration’s various loan programs, certain aspects of the application requirements can leave some entrepreneurs in a panic. Most particularly? The realization that in order to obtain an SBA loan, you may be expected to provide a down payment.
In this guide, we cover the details of down payments on SBA loans.
How Do SBA Loans Work?
Remember, an SBA loan is a low-interest, long-term loan that’s partially guaranteed by a part of the federal government—the U.S. Small Business Administration. This means that although the small business loan is funded directly by the bank or alternative lender (just like with a traditional term loan), the SBA makes these loans more accessible to borrowers by partially guaranteeing loans obtained through it’s programs.
In essence, this means that if a small business owner borrows funds through a government business loan and defaults, the SBA will step in to repay at least a portion of the balance owed. Because of this lowered risk, banks and intermediary partners are more willing to work with borrowers approved by the Small Business Administration.
Why Do SBA Loans Require Down Payments?
The SBA and its intermediary lenders both know that when a small business owner is investing his or her own money and time into a business venture, they are more likely to successfully follow through with the business plan and repay the loan in full.
Remember that in this partial guarantee arrangement, both the SBA and the intermediary lender have something significant to lose if a borrower fails to repay. The SBA will owe money to the lender to cover the debt that was guaranteed, and because the SBA’s guarantee is only a partial one, the lender themselves will likely still lose money on the defaulted loan.
Before taking this risk, both the SBA and its intermediaries want to know that you as the borrower have “skin in the game” or something to lose as well. That’s the purpose of the down payment.
What is an SBA Loan Down Payment?
An SBA down payment is just like any other down payment. Specifically, it’s an amount of money paid by the borrower to the lender at the start of the loan term—typically figured as a percentage of the total loan amount.
Think of your SBA loan down payment as your promise to the lender that you intend to repay the loan in full. When a lender is considering a borrower, their biggest question is whether or not the loan will be repaid. The down payment that you provide is simply one more indication to both the lender and to the SBA that you fully intend to repay your loan according to the terms of the agreement.
When is an SBA Loan Down Payment Required?
When an SBA down payment is required depends upon what type of SBA loan you’re getting. Some SBA loans—such as the SBA microloan—don’t require a downpayment
If you’re applying for an SBA 7(a) loan or an SBA real estate loan, you will be required to submit a down payment equivalent to 10% of the total amount you’re borrowing. For 7(a) loans, the SBA rules require a down payment only from startups and for business acquisitions. However, many lenders require the down payment for other loan uses as well.
This means, of course, that the more money you plan to borrow, the higher your loan down payment will be.
To help you decide what SBA loan program would be the best fit for your business, let’s take a look at the basics of the most popular SBA loan programs—including the down payment requirements for each SBA loan.
Types of SBA Loans
SBA Loans That Require a Down Payment
Unfortunately for those borrowers who would rather avoid SBA loan down payment requirements, they reality is that the majority of loans guaranteed by the SBA—accounting for almost 85% of all loan dollars approved in 2016—will fall into the category of loan programs that require a 10% down payment from the borrower: 7(a) loans and CDC/504 loans.
But despite any fears you may have about providing a down payment for your SBA loan, these are fantastic loan programs that are a great fit for the large majority of borrowers.
Let’s break down the facts you need to know about these two most popular SBA loan programs.
- SBA Express Loans:This type of SBA 7(a) loan typically has a faster loan approval time, but is capped at $350,000. There’s also the option for veterans to waive the guaranty fee which is typically 3% of loans over $150,000. SBA guarantees a maximum of 50% on SBA Express loans, making them less attractive to lenders.
- SBA 7(a) Community Advantage Loans:These loans are designed to help businesses in underserved markets. This type of loan is perfect for a borrower that meets the SBA eligibility requirements but may have low revenue, low collateral, or might not meet some other requirement. This loan has the same expedited approval as the express loan, but the SBA guarantees up to 85% of loans up to $250,000.
- Have a 680 or higher credit score
- Fund with a 10% down payment
- Meet job creation or public policy goals (explained in detail below)
- Real estate must be at least 51% owner occupied
- Business district revitalization
- Expanding minority, women, or veteran owned businesses
- Development in rural areas
- Using clean energy or becoming energy efficient
- Expanding exports
SBA 7 (a) loan
The SBA 7(a) loan is the most common type of SBA loan. It can be funded for up to $5 million and be used for working capital, to refinance debt, or to buy another business, real estate, or equipment. The majority of businesses will be eligible for this loan, which requires a credit score of 680 or higher, a 10% to 20% down payment, and some collateral. This type of SBA loan doesn’t need to be fully collateralized, and loans under $25,000 don’t require any collateral.
This type of loan is available to start-ups, but it is our experience that only the most qualified start-ups are approved. The start-up will need a credit score in the 700s, high net worth, and real estate with equity.
There are two subcategories of SBA 7(a) loans:
CDC / SBA 504 loan
The CDC / SBA 504 loan is specifically for the purchase, renovation, or building of commercial real estate or purchase of heavy equipment.
This type of loan combines two types of lender and a down payment to fully fund the loan. Up to 50% of the loan will come from a traditional bank, credit union, or other lender. Another 40% will come from the CDC or Community Development Corporation. The final 10% of the loan is funded through an owner down payment.
To be eligible for a CDC / SBA 504 loan, you need to meet certain requirements. You must:
CDC / SBA 504 loans are much more restrictive than the SBA 7(a) loan in how the funds can be used, but they also offer much higher funding valuation. CDC / SBA 504 loans have no set maximum for funding.
Another aspect that’s unique to the CDC / SBA 504 loan is the requirement that the business meet certain public policy goals set by the SBA. These goals might include certain job creation or community development requirements.
The SBA requires that for every $65,000 loaned ($100,000 for small manufacturers) that one job be created or retained. The SBA might require that a business meet certain community development goals. These goals might include:
The CDC / SBA 504 loan offers the largest funding opportunity but has strict requirements on how the funds are spent, requires that community development guidelines are met, and demands a 10% down payment on the total loan amount.
SBA Loans With No Down Payment Requirement
As you’ll see below, there are several additional loan programs available through the SBA that have no down payment requirements. This is typically because these loan programs—which account for a much smaller combined proportion of all SBA loans—fall into one of two categories: Either the amount of money being provided is relatively small (as with the microloan program), or they are special consideration loan programs designed for very specific purposes.
That said, let’s take a look at the various SBA loan program options that do not require a down payment from the borrower.
- Some collateral
- A credit score of 640 or higher
- Seasonal Line of Credit:This line of credit can be used to help offset seasonal shifts in accounts receivable, inventory, or increased labor costs. The business must be at least 1 year old and establish a seasonal pattern in revenue.
- Contract Line of Credit:This line of credit can be used for materials or labor associated with assigned contracts.
- Builders Line of Credit:This line of credit can be used by contractors or builders to purchase materials, equipment, permits, labor, or land when renovating or building commercial or residential property.
- Standard Asset-Based Line of Credit:This line of credit allows a small business to convert a short-term asset into cash.
- Small Asset-Based Line of Credit:This line of credit allows a small business to turn a short-term asset into cash. This line of credit is limited to $200,000.
To be eligible for any of the SBA CAPLines, your business must meet these requirements:
- At least a 660 credit score
- Must pledge accounts receivable, inventory, contracts, or purchase orders as collateral
No down payment is required to be eligible for any of the SBA CAPLines programs.
- SBA Export Express Loan:This SBA loan offers up to $500,000 in funding for export activities. The business must be at least one year old to be eligible.
- SBA Export Working Capital Loan:This working capital loan offers up to $5 million in funding for export costs for a business that has a foreign customer.
- SBA International Trade Loan Program:This loan can be used by businesses the export to foreign countries or that have been negatively affected by imports.
To be eligible for an SBA export loan, your business must meet the following requirements:
- Have a 660 or higher credit score
- Must be involved in export goods or services to foreign countries.
There is no down payment requirement for an SBA export loan.
- SBA Business Physical Disaster Loans (BPDLs):This type of SBA disaster loan helps business to rebuild, repair, or replace physical property that was destroyed or damaged during a declared disaster. Your business doesn’t have to be for-profit to be eligible for this type of SBA disaster loan. This type of loan is long-term and low-interest.
- SBA Economic Injury Disaster Loans (EIDLs):This type of SBA disaster loan provides capital for businesses to meet regular businesses expenses after it has suffered significant economic injury. To be eligible for this loan, a business doesn’t need to be for-profit, This type of loan is short- to medium- term.
- SBA Military Reservists Economic Injury Loans (MREIDLs):This type of SBA disaster loan helps businesses to meet normal operating expenses after losing an essential employee who’s been called for active military service.
SBA disaster loans can be used for repairing or replacing damaged property, meeting normal business expenses, or as working capital. To be eligible for a disaster loan, your business must meet these requirements:
- 660 or higher credit score
- Business must have suffered physical or economic damage from a disaster
- Business must be within SBA declared disaster area
Your business can apply for and receive multiple types of SBA disaster loans at the same time. Each SBA disaster loan is used differently.
A down payment is NOT required to be eligible for an SBA disaster loan.
For businesses looking for a small amount of funding, the SBA microloan is the perfect choice. SBA microloans are offered up to $50,000. These loans are available to for-profit businesses and non-profit child care centers.
One of the major differences between the SBA microloan and their other loan programs is that the SBA offers no guarantee to the intermediary lender on SBA microloans. This raises the risk taken on by the intermediary lender.
SBA microloans can be used to start or expand a small business but can not be used refinance debt or purchase real estate. How you plan to use the loaned funds will be highly scrutinized by the lender and will affect whether or not you’re approved for the loan.
To be eligible for an SBA microloan, you must have:
Unlike other SBA loans, the eligibility requirements for an SBA microloan are left up to the intermediary lender and are therefore variable depending on what institution is granting the loan.
No down payment is required to receive funding for an SBA microloan.
SBA CAPLines Program
The SBA CAPLines Program is slightly different than the rest of the SBA loan in the fact that they are lines of credit, not loans. These SBA lines of credit offer businesses up to $5 million to meet their cyclical or short-term working capital needs.
There are five SBA CAPLines:
SBA Export Loans
The SBA export loans are to help American small businesses to expand their exports, engage in international transactions, and enter new foreign markets.
There are three types of SBA export loans:
SBA Disaster Loans
An SBA disaster loan can be used by a business to recover from a declared disaster or the loss of a crucial employee. There are three types of SBA disaster loans:
Additional SBA Loan Application Requirements
While it’s helpful to know that there are certain instances in which an SBA loan can be available without a down payment, it’s important to remember that this is just one of many requirements that the SBA maintains as part of its SBA loan application and approval process.
To be eligible for any SBA loan, you’ll need to meet the following basic requirements:
- Be defined as a small business: Under 500 employees; Average annual revenue of under $7.5 million; Average net income under $5 million; Net worth under $15 million
- Be a for-profit business
- Have been in operation for three or more years
- Operate primarily within the U.S.
- Have a physical location in the U.S.
- Have used personal finances to fund the business
- Be able to demonstrate a need for funding
- Show no negative financial history such as bankruptcies, defaults, or debt obligations to the U.S. government
- Not received an SBA loan in the past
Frequently Asked Questions
SBA Loans and Required Down Payments
Each type of SBA loan has a different set of eligibility requirements as well as different requirements for if and how much of a down payment is required.
Both the SBA 7(a) and CDC / SBA 504 loan require the business owner to put down a 10% down payment. The SBA 7(a) loan is the most common SBA loan and the CDC / SBA 504 loan offers the highest amount of funding available through an SBA loan.
Though a down payment is required for these two types of SBA loans, they are also two of the most common and highly sought-after SBA loans available to business owners.