Overview of Down Payment Requirements

Being a small business owner or startup owner, you know your business is growing, and you will require capital for immediate emergencies or day-to-day operations.  After you have decided on the amount you need, the lending starts with the application process. You will require money for a down payment on the loan. Lenders usually ask borrowers to pay some percentage out of pocket as a down payment for small business loans, especially for large loans. 

Read More: Working Capital-Uses, Benefits, Eligibility, Requirements.

Down payment requirements for a business loan?

Being a small business owner or startup owner, you know your business is growing, and you will require capital for immediate emergencies or day-to-day operations.  

After you have decided on the amount you need, the lending starts with the application process. You will require money for a down payment on the loan. Lenders usually ask borrowers to pay some percentage out of pocket as a down payment for small business loans, especially for large loans. 

But have you ever thought about why it is required? Because you need money and you only have to pay upfront to receive the loan. This guide will tell you which small business loans require down payments and the options to pay them. 

Why do Lenders require down payments?

Businesses that have already taken large sums of loan amounts earlier are familiar with the down payment. You require a down payment for car loans and mortgages. Down payment for business loans works the same way but knowing why lenders require it is the point.

The requirement of a down payment by lenders is just the way to reduce lenders’ risk. When business owners make the down payment, they are investing their own money, which makes lenders believe that they are serious about the loan and will pay it back. 

With this, it will be easier for the lender to recoup in the event of default. If the asset is repossessed to pay the debt, the lender does not have to sell for the value to recoup its investment. Also, down payments don’t just benefit the lenders, it benefits the business owners too. 

By making the down payment, you will lower your burden of the amount you have borrowed. This will not only make your monthly installments less, but it will also reduce the total interest over time. A down payment makes the loan more feasible over the long term for business owners. 

Read More: Letter of Credit – Functions, Agreements, Documentation

Do all business loans require a down payment?

Most large business loans like commercial mortgages, commercial auto loans, and equipment loans require a downpayment to get approval for funding. If a down payment is needed or not, and if needed, then the small amount often varies based on the buyer’s creditworthiness. For instance, borrowers with solid history may qualify for zero down payment or very minimum down payment. 

And borrowers with bad credit scores and history may have to pay a huge sum for a down payment to get the loan. Also, when there is a minimum down payment required, it’s good for borrowers to put more money down as possible. With this, you will have to borrow less money which will have lower payments and long-term savings on interest. 

How to decide on down payment costs?

Certain factors determine the down payment cost. One of them is the lender’s policies. For certain loans, lenders may require a down payment or loans that exceed a certain amount. For a down payment borrower’s credit history also plays an important role. 

The requirement for a down payment is lower for borrowers with higher credit scores and solid history. Sometimes, these borrowers qualify for zero down payment or no down payment. Borrowers with low scores might have to make a down payment before taking up the loan. 

Collateral also plays a vital role in the amount of the down payment. When enough collateral is present to cover the loan, a down payment will not be required for a business loan. For some loans where the collateral is not required, a down payment is required based on the borrower’s creditworthiness and loan amount. This also works for loans where the assets are purchased with loan proceeds like vehicles, and real estate, which serve as collateral.

Down payment required by different business loans

Which loan requires a down payment depends on several factors, including the category of loan selected. A down payment is necessary for some loans, and for some, it will be based on the borrower’s history, creditworthiness, and loan amount. And for some loans down payment is not required at all. 

Let us see the typical down payment required by different loans:

• Bank Loans & Lines of credit – 0% – 20%

• Online Loans & Lines of credit – Not required

• SBA 7(a) Loans – 10% – 20%

• SBA CDC / 504 Loans – 10% – 30%

• Business Acquisition Loans – 10% – 20%

• Commercial Real Estate Loans – 10% – 30%

• Equipment Loans – 0% – 20%

• Invoice financing – Not required

Read More: Business Loans and Top 14 Types of Business Loans

Down payment for each type of loan:

Bank Loans & Line of Credit

Business loans from banks are generally for the best borrowers. Banks always protect themselves from risk as much as they can, and that is why they ask for a down payment, especially for loans of higher amounts. The down payment required for a bank loan ranges from 10% – 20%.

The down payment is based on the amount borrowed, the usage of funds, the borrower’s credit history, and the collateral for the loan. Line of Credit is different from bank loans, and for those down payment is not required. Secured lines of credit might require collateral, but no down payment is required. 

Online Loans & Line of Credit

Online loans are easy and convenient to apply for and are funded quickly. Online loans and Lines of credit are top choices by borrowers, as a down payment is not required. But for some loans, collateral is required to secure the loan. 

SBA 7(a) Loans 

SBA Loans generally require a down payment of 10% to 20%. The down payment amount will be based on factors like the borrower’s history, amount of loan, amount of collateral, and more. SBA loans are offered to borrowers through intermediary lenders.

SBA CDC / 504 Loans

For SBA CDC, the down payment is typically around 10%. CDC gives 40% of the total project cost as a loan, and the second lender gives 50% of the total cost. So the remaining 10% with the borrower can be used as a down payment based on factors like a credit profile, amount funded, and more. SBA CDC / 504 Loans are used to purchase or improve commercial real estate. 

Business Acquisition Loans 

Business acquisition loans are taken when funds are required to acquire a business. And for such cases down payment is required. It all depends on the risk to the lender. Borrowers with low risk and stellar credit scores with high collateral may have a down payment as low as 10%. 

And loans for borrowers who have low credit scores and higher amounts of loans or loans with no collateral may have a down payment of around 20%.

Commercial Real Estate Loans

Generally, the down payment depends on the lender. Most lenders require a minimum of 10% down payment for commercial real estate loans. And for some cases, around 30% of the purchase price may be required for the down payment. Commercial real estate loans are often used to purchase land or commercial properties. Commercial real estate loans are similar to personal mortgages, which need a down payment. 

Equipment Loans

Businesses use an equipment loan for purchasing equipment or expanding machinery. Equipment loans require a down payment of up to 20% of the total value of the equipment. Equipment with resale value will qualify for less or zero down payment. There are options for 100% of equipment loans without any down payment. 

Invoice Financing

Lenders providing a cash advance on unpaid invoices is referred to as invoice financing. This loan is best for businesses with unpaid invoices and issues with cash flow. In invoice financing, the invoices are like collateral, so no down payment is required for this type of loan. 

Read More: Business Loans and Top 14 Types of Business Loans

Tips if you cannot fulfill the down payment requirements

If you need the loan for your business, or you have already taken the loan but are facing issues with a down payment, then you may consider a few steps. 

• Explore and choose the loan with lower down payment requirements.

• Read about loans and choose the one which requires no down payment, like online loans or Lines of credit.

• You can also try a credit card, but it is generally not recommended. 

• If you don’t need the money immediately, consider saving. 

Final Thoughts

For small business loans, a down payment may feel a little fussy, but this requirement is for the protection of lenders. Lenders are always and will be worried about the amount they give as a loan and its repayment. In this article, we have given the down payment requirement by business loans and the percentage of down payment required by different business loans. 

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