Do I Need a Down Payment for a Business Loan?
A down payment for a business loan is not always necessary, but it may be a good idea if you have the capital.
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Depending on your lender and the type of loan you’re applying for, you may be required to make a down payment, or a lump sum of money that reduces the amount you have to borrow. Even if it’s not required, a down payment can help you get approved for a small-business loan with more favorable terms, and lower your monthly installments.
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What is a down payment for a business loan?
A down payment for a business loan, also sometimes referred to as an equity injection, is a lump sum of money that you, the borrower, brings to the table. A down payment is a risk mitigant for a lender. Not only does it lower the amount of money you have to borrow, it demonstrates to a lender that you have skin in the game, or are motivated to repay the loan. Putting money down can help your chances of getting approved, and also help you get a better interest rate or term.
>> MORE: What is a business loan?
How much is a down payment for a business loan?
The exact amount required for a business loan down payment will vary, but typical down payments range from 10% and 20%. Some business loans require a set down payment, or a predetermined percentage of the total amount of loaned funds, while others may fluctuate based on lender policies, loan amount, purpose or credit history.
That said, there’s no limit on how much money you can put down on a business loan. Even if it’s not required, a business loan down payment can increase your chances of getting approved and reduce your monthly payments, which means you can pay the loan back faster and save on interest.
| Type of Loan | Required Down Payment |
|---|---|
| SBA 7(a) Loan | 10% |
| SBA 504 Loan | 10%-20% |
| SBA Microloan | None |
| SBA Disaster Loans | None |
| USDA Business & Industry Loan | Lender's discretion |
| Bank Business Term Loans | 10%-20% |
| Online Loan | None |
| Commercial Real Estate Loans | 10%-30% |
| Equipment Financing | 0%-20% |
What types of business loans require down payments?
Although you can make a down payment on any type of loan, certain loans are more likely to require down payments than others.
SBA loans
SBA 7(a) loans and 504 loans both require a down payment of at least 10%, although loan terms can vary based on the SBA lender. For 7(a) loans, requirements may vary based on changes in ownership. SBA 504 loan down payment requirements vary based on loan purpose and length of time in business.
SBA microloans and SBA disaster loans do not require down payments.
Business term loans
Business term loans can come from banks, online lenders or community development financial institutions (CDFIs). While online lenders and CDFIs typically don’t require down payments for general term loans, banks may require up to 20% down depending on the size of the loan request. It is possible to get approved with a bank without a down payment, but you may be asked to pledge collateral or sign a personal guarantee.
Commercial real estate loans
Most commercial real estate loans require a down payment, which may range between 10% and 30%, although some special lender programs go as low as 5%. A down payment for a commercial loan is determined by several factors, including the appraised value of the property. Keep in mind that you may be asked to pay for a property appraisal in addition to other fees, which contributes to your upfront cost of borrowing.
Equipment financing
Equipment financing doesn’t usually require a down payment because the equipment being financed serves as collateral; however, some lenders may request 15% to 20%. Whether or not a down payment is required depends on the amount of the loan, the equipment being purchased and your financial history.
How do down payments work for business loans?
For lenders that don’t have a set down payment percentage, the amount they ask you to put down will vary based on different factors, including:
- Type of loan.
- Loan amount.
- Purpose of the loan (how the funds will be used).
- Financial profile of the borrower (this can include the business owner’s personal financial history as well as that of the business).
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 will be and the lower the required down payment will be. If you have bad credit, typically defined as a score between 300 and 629, you may be asked to put down more money.
How to get a down payment for a business loan
The best way to come up with a down payment on any loan is to plan ahead as much as possible and save the amount you think you’ll need; however, that’s not always realistic. There are other options you can think about to come up with a down payment, including:
- Retirement savings. Rollovers as Business Startups (ROBS) allows you to use your retirement savings to fund your startup business without paying taxes on the money. Some use ROBS to cover their entire startup costs and avoid taking out a loan, but ROBs can be used as a down payment as well. ROBS is considered a risky method of finance because if your business fails, you could lose your retirement savings.
- Equity financing. Equity financing from angel investors or crowdfunding, is a type of funding that involves exchanging equity, or ownership in your business for lump sums of cash. Equity financing can also be a way to avoid taking out a loan entirely.
- Friends and family. Family or close friends who have the means and are willing to invest in your business can help you come up with a down payment for a business loan. Anyone you go into business with should be someone you trust, and who believes in your business.
Can you get a business loan with no down payment?
It is possible to get a business loan without putting money down. If a down payment requirement is keeping you from getting approved for a loan, there are other things that can strengthen your loan application, as well as alternative methods of financing your business.
Other ways to strengthen your application
- Collateral. Adding collateral to support a business loan application shows a lender that you are motivated to repay your loan, and can help a lender recover some of their losses in the event of a default. Pledging collateral can significantly improve your chances of getting approved.
- Cosigner. Adding a cosigner to your business loan can also be a way to strengthen a business loan application. Generally, a cosigner should be someone you trust, who knows your business, and someone who has strong personal credit and finances.
Other types of financing
- Invoice financing or factoring. Both invoice financing and invoice factoring allow you to use unpaid invoices to get cash upfront. With invoice, or accounts receivable financing, you use your invoices as collateral. With invoice factoring, you sell unpaid invoices to a factoring company, and they assume the responsibility of getting payments from your customers.
- Business line of credit. 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.
A version of this article originally appeared on Fundera, a subsidiary of NerdWallet.
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