Do I Need A Down Payment To Get A Small Business Loan?

Some lenders often require borrowers to pay a percentage out of pocket as a down payment for a business loan. For most small business owners, this seems a bit counterintuitive. You’re borrowing money because you need more, but you have to pay money upfront to receive the loan.

Is there a way around this apparent catch-22? What loans require down payments, and what are your options if you don’t have the funds to pay a down payment? Read on to find out more.

Why Lenders Require Down Payments

A down payment may be one of the requirements for a small business loan. A down payment is just one of the ways that lenders lessen their risk. When you make a down payment, you’re investing your own money, which demonstrates to the lender that you’re serious about the loan and more likely to pay it back. It will also be easier for the lender to recoup at least part of their money in the event of a default. If an asset must be repossessed to pay off the debt, the lender will not have to sell the item for the full value to recoup the investment.

Of course, down payments aren’t just good for lenders — they benefit you, too. By putting up a down payment, you’re able to lower the amount of money that you borrow. This means that not only will your monthly payments be smaller, but you also will save on interest over time, making the loan more affordable over the long term.

Do All Business Loans Require Money Down?

Most larger business loans — including commercial mortgages, commercial auto loans, and equipment loans — do require a down payment as a condition for approval.

Whether a down payment is needed (and the required amount) often varies based on the borrower’s creditworthiness. A borrower with a solid history may qualify for a “zero down” offer or a very low down payment. In contrast, a borrower with a troubled credit history may be required to pay a down payment to be approved for the loan.

One thing to consider is that when there is a minimum down payment requirement, it’s a wise move to put more money down, if possible. This means you’ll need to borrow less money, leading to lower payments and long-term interest savings.

How Down Payments Are Determined

There are a few factors that determine the cost of a down payment:

• Lender Policies: Lenders may automatically require a down payment for specific loans or loans that exceed a certain amount.
• Credit History: Down payment requirements are often lower for borrowers with high credit scores and solid credit histories. Borrowers with low scores may be required to make a down payment before even being considered for a loan.
• Collateral: If sufficient collateral has been put up to cover the loan in case the borrower defaults, a down payment may not be required. For other loans with no specific collateral requirements, a down payment may be required based on the loan amount and the borrower’s creditworthiness.

Typical Down Payment Requirements By Loan Type

Whether a loan requires a down payment is based on a number of factors, including the type of loan selected. For some loans, a down payment is always required but may vary based on the borrower’s profile and other considerations, such as the loan amount. For other loans, a down payment may not be required at all.

Learn more about down payment requirements for each type of loan below.

What To Do If You Can’t Afford A Down Payment For A Business Loan

There are a few steps you can take when you’re struggling to come up with the funds to make a down payment for a business loan.

• Consider Other Loan Options: Look for options with lower down payment requirements. For instance, SBA loans typically have lower down payment requirements than traditional bank loans. You can also explore loan options that don’t require a down payment, such as online loans and lines of credit. Remember, though, paying a down payment will help reduce the amount that you borrow, the monthly payment, and the overall cost of the loan.
• Pay Off Your Credit Cards: While you can put a down payment on a credit card, this isn’t a wise financial move. Interest charges will rack up as long as there is a balance, keeping the business in debt. Instead, consider paying off your credit cards and other debts. Once old debts are paid off, the money that was being used to pay balances, plus interest, can then be applied toward the down payment.
• Save Money: If the financing need isn’t immediate, you can also consider saving the money. You can put money in a savings account or into certificates of deposits, money market funds, or other short-term investment vehicles.
• Build Your Credit: If a low credit score is an issue that contributes to a high down payment, pull your free credit report and score and get to work building your credit profile to qualify for lower down payments — along with improved interest rates and terms — in the future.

While it’s possible to use credit cards or other borrowed funds to pay your down payment, this ultimately just adds to your business debt, so it’s best to avoid these methods, if possible.

The Bottom Line On Down Payments For Business Loans

A down payment for a small business loan may seem like an inconvenience, but this requirement is put in place to protect the lender. The good news is that the lender isn’t the only one that will benefit. Having a solid down payment for your business loan will help you save money over the long term in interest fees while also reducing your monthly payments and lowering your debt — all keys to smart, responsible borrowing.