A business loan is a great opportunity to grow your company. You can use it to buy assets, upgrade your equipment or as working capital. But some lenders require a down payment to give you the funds.
In this article, we tell you what a down payment is, what are its advantages and disadvantages, and the business loans that ask for one. We also offer some solutions if you can’t afford it.
What is a down payment?
A down payment is a payment made in advance when you buy an expensive asset, such as a property, a vehicle, machinery or a business. It represents a percentage of the total value of the asset, and you must pay it with your own money. Usually, the rest of the capital is obtained from a loan.
For example, a small business owner looking to buy a commercial vehicle can make a down payment of 10% of its total value, and a bank or other lender can cover the rest.
Down payments are, in a way, a guarantee for the lenders. By paying this percentage, you show your commitment because you are also putting your capital at stake.
Advantages and disadvantages of down payments
Down payments have their advantages, but it all depends on how high, or low, is the percentage.
For example, the higher it is, the less money you will have to borrow. This also means paying less interest and fees, as well as lower monthly installments.
However, a generous one, as appealing as it may seem, also has its disadvantages. For starters, it can be difficult to save enough to reach up to 20% or even 10% of the value of the loan.
A very high down payment could also leave you without funds for emergencies such as natural disasters, legal disputes, or problems with taxes.
What types of business loans need a down payment?
All loans are different, some require higher down-payments than others, that’s why you need to investigate and choose the option that best suits the circumstances of your business, and your ability to pay.
We have listed several types of loans that require a down payment, we explain their characteristics, and what percentage you’ll have to pay:
The SBA, in association with banks and other lenders, offers loans for different needs. The best known are programs 7(a) and CDC/SBA 504. Both need a down payment. Let’s look at their characteristics:
- Loan Program 7(a). It is the most common of the loans offered by the SBA and can offer up to $ 5 million that you can use as working capital, to buy equipment, property or refinance debts.
To access this loan you need a credit score of at least 680 and a down payment of 10% to 20%. You might also need to put up collateral if the loan exceeds $25,000.
- Loan Program CDC/SBA 504. This program is designed to finance the purchase, renovation or construction of properties for commercial use, or to purchase heavy equipment.
50% of the funds for this program come from banks and credit unions. Another 40% is contributed by the Community Development Corporation. The remaining 10% corresponds to the down payment.
To access this loan you must have a credit score of 680 or higher, and ensure that with it you will create new jobs or contribute to the development of your community. CDC/SBA 504 loans do not have a limit on the financing they offer.
These SBA programs are one of the most sought after loans, but its requirements are very strict. In other words, it is difficult to access them.
Other SBA loans don’t need a down payment, such as microloans, the CAPLines program, and the disaster assistance loan.
2-Commercial real estate loans
If you plan to remodel your business or buy a new store, but do not have funds, what you need is a loan for commercial properties. Most of them need a down payment.
There are a lot of loans for commercial properties. Here are some:
|Type of commercial real estate loans||Down payment|
|USDA Business and Industry loans||20-25%|
|Conduit loans (CMBS)||25-30 %|
|Freddie Mac loans||20-30%|
|Fannie Mae loans||20-30%|
With these types of loans, you don’t have to offer any extra assets as collateral, as the equipment itself is the collateral. If you do not pay your debt, the lender will recover their money by taking possession of the acquired equipment.
In some cases, down payments are not necessary and you can get up to 100% of the capital, but this depends on the amount of the loan, the kind of equipment you are going to buy, and your financial history. Regular down payments, when charged, do not exceed 20%.
Other business loans that don’t need a down payment
There are many financing options for your company, and not all of them need a down payment. These are other loans that could help you capitalize your business without the need for a down payment:
- Lines of credit. These are available for all types of businesses. Banks offer this form of credit through checkbooks, cards and bank withdrawals.
They are renewed periodically, and you only pay for the money you spend.
- Invoice financing. With this form of credit, you can access funds that amount to a percentage of the value of your payable bills. Your invoices, in turn, are used as collateral.
How to calculate a down payment
Not all loans offer the same percentage of down payment. In some cases the value is already predetermined, in others, the percentage varies according to factors such as:
- The total amount of the loan
- How the capital will be used
- Your credit score
After evaluating these elements, the lender then decides the percentage of the down payment on the value of the loan.
By multiplying the percentage of the down payment by the loan amount, you will get how much you will have to pay as a down payment.
For example, if you want to purchase machinery and you need a loan of $50,000, a down payment of 5% would be $2,500. If the down payment was 10%, you’d need to pay $5,000.
What happens if you can’t afford a down payment?
Gathering a large sum of money to pay a down payment is not easy, especially if your business is having a rough time. But don’t worry, there are still ways you can get the money for the down payment:
- Choose the loan with the lowest down payment. The SBA and Department of Agriculture programs offer better conditions than private business loans, such as lower down payments and more competitive interest rates.
- Shares. If you have shares in stocks, selling them could help you raise the money for the down payment. However, this strategy could have financial repercussions and make you lose money. Therefore it is recommended to consult with a financial advisor before selling them.
- Personal loans. You can use the money from a personal credit as the down payment on a business loan. But you may have to offer your personal assets as collateral.
- Sell assets. You can convert personal or business assets into cash to pay a down payment. Cars, boats, premises or machinery can serve this purpose, although selling them can take time.
- Get an investor. Anyone interested in being your partner could contribute the money for the down payment. Remember to put in a contract the responsibilities and rights of this partner or investor.
- Start saving. Separating a percentage of your business profits is the best strategy for the long term. It may take you a while to get the money you need, but it will be worth it.
Find a lender that does not require down payments
Knowing what a down payment is and how it works can help you choose the best loan for your business. Of course, there are many alternatives in the market, and each down payment varies depending on certain conditions. If you have to make a down payment and you don’t have the money, saving, getting investors or selling assets can be a solution.
Other more affordable options do not need down payments. These should be your first choice.
In Camino Financial you do not need down payments to access a loan. Our philosophy is that no business is left behind, that’s why we give you the best terms and we don’t have any hidden fees or additional payments.
Request a quote today!