Our Guide to Business Loan Down Payments
In this post, we’ll take a closer look at the various business financing options out there and what you can expect from their down payment terms.
Do You Need a Down Payment for a Business Loan?
The business lender and loan type you choose will dictate whether or not you need a down payment. In addition, your credit history may also play a role.
In most cases, however, most lenders ask that borrowers put at least some money down.
The larger your down payment is, the less risk you pose to them and more likely they’ll approve you for additional working capital. A larger down payment may also lead to a lower interest rate and more favorable terms. Other benefits of a substantial down payment are a smaller loan balance and smaller monthly payments.
Down Payment Requirements for Business Loans
While down payment requirements vary significantly depending on the financing option you choose, these are common among many lenders and can give you an idea of what to expect.
1. SBA Loans
Small Business Administration or SBA loans offer a long list of benefits. If you move forward with one, you may land a low interest rate, favorable repayment terms, and resources to help start or grow your business. When it comes to down payments, SBA loans usually have lower requirements than private business loans. SBA 7(a) loans and SBA 504 loans, the most common types of SBA loans require a down payment amount equal to 10% of the amount you’re borrowing.
2. Commercial Auto Loans
A commercial auto loan may be a good option if your operation transports customers, delivers products or services, or involves heavy travel. Since most auto loans are secured to collateral, which is the vehicle being financed, lenders usually have lenient down payment requirements.
Depending on your credit score, you may be able to take out a commercial auto loan with 0% down. If you finance a truck, however, down payments are stricter and may require a down payment of anywhere from 10% to 50%.
3. General Purpose Loans
General purpose loans are just like what they sound like; they’re general, meaning you can use them to cover just about any business-related expense. Due to this, many small business owners find this loan option to be ideal.
Since general purpose loans are so flexible, their down payment requirements tend to be flexible as well. Regardless of whether you opt for an unsecured loan or secured loan, you may get approved with no money down. It’s important to note that a no down payment unsecured loan will likely come with a higher interest rate. With a secured loan that doesn’t require a down payment, you’ll have to put an asset at risk.
4. Equipment Loans
Chances are your business depends on equipment to meet its goals. If you’re a restaurant, for instance, you might need to purchase ovens, refrigerators, freezers, ranges, and other equipment. An equipment loan can help you purchase necessary equipment.
Equipment loans are designed for business owners who need to pay for new equipment or update old equipment. Depending on the lender and your credit, you may be able to get an equipment loan with a down payment of anywhere from 0% to 20% of its value. The equipment will serve as collateral for your loan.
5. Inventory Loans
Inventory loans allow you to borrow money to purchase inventory and avoid cash flow shortages. They are primarily used by small to mid-sized retail businesses.
Known as short-term financing solutions, inventory loans typically require a down payment of 10% to 40% of the liquidation value. With an inventory loan, your current and future inventory is used as collateral and will be seized if you default on your loaned funds.
How Much of a Down Payment Should I Put Down?
Small business loan down payments are not created equal. Sometimes, you can get approved for a term loan without any money down. In the event this happens, keep in mind that you may still want to offer a down payment. A down payment can lead to better terms and save you thousands of dollars on the overall cost of your loan.
If you’re a startup with minimal cash at your disposal, it may be difficult to put any money down. On the other hand, if you’re an established business with some cash to spare, a down payment is probably in your best interest.
Conclusion: Take Time to Learn About Business Loan Down Payments
When you’re shopping around for business loans, make sure you pay close attention to the down payment criteria.
If you want to put some money down but are unable to, you may want to slash some expenses and pay off debt. It’s also a good idea to look into SBA loans or other government sponsored loans that require lower down payments than private business loans.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.