No Money Down Business Loans: Do You Qualify?
With a money down business loan, you can secure the funds you need without having to come up with a down payment.
In this post, we’ll review what no money down business loans are so you can determine whether they make sense for your particular situation.
What are No Money Down Small Business Loans?
No money down small business loans are exactly what they sound like: business loans you can take out without a down payment. While a no money down small business loan may seem like the ultimate option, it does come with some caveats you should be aware of.
First and foremost, no money down financing almost always requires you to put down collateral, which is an asset you own like your equipment or inventory. While this reduces the lender’s risk of approving you for a loan, it puts your asset at stake. If you default on the loan, the lender may seize the asset.
Also, most lenders who offer no money down small business loans charge high interest rates. This can significantly increase the overall cost of your loan. In fact, it may run you thousands of extra dollars that you may be able to save if you go with a loan that does require a down payment.
Some no money down small business loans come with many fees like origination fees and late fees. In addition, you may be on the hook for a prepayment penalty if you decide to pay off your loan early.
The Pros of No Money Down Business Loans
The greatest advantages of no money down financing include:
- No Money Down: With a no money down business loan, you can receive the additional funds you need without a down payment. If you have cash flow issues, this is a huge benefit.
- Lenient Requirements: Most no money down small business loans come with lenient requirements. In fact, you may be able to get one even if you have no credit history or a bad credit score.
- Flexible: No money down financing is usually flexible, meaning you may use the funds on payroll, office supplies, real estate, equipment, or anything else you’d like.
The Cons of No Money Down Business Loans
- Collateral Required: In most cases, you’ll have to back a no money down business loan with collateral. This can put you at risk for losing a valuable asset if you fail to repay the loan.
- High Interest Rates: Many no money down loans have sky-high interest rates. These rates can significantly increase the overall cost of your loan.
- Hefty Fees: No money down loans are also known for their hefty fees, which may add to hundreds or thousands of extra dollars. These fees may be for origination, late payments, and prepayments.
The Types of No Money Down Small Business Loans
There are a number of no money down business loans you can choose from such as:
1. Term Loans
With a term loan, you’ll receive a set amount of money upfront and pay it back via monthly payments over the term of the loan. Loan terms can vary significantly but often range from a few months to several years. You may not have to put any money down but will likely need collateral.
2. Business Lines of Credit
A business line of credit is a lot like a credit card; the lender will look at your credit score and other factors to assign a credit limit. Then, you may withdraw as much or as little as you’d like up to your designated credit limit.
Once you receive your line of credit, you’ll repay the amount you borrow plus interest. Most likely, you’ll need to put up collateral if you put money down on your business loan.
3. Invoice Financing
Invoice financing is where you receive money in advance in exchange for your outstanding invoices. Most invoice financing companies will give you up to 85% of your invoice balances and hold the remaining 15% until your customers pay the invoices. Invoice financing doesn’t usually require a down payment.
4. Equipment Loans
Upon approval, you can receive up to 100% of the money you need to buy a piece of equipment. You may not need a down payment, unless the equipment financing company only fronts you 80% of the equipment cost, for example.
5. SBA Microloans
The SBA Microloan is one of the few SBA loan programs backed by the Small Business Administration (SBA) that doesn’t have a down payment requirement. While a microloan can give you up to $50,000, most borrowers borrow an average of $13,000.
Conclusion: You Don’t Always Need a Down Payment to Secure a Business Loan
As a small business owner, it’s reassuring to know that there are business options for if you don’t have the cash to cover a down payment.
Before you commit to a no down payment small business loan, however, review the pros and cons of doing so. Depending on your goals and current financial state, it may make sense to save for a down payment and land a loan with better rates and terms.
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.