If you’re applying for a business loan, you may need to make a down payment before you can get the funds you need to support your business. The amount you need depends on how much you borrow, what the lender requires, and the type and amount of loan you apply for.
Let’s take a closer look at business loan down payment requirements so you can be prepared.
Why Do Lenders Require Down Payments on Business Loans?
Loaning money to a business presents a financial risk to lenders. If the business defaults on the loan, the lender won’t get its money back. But a down payment gives the lender some up-front capital and lowers that risk.
A down payment shows that you’re invested in the outcome. Having a financial stake demonstrates your commitment to the business.
And the good news for you as a borrower is that if you make a down payment, you could qualify for lower interest rates and better terms on a business loan.
What Can I Use for a Down Payment?
Not sure where to find money for a down payment for a business loan? Here are a few sources to consider.
- Personal savings
- Business savings
- Sale of personal or business assets
- Friends or family
If you use personal savings, keep in mind the risks of using that money for your business. Using this money for your loan down payment means you won't have the cushion of cash set aside for personal emergencies or unexpected expenses. It should be your top priority to repay the money you borrowed from your savings account.
If you don’t have cash on hand for the down payment, consider whether you could sell an asset—maybe a boat or an extra vehicle you’re not using—to raise capital for your business.
Borrowing from friends or family members may be another way to get cash for a down payment. Even if someone you’re close to is willing to lend you the money, treat it as a typical business agreement. Create a loan document that outlines the repayment terms and interest rate, if any.
Down Payments for Business Loans by Type
Let’s look at some different types of business financing options and their typical down payment requirements.
Traditional Business Loan Down Payments
Banks and credit unions offer traditional business term loans that sometimes require down payments, especially for larger loans. Traditional business loans often require 10% to 30% down, depending on the loan size and lender.
The larger the loan, the higher percent of the loan value you may be required to put down. For example, if you borrow $10,000, you might need a down payment of 10%. For a $1 million loan, the required down payment might be 25%.
SBA Loan Down Payments
Loans backed by the Small Business Association may require as little as 5% to 10% as a down payment for purchases like business acquisitions, real estate, or equipment. The actual amount will depend on the applicant's creditworthiness, loan use, and the bank's policy on down payments.
Here are more details on specific SBA loan programs and their down payments.
- 7(a) Loans: May require up to 10% of the loan value as a down payment.
- CDC/504 Loans: For commercial real estate or large equipment purchases, the down payment for a 504 loan can be as low as 10%.
- SBA Microloans: Loans up to $50,000 may not require a down payment.
Commercial Real Estate Loans
Commercial real estate loans are often secured by the property you’re buying in addition to the down payment. The required down payment may be 10% to 30% of the property’s purchase price.
Online-Only Loans and Down Payments
Online lenders may offer business loans with lower down payments or even none at all, especially for smaller loan values. Other types of financing, like merchant cash advances, don’t have down payment or collateral requirements, but may come with higher fees and interest rates.
Factors That May Lower Your Down Payment Requirements
There's no one-size-fits-all answer to how much a down payment for a business loan will be. A lender will consider several factors. Each lender has a different recipe for determining the size of your required business loan down payment. Lenders look at:
- Your creditworthiness
- Type of loan
- Collateral requirements
- Size of loan
A stronger credit history and higher credit scores could mean you’ll be asked for a lower down payment. Your solid credit history tells lenders you’ve paid off all past debts, which generally signifies less risk to them.
Some types of loans and amounts automatically require a down payment. Real estate loans, for example, usually require a down payment, while a microloan from the SBA may not.
And some lenders will accept collateral instead of a down payment. This may not be the case with real estate loans, however.
Can I Negotiate the Down Payment?
You may be able to work with the lender to lower your required down payment, especially if your credit history is strong and you offer collateral. Start your research with your own bank, since you have an existing relationship there.
If your bank doesn’t want to negotiate, shop around. The business lending industry is competitive, and many lenders are vying for your business. Comparing different offers could help you find a loan that requires a lower down payment.
Alternatives to Cash Down Payments
What if you don't have the cash for a down payment? Are there other options for you?
In some cases, the lender may accept a personal guarantee instead of a down payment or agree to a reduced down payment. A personal guarantee is an agreement that you’ll pay the loan if your business is unable to.
You may also be able to use personal or business assets as collateral instead of a cash down payment. Assets may include property, machinery, or inventory.
If you're open to working with investors, you can give them equity in exchange for the capital you need for the down payment.
A business line of credit is another alternative. Like a business loan, it provides capital for your business, but you can borrow from the line and repay it again and again without having to provide a down payment.
If you need to purchase equipment or machines for your business, equipment loans are typically secured. That means the equipment itself guarantees the loan. If you fail to repay the loan, you could lose the equipment. You might not have to make a down payment. You might also consider opening a business credit card, which is another way to make purchases for your business and pay for them over time.
One final alternative to cash down payments is seller financing, especially if you’re purchasing another business. In this case, the seller acts as the lender for the loan. You may be able to negotiate the down payment and terms.
Why You Should Make a Big Down Payment
If you’re financially able to, making a large down payment, even more than what’s required, can have several benefits.
First, it may help you secure better terms for the loan. That means you may pay less in interest over time than if you hadn't provided a down payment.
You'll also have lower monthly loan payments if your larger contribution means that you need a smaller loan. Smaller payments can help free up capital for other business expenses.
If you're buying real estate, a larger down payment gives you more equity in the property.
A larger down payment means you’re taking out less financing, which can reflect positively on your credit report. You have what's called a debt-to-credit ratio that looks at how much debt you have compared to the credit available. The more debt you take on, the higher that number. If you can keep that number low, you may find your business eligible for future financing needs at better rates.
There’s no need to feel like you’ve hit a dead end if you explore loan options only to find out that the down payment requirement doesn’t work for you. At the end of the day, you may have some control over whether you have to make a down payment, and if so, how much it needs to be. There are advantages to making a down payment, as well as advantages to finding financing that doesn’t require it. Discuss your situation with a qualified loan officer to find out what financing path might be right.
