The amount required for a down payment for a business loan will vary depending on the type of loan and how much you need, along with your credit history. It is different for various business loan types and isn’t always required for the most popular loan types.
Taking out a business loan could be just the opportunity your small business needs to grow, purchase new equipment, invest in real estate, or simply have working capital available on hand to manage the day-to-day costs of doing business. But how much down payment is needed for a business loan?
The short answer: It depends. And that’s not always a very satisfying response, particularly if you’re running a cash-strapped or very young business. As you consider whether taking out a loan is the right choice for your business, the upfront cost of financing might be a major concern—a large down payment might make it impossible to even consider a business loan.
Luckily, there are business loan options for every type of business and at every range of affordability. Some types of business loans don’t even require a down payment.
The best thing you can do, as always, is homework. A lot of it. Let’s start by taking a look at the business loans you can choose from, including those without a down payment. And if those aren’t an option for the financials of your business, we’ll help you figure out some alternatives that could work for you, too.
How much down payment is needed for a business loan?
USDA Business & Industry Loan
10%-16.7% depending on purpose
HUD FHA Healthcare Property Loan
Fannie Mae Apartment Loan
Fannie Mac Apartment Loan
Commercial Equipment Financing
Business Loan Down Payments 101
Each type of business loan—and there are many—has unique requirements for if and how much of a down payment is required.
To make better sense of exactly how loan down payments work and whether they’ll be a factor in your business financing journey, let’s explore the different types of business loans available, the types of businesses those are best for, and how much down payment is required if at all.
The most common types of business loans
We’ll examine each of the most common types of business loans and their required down payments. These include:
Commercial real estate loans
Commercial equipment financing
Term loans and short-term loans
What determines how much down payment is required
There are a few important characteristics to keep in mind when evaluating how much down payment will be required for your business loan.
Some business loans require a set down payment, meaning it’s a predetermined percentage of the total amount of loaned funds. For other loan types, the down payment amount fluctuates depending on a few factors:
Purpose of the loan (how the funds will be used)
Financial profile of the borrower (this can include the business owner’s personal financial history as well as that of the business)
All of these factors are evaluated by the lender during the loan application process. The stronger your borrowing and financial history, the lower your interest rates will be and the lower the required down payment will be. For borrowers with poor credit history, the penalty might be a higher down payment.
Some of the most sought-after and desired business loans are SBA loans. SBA loans are offered for a range of businesses by the Small Business Administration, an agency of the U.S. federal government, and their lending partners.
The SBA pairs with traditional banks as lending partners to offer small business owners a low-interest, long-term loan option. There are few loans that can beat the value of an SBA loan. This also means that the eligibility requirements to be approved for an SBA loan are the most stringent, making it difficult for most businesses to get approved.
Yes, an SBA loan down payment is required most of the time.
Although there are many types of SBA loans, the two most common SBA loan programs are the SBA 7(a) loan and the CDC/SBA 504 loan. Both of these types of SBA loans do require a down payment.
On the other hand, there are SBA loans that don’t require down payments:
Most of these SBA loan options are for specific types of applications and business owners. These SBA loans will have a lot of restrictions so you should investigate whether you’re eligible for any of these loans before completely diving into an in-depth application. Consider starting your research with the SBA 7(a) and SBA CDC/504 loans.
What type of business is an SBA loan best for?
There’s an SBA loan for almost every type of business. The real determining factor in what type of business an SBA loan is right for: business credit score. SBA loans are highly sought after so lenders can be choosy about who gets approved. Only businesses with strong borrowing histories qualify for SBA loans. Ideally, you’ve been in business for two years, have a good credit score, and strong revenue.
Commercial real estate loans
One of the most common reasons businesses seek a loan is to purchase commercial real estate. This is also one of the biggest financial investments a business can make. Fortunately, there are many options when it comes to commercial real estate loans.
Commercial real estate loan down payments
Most commercial real estate loans require a downpayment. For most businesses, commercial real estate is one of the biggest purchases they’ll ever make. Saving up the cash to have a down payment for a commercial real estate loan takes time and planning but is necessary if you want one of these loans.
What type of business is a commercial real estate loan best for?
A commercial real estate loan is a broad category of loans. With so many types of commercial real estate loans, there really are options for every type of business. If your business is looking to purchase commercial real estate, you’ll likely need one of these commercial real estate loans. Every type of commercial real estate loan will require a down payment, so it’s important to set aside some cash and begin saving before applying for a loan.
Commercial equipment financing loans
If your business is in need of new equipment, you should consider commercial equipment financing. Equipment financing enables your business to purchase the equipment it needs right away and pay it off over time.
One of the benefits of commercial equipment financing is that the lender considers the purchased equipment collateral. This means that you, as the borrower, might not have to put down any money or collateral to receive approval for the loan.
Is a down payment required for equipment financing?
Whether or not a down payment is required for equipment financing depends on the amount of the loan, the equipment being purchased, and your financial history. Some equipment financing loans require no down payment, so you can receive 100% financing for your equipment.
The equipment purchased with the loan funds is considered collateral, so the lender doesn’t require any down payment for commercial equipment financing. If the borrower defaults on payments, the lender can collect the collateral (the equipment purchased with the loaned funds) as repayment for the loan. Collateral is the lender’s protection that they won’t lose money on the loan.
Other times, a borrower can only receive 80% financing for the loan. This leaves up to 20% of the cost to be paid by the borrower in the form of a down payment.
Technically, any loan can be used to purchase commercial equipment. The benefit of specifically applying for and using equipment financing to purchase equipment is that some lenders will provide 100% financing and use the equipment as collateral. And, as a collateralized loan, equipment financing can sometimes also be done at a cheaper rate than a standard term loan. For traditional loans, there’s more likely to be a down payment required.
What type of business is commercial equipment financing for?
If your business needs new gear, then equipment financing is right for you. Equipment financing offers a quick solution to getting cash to purchase equipment. Some businesses are even eligible for 100% financing. All of this makes equipment financing great for businesses that are new and need equipment to get started, and also for businesses that are growing and need updated equipment or a makeover.
Business line of credit
A business line of credit is simply an amount of capital that is available to a business immediately. When capital is needed, you use some—only as much as you need. The amount used is paid back over time plus interest. You can think of a business line of credit like a credit card, but (often) with lower APRs and (always) access to cash.
Is a down payment required for a business line of credit?
A business line of credit doesn’t require a down payment and you only pay interest on the funds that are used. A business line of credit sometimes requires collateral but is also a great way to build up a strong financial history and credit score.
What type of business is a business line of credit best for?
There are no specific requirements on what types of businesses are eligible for business lines of credit. The lender will look at your credit score and financial history, but qualification for this type of loan isn’t limited to certain types of businesses.
For businesses that invoice customers, one of the major headaches they experience is a lack of cash flow. This can be due to strong seasonal fluctuations in business revenue or customers who don’t pay their invoices on time. Either way, invoice financing can help resolve that cash-flow issue. Invoice financing is fast. Most businesses can get cash in hand within one to five days of their application.
Most invoice financing lenders follow this simple process:
Connect your cloud-based software to their online portal
Choose which invoices you’d like to finance
Receive up to 85% of the value of those invoices in cash
Once a customer repays the invoices, you repay the lender plus fees and keep the rest of the invoice amount
Is a down payment required for invoice financing?
No down payment is required for invoice financing because the financed invoices act as collateral for the loan. Also, most invoice financing lenders don’t loan 100% of the invoice total, but closer to 85%. Some lenders offer 100% financing, but that’s pretty rare.
What type of business is invoicing financing best for?
The only invoice financing qualification limitation on invoice financing is that your business must invoice customers. Some invoice financing lenders work only with B2B or B2C borrowers, but that’s designated by the lender, not the type of loan.
Term and short-term loans
A term loan is a traditional loan, you’re loaned a lump sum of cash, which you pay back plus interest over a period of time set by the lender. Payments are typically collected monthly. A short-term loan is very similar, you receive a lump sum of cash that’s paid back with interest. The difference is that payments are made daily or weekly over three to 18 months.
Is a down payment required for term and short-term loans?
Term loans and short-term loans don’t require a down payment. The caveat here is that you’re only approved for what the lender thinks you can afford. So if you want to make a $100,000 purchase, but the lender thinks you can only repay $80,000, that’s what they’ll loan you.
So even though term loans and short-term loans don’t require a down payment, it doesn’t mean you’ll be approved for the full amount that you need. That’s up to the lender, who evaluates your profile and qualifications when you submit your app. The business still might need to contribute toward the desired purchase.
What type of business are term and short-term loans best for?
Term loans and short-term loans are the bread and butter of loans so there’s an option for every type of business, every type of purchase, and for every price point. Each lender has a specialty, but if you’re in need of a loan, you’ll find an option out there that’s right for your business.
If you don’t have cash for a down payment
If you’ve decided that the best loan option for your business is one of the types that requires a down payment but you don’t have any cash saved up, there are still options.
You can consider the following financing options.
ROBS or rollovers as business startups financing. The way this works is that you can access some of the funds within your 401(k) or IRA, without penalty, to start a business. Essentially, you can borrow up to $50,000 from your retirement account penalty-free to start a new business. You pay no withdrawal penalties, taxes, or interest on the funds you use.
A home equity loan, or HEL, uses the equity you own in your home as collateral for a loan. The downside to these loans is that, if you can’t repay them, your house can be repossessed. This type of loan can be used to fund a startup or an existing business.
A HELOC or home equity line of credit is slightly different than a HEL. Instead of a loan, this offers a line of credit that functions similarly to a credit card. You can use some or all of the funds offered, and you only pay interest on the funds that are used.
Even if you’re currently without enough cash or savings to afford a down payment for your loan, there are still options.
How much down payment should I put down for a business loan?
Just because a down payment isn’t required, doesn’t mean you shouldn’t put some money down if it’s available or you have cash set aside and saved up to help with prepayment. Taking out a loan is a big step for any business, and there are major consequences for not being able to repay the loan. It’s important to take time to research all of the available loan options and study your business’s finances to make sure you fully understand just how much of a loan you can afford.
Many businesses have bitten off more than they can chew when it comes to loans, and they have been forced into default because of it. Before committing to a loan product, make sure it’s within your budget.
The bottom line
The big takeaway here is that the majority of loans don’t require a down payment from the borrower. And that’s good news for businesses that are looking for a loan to help with cash flow. Most loans—including the very common and popular term loans and short-term loans—don’t require a down payment.
But one of the best loans on the market, the SBA 7(a) loan, requires a 10% to 20% down payment. It’s worth it if you can qualify, though—in return, your business will receive lower interest rates and longer repayment terms.
Whatever type of loan you decide is right for your business, remember that a down payment isn’t always a bad thing. A down payment helps to lower your overall cost and to plan ahead and save for the repayment of the loan. Even if a down payment isn’t required, you might decide it’s the right decision for your business to pay some of the loan cost up front.
This article originally appeared on Fundera, a subsidiary of NerdWallet.