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Guide to Business Loan Down Payments

Guide to Business Loan Down Payments
Susan Guillory
Susan GuilloryUpdated February 1, 2022
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If you're thinking about getting a loan to launch or expand your business, you may want to keep in mind that small business loans often require a down payment. While the idea of having to come up with money in order to borrow money may sound like a catch-22, down payments are a way of lessening risk for the lender. Down payments can also benefit borrowers by improving the loan terms and lowering the overall cost of the loan.Not all business loans require a down payment, however. Whether you’ll need to put money down — and how much — will depend on a number of factors, including the loan servicer, the type of loan, how much you are looking to borrow, and your credit profile. Here’s what you need to know about business loan down payments and how much you may need – or want – to put down in order to get the right financing for your business.

What Is a Business Loan Down Payment and When Is It Due?

You’re probably already familiar with the concept of a down payment on a loan. When you get a mortgage to buy a house or arrange financing to purchase a car, you typically need to make a down payment. Let’s say you purchase a car for $25,000 and a 10% down payment is required. That means you have to come up with $2,500 cash to get the loan. The lender loans you the rest — $22,500.A downpayment on a business loan works in a similar way. It means you’ll need to pay a certain percentage of the total loan amount, say 10% or 20%, up front in order to get the loan.There are many different types of small business loans, and each has unique requirements for if and how much of a down payment may be required.Recommended: Applying for a Small Business Loan in 6 Steps 

What Determines How Large a Down Payment Is?

There are several factors that determine the size of a business loan down payment. The first is the lender’s policies. Some lenders may automatically require a down payment for specific loans or loans that exceed a certain amount, while others may not. It can be worthwhile to shop around and compare small business loans since one lender may require less of a down payment than another.Another key factor is your credit score and credit history. Down payment requirements are often lower for borrowers with high credit scores and solid credit histories. In some cases, these borrowers may even qualify for no-down-payment offers. Borrowers with low scores will likely be required to pay a higher down payment.Collateral may also come into play. If the loan is a secured loan, meaning you put up collateral for it, you may not be required to make a down payment, or you may need to put less down, since that collateral lowers the risk for the lender. 

Why Do I Need to Make a Down Payment?

Requiring a down payment is one of the tools lenders use to manage their risk. By investing your own money, you’re showing the lender that you’re serious about the loan and likely to pay it back. In other words, you’re putting “skin in the game.” In addition, should you fail to fully repay the loan, the lender will at least have that money to lessen its loss.Down payments aren’t just good for lenders, though. They also benefit you as a borrower. By putting up a down payment, you’re able to lower the total amount of money that you will pay interest on. A down payment can also help you get a lower interest rate. Together this can lead to a lower monthly payment and make the loan more affordable over the long term.

Are Down Payments Always Required on Business Loans?

Not every lender requires a down payment on business loans. Some will offer no-money-down loans as an enticement to bring in new business, but will have strict requirements for who qualifies for those loans.Online business loans and the very common term loans generally do not require a down payment, though they may require collateral.Some of the most desirable business loans on the market, however, are offered by the Small Business Association (SBA), and these typically require a 10% to 20% down payment. While it may seem like a hefty amount to plunk down, it can be well worth it since you can often get a long-term, low interest rate loan in return.Most larger business loans — including commercial mortgages, commercial auto loans, and equipment loans — also require down payments to get approval for funding.

Required Down Payment by Loan Type

With so many different types of business loans, it can be confusing to know which require a down payment and which do not. For some loans, a down payment is always required but may vary based on the borrower’s profile and loan amount. For other loans, a down payment may not be required at all. Here, we break it down by different types of loans.

Commercial Mortgage Down Payments

For many businesses, commercial real estate is one of the biggest purchases they will make. Due to the size of the purchase, most business real estate loans require a downpayment. How much they will require will depend on the lender. Commercial mortgages offered through government-sponsored programs, including the SBA and the Department of Housing and Urban Development (HUD), generally offer some of the best financing options. If the property will serve a governmental purpose (such as a healthcare facility or public housing), your chances of scoring good terms tend to be even better.Here are some examples of commercial mortgages and the down payments they may require.

Commercial Vehicle Down Payments

If you need a vehicle to conduct business or deliver goods, you’ll likely be in the market for a small business auto loan. Some lenders specialize in providing business auto loans and fleet financing. For heavy-duty vehicles (weighing 2.5 tons or more), you will typically need to use an equipment loan. In some cases, lenders are willing to finance a new vehicle with no down payment because the vehicle serves as collateral for the loan. Whether a downpayment is required and how much it will be often depends on the buyer’s profile.Here are some common types of commercial vehicle loans and possible down payments they may require. 

General Purpose Business Loan Down Payments

There are a variety of general business loans you can use to hire staff, invest in marketing, buy inventory, or cover other business expenses. This includes traditional term loans, lines of credit, and government-sponsored lending programs. These types of loans tend to be more flexible than business auto loans and commercial mortgages, since they can be applied to various purposes. Whether you are required to make a down payment on a general business loan will depend on the type of loan and your qualifications. Some of the most sought-after general business loans are SBA loans, which have stringent qualifications and, in most cases, require a down payment. Here’s a look at common general business loans and the down payments they may require.

Down Payments vs. Collateral

Down payments and collateral are similar, but also have some key differences.A down payment is a cash payment you make to the lender before you receive the loan. If you default on the loan, you forfeit your down payment.Collateral is an asset you put up against the loan. This means you give the lender the right to take the asset if you are unable to pay the loan. Collateral could be a vehicle, piece of equipment, inventory, or real estate. Collateral allows you to keep more liquid capital in your business, but comes with the risk that you could lose the asset.Both down payments and collateral serve the same purpose — they lower the lender’s risk. Some loans require one or both, while some require neither. Generally, if a loan requires either a down payment or collateral, it will have a lower interest rate.

Pros and Cons of Putting the Minimum Down

If you are required to make a small down payment for a business loan, should you pay the minimum…or should you make a larger down payment? Let’s look at the benefits and drawbacks of paying only the minimum.

Pros

Having any kind of down payment means you’ll need cash upfront before you even get the loan. By paying the minimum, you may find it easier to come up with the down payment, particularly if you don’t have a lot of cash on hand.By only paying the minimum, you may also be able to come up with the down payment faster, which means you can get the loan sooner.

Cons

The smaller the down payment, the larger the balance — and the more total interest you’ll end up paying on the loan. As a result, you may end up with a larger monthly payment than you’d like. By paying just the minimum, you may also end up paying a higher interest rate than if you offered a higher down payment.

Should You Pay the Minimum Down Payment?

Once you establish how much you are required to have as a down payment for the business loan you’re planning to apply for, you may actually want to consider paying more. Why? The less money down you offer, generally the higher your monthly payments and higher the overall cost of the loan.Lenders typically offer lower interest rates on business loans with higher down payments to incentivize a borrower to pay more up front. If your business can afford to make a greater contribution to the down payment, it can reduce the overall interest costs of the loan.This can be a smart move if your business has an uneven cash flow, yet you have a lump sum available now. This can lead to lower payments when you may have less cash available.On the other hand, if cash is tight right now, but you are confident you can pay the larger monthly payment, you might go with just the minimum required.

What if You Can't Afford a Down Payment?

If you can’t afford the down payment on a small business loan, you’re not necessarily out of financing options. One solution is to look for loans that have lower down payment requirements. SBA loans and loans sponsored by government entities can help businesses in a bind since they may require lower down payments than private business loans and offer competitive interest rates.  You can also look into loans that don’t require a down payment, such as online loans and lines of credit. Another option is to borrow less money, since some lenders only require a down payment if you’re borrowing a large amount of money. If you have some time before you need financing, you can start saving up for the downpayment by transferring extra cash each month into a high-yield saving account, money market fund, or certificate of deposit. Or, you might work on paying off credit cards and debts you currently own. Once they are paid off, the money you were using to pay balances plus interest each month can now be applied to the down payment.If a low credit score is the reason for a high down payment, you can work on building your credit profile, so you are able to qualify for lower down payments — along with improved interest rates and terms — in the future.
Photo credit: iStock/ SDI Productions
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1221015

Frequently Asked Questions

How much do you have to put down on an SBA loan?
Is a down payment always required on a business loan?
Can you get a business loan with 10% down?
Can you make more than the minimum down payment?

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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