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Are No-Money-Down Business Loans Real and How Do They Work?

Are No-Money-Down Business Loans Real and How Do They Work?
Susan Guillory
Susan GuilloryUpdated January 8, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
You’re ready to take out a loan to expand your business, hire staff, or purchase a permanent space. Trouble is, small business loans typically require a significant down payment and, right now, you simply don’t have the cash. Does that mean financing is off the table?Not necessarily. There are several types of small business loans, including some term loans, that don’t require borrowers to make a down payment. In addition, some lenders will forgo a downpayment if a borrower has excellent credit or can offer collateral to secure the loan. No-money-down business loans may come with higher fees and interest rates than conventional loans, however. So it’s important to shop around, compare business loan rates, and always read the fine print. Here’s what you need to know about no-money-down loans.

What Are No-Money-Down Small Business Loans?

No-money-down small business loans are exactly what they sound like – business loans with no down payment requirement. While many small business loans require you to make a down payment of anywhere from 10% to 30% of the principal amount in order to secure the loan, these loans don’t ask for any initial deposit. Common no-money-down loans include: secured loans, short-term loans, microloans, invoice financing, and business lines of credit.

Why Cash Flow Matters to Lenders

Lenders are more likely to approve you for a no-money-down loan if your business can demonstrate a positive cash flow, which refers to the total amount of money that comes in and out of your business.A positive cash flow means your revenue is higher than your expenses. This enables you to pay expenses, invest in new opportunities, and grow your business. A negative cash flow, on the other hand, means your expenses exceed your revenues. Businesses with positive cash flow tend to be more reliable borrowers that can afford their debt obligations, making them a trustworthy candidate to lenders. 

Why Might You Need a No-Money-Down Business Loan?

If your business is new or just getting off the ground, you may not be able to spend money (as in come up with a hefty down payment) in order to get money. Any available cash may be needed elsewhere in your company. A no-money-down loan can help your business move forward without having to part with precious capital. Lenders will often waive the down payment in exchange for collateral, a higher than average interest rate, and fees. This type of loan isn’t necessarily cheaper in the long term. However, if you need an influx of cash to achieve a healthy return on investment (ROI), a no-money-down business loan may be worth considering. Of course, it’s important to only borrow funds you know you can repay on time.

How Does a Loan With No Money Down Work?

Lenders require deposits to lower their risk. To offset the higher risk involved in offering a no-money-down business loan, lenders may offer lower funding amounts, shorter loan terms, and/or higher fees and interest rates.In some cases, lenders may also require collateral. Using assets such as real estate or equipment as collateral allows lenders to recoup their losses if you go into default. Lenders that don’t require you to put up collateral may instead require a blanket lien (which allows them to place a claim on all assets to satisfy the debt) or request a personal guarantee (which says that if the business can’t pay its debt, the person providing the guarantee will be responsible for repayment).Aside from the initial requirements, no-money-down business loans work the same way as traditional business loans. Typically, you receive the loan principal in a lump sum, then start paying it back (plus interest) according to a predetermined schedule. As with other types of business loans, the interest you pay on a no-money-down loan can be a tax-deductible business expense.

Pros and Cons of No-Money-Down Loans

If you’re short on capital, getting a no-money-down business loan may sound like the ideal solution. However, these types of loans come with both pros and cons. Here’s a look at how they stack up.

Pros

The biggest advantage to a no-money-down business loan is that you can avoid the catch-22 of having to come up with cash in order to borrow cash. Not having to wait until you've saved enough for a downpayment can also mean faster funding.Another plus is that no-money-down business loans often have less stringent requirements, making them a viable option for businesses that have no credit history or a poor credit history. No-money-down loans also tend to be flexible, meaning you can use them for any type of business expense, such as supplies, payroll, equipment, or real estate.

Cons

One of the biggest drawbacks of no-money-down loans is that they often come with higher interest rates than conventional loans. You may also get hit with hefty loan fees, including fees for origination, late payments, and prepayments. Loan amounts for no-money-down loans also tend to be smaller and terms are often shorter compared to conventional loans. In addition, you may have to put up a business asset as collateral in order to secure the loan.Also keep in mind that not putting money down on a loan means the total amount you are borrowing will be greater. As a result, your loan payments will be higher.
Pros of No-Money-Down LoansCons of No-Money-Down Loans
Faster funding, since you don’t have to wait until you’ve saved enough for a downpaymentMay come with high interest rates and fees
May be able to qualify with thin or poor creditMay require collateral
Can typically be used for any type of business expenseWith no down payment, payment amounts will be higher

No-Money-Down Loans vs Conventional Loans

No-money-down loans can come in handy in certain situations, but rates and terms tend to be less favorable when compared to conventional loans. Here’s how the two options compare.
No-Money-Down LoansConventional Loans
Typically offered by alternative lendersTypically offered by banks and credit unions
Can be easier to qualify forMay have strict requirements for approval
No down payment required, but may require collateralDown payment required; may or may not require collateral
Higher interest ratesLower interest rates

Collateral vs Down Payments

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.

6 Types of No-Money-Down Loans

Not every type of business loan requires a down payment. Here are some no-money-down loan options.

1. Business Lines of Credit

If you're interested in getting a loan to relieve cash-flow issues, a business line of credit (LOC) can be a good solution. This kind of financing allows you to access cash when you need it and doesn’t require any down payment. With a small business LOC, you can draw funds up to an agreed-upon credit limit (based on your business’s qualifications) whenever you need them in whatever amount you need. You only pay interest on what you use. Your line of credit replenishes to its original amount once you repay what you’ve used, plus interest.

2. Invoice Financing

Like a business line of credit, invoice financing is a quick way to improve cash flow, and it requires no down payment to secure. With invoice financing, you sell your unpaid invoices to a company who gives you up to 85 percent of the value of those invoices in return. You get the remaining amount, minus fees, once the invoices are paid by your customers.

3. Equipment Loans

If you need a loan to purchase a vehicle or piece of equipment for your business, equipment financing can be a good option because the asset you are buying serves as collateral for the loan. And, if you can receive 100% of the money you need to buy the equipment, there won’t be any down payment involved. In some cases, however, an equipment loan will only cover 80%, which means you would need to come with 20% of the cost in advance.

4. Term Loans

Business term loans, which allow you to borrow a lump sum of money and repay it via monthly payments over the term of the loan, are one of the most common funding solutions for small businesses. And, you often don’t have to put money down to get one. If your lender looks over your credit and application and deems you a fit, they may only ask that you put up collateral or sign a personal guarantee.

5. SBA Microloans

If you’re looking for a startup business loan with no money down, you may want to consider a Small Business Administration (SBA) microloan. Unlike traditional, large SBA loans, microloans are for small amounts (up to $50,000) and typically do not require a down payment. SBA microloan lenders look to accommodate borrowers in underserved communities; female-, minority-, or veteran-owned businesses; environmentally friendly businesses; and certain nonprofits.

6. Crowdfunding

Crowdfunding involves getting small donations from a large number of people via a crowdfunding platform, such as Kickstarter or Wefunder. With rewards-based crowdfunding, you create a post describing your product or service, set a target funding amount, and create tiered rewards for contributors based on the size of their donations, such as a company t-shirt or early access to the product. You need to meet your goal in order to keep the funds, and the platform charges a fee. There are also other types of crowdfunding you might consider, such as equity crowdfunding (where donors receive a stake in the company), debt crowdfunding (where the money pledged by backers is a loan and must be repaid with interest by a certain deadline), and donation crowdfunding (where people give to a campaign for nothing in return).

Applying for No-Money-Down Business Loans

Even if you don’t have the cash available to make a down payment, you may be able to qualify for a small business loan. Here are some things to consider before you apply for a no-money-down business loan.

Check Your Financials

At the end of the day, a lender simply wants assurance that any loans they extend will be fully repaid (plus interest). To qualify for a no-money-down loan, you’ll typically need to show a lender evidence that your business is generating revenue. If it isn’t, you’ll want to look at other assurances you can offer, such as collateral or strong personal credit, that demonstrate to the lender you are a safe bet.

Check Lender Requirements

Some lenders, like banks, have strict application requirements, such as a certain number of years in business and a minimum amount of annual revenue. Online lenders, however, tend to have more flexible criteria and may consider new businesses and those with lower cash flow if they can show other strengths, such as strong personal credit. It’s key to know what a lender is looking for before you start the application process to make sure it’s going to be worth your while.

Can You Afford the Loan?

Before applying for a small business loan, you’ll want to make sure that you have enough revenue or available cash to easily manage the monthly payments. Lenders generally like automatic withdrawals, so you’ll want to ensure that your business account balance is consistently well over wherever the monthly payment amount will be.

Can You Afford the Risk?

The rate and terms of a loan are based on the risk the borrower represents. If you can’t afford to make a down payment, you represent a higher risk to a lender. As a result, the annual percentage rate (APR) and payment frequency may be higher and the repayment period may be shorter than a traditional business loan. You may also have to put a business asset at risk. If you default on the loan, you could lose that asset. 

Business Acquisition Loans With No Money Down

If you’re looking to purchase an existing business, a business acquisition loan can be a good option. This is a loan that's given to a small business specifically to acquire another business. If the business you're buying has sufficient assets to serve as collateral for the loan, you might be able to qualify for a no-money-down acquisition loan. If that’s not the case, you may be able to secure financing directly from the seller. If the owner is eager to sell, you may be able to negotiate a payment plan that doesn’t require a down payment.

Explore Small Business Loans Today With Lantern

If you’re in the market for a no-money-down business loan, keep in mind that a down payment is only one factor that affects the cost of a loan. You’ll also want to compare business loan rates, fees, and repayment terms to find the best deal for your business. With Lantern by SoFi’s online lending tool, you can quickly review and compare small business loan options that meet your company’s needs and qualifications. There’s no obligation and you only need to fill out one application.

Frequently Asked Questions

Do SBA loans require a down payment?
Can you fund a business with no money?
Do no-money-down business loans exist?
What is collateral for a business loan?
What are the downsides of no-money-down loans?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Photo credit: iStock/JuiceBros
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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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