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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 Guillory

Updated May 3, 2022
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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.

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 who 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 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 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.

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.

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.

Types of No-Money-Down Loans

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

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.

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.

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.

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.

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.

Applying for No-Money-Down Business Loans

The process of applying for a small business loan with no money down will vary from one lender to the next. You will likely be asked questions about your business, such as the industry it’s in, time in operation, and annual revenues. You may also be asked about your personal finances.Depending on the lender, you may be able to finish the application and upload your supporting documents online in just a few minutes. In some cases, it may be a more extensive and time-consuming process. Also depending on the lender, It might take as little as a few hours or as long as a few months to get a decision.Once you’re approved, make sure to review the loan agreement carefully to know exactly the terms you’re signing up for. Look closely at the annual percentage rate (APR). A loan’s APR is the real cost per year of borrowing money because it includes not only interest but also added fees. APR is also the best metric to use as a comparison if you’re evaluating multiple no-money-down loan offers.

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.
Photo credit: iStock/JuiceBros
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.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. SOLC1221026

Frequently Asked Questions

Do no-money-down business loans exist?
What is collateral for a business loan?
What are the downsides of no-money-down loans?

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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