In many cases, the answer is yes. Down payments for business loans vary depending on the type of financing.
Learn whether a deposit is required for your small business loan.
Why Some Loans Require Deposits
Most loans and related financing products require some type of deposit upfront. For instance, if you take out a $100,000 business term loan from a bank, your lender may require you to put down a 10% deposit of $10,000.
Many lenders require deposits for several reasons:
- When you put down a deposit, it demonstrates a commitment on your part. This helps persuade the lender that you’re serious about managing your finances and your business responsibly because you’ve invested some of your own money.
- Putting down a deposit also shows you already have some financial resources available. This helps convince lenders that you’re able to repay your loan.
- Putting down a deposit on a loan, this provides your lender with some compensation in the event you default on your payments. This reduces the financial risk they’re taking in extending you a loan.
How Deposits Are Determined
How much of a deposit a lender may require for a business loan depends on several factors, including:
- Different types of loans have different deposit requirements
- The purpose of your loan can affect whether you need a deposit
- Loan providers have varying deposit policies
- Deposits vary directly with the amount of your loan, with higher loan amounts requiring higher deposits
- Your business and personal credit scores can affect your deposit requirement, with lenders requiring higher deposits from borrowers with lower scores due to higher perceived risk
- Collateral can sometimes be used to reduce or replace down payments
Some or all of these factors may come into play when lenders set your deposit requirements.
How Much Deposit Do I Need for a Business Loan?
The deposit required for business loan products varies by type of loan. In general, forms of financing that don’t involve some type of asset as collateral, such as real estate or equipment or invoices, have higher standard deposit requirements.
Small Business Administration (SBA) loans represent one of the best loan options available for small businesses. These loans are offered by lenders who are approved by the federal agency. These lenders have agreed to cap interest rates at a set level in return for SBA backing of a percentage of their loans. This reduces risk to lenders, enabling them to offer better terms to borrowers.
SBA loans include a number of different loan programs. The SBA’s primary program, the 7(a) loan program, provides funding that can be used for general purposes, including covering working capital expenses, purchasing real estate or equipment or refinancing debt. Official guidelines for 7(a) loans don’t specify a minimum down payment requirement, but they do require owners to invest a reasonable amount of equity, leaving discretion to lenders as to what form this equity should take. In practice, lenders typically require down payments of 10% to 20%, according to two financing review sites.
Another popular SBA loan program is the Certified Development Company (CDC)/504 program, used for expanding or improving existing facilities or acquiring new buildings or equipment. Because collateral is involved, borrowers typically only make down payments of 10% on CDC/504 loans, though in some cases this may go as high as 20%.
Conventional term loans are another major financing option for small businesses. As the name indicates, term loans are characterized by a set term length defining how long the borrower has to repay the loan. Term loans divide into short-term loans (1 year or less), medium-term loans (1 year to 3 years) and long-term loans (more than 3 years). Interest rates on term loans tend to be higher than SBA loans.
Down payment requirements on term loans can vary. Normally, business term loans are based on your creditworthiness and don’t require a down payment. However, larger loans or loans to borrowers with poor credit ratings may require a down payment or collateral. Putting down a down payment can also lower your monthly payment requirements.
Commercial Real-Estate Loans
Loans for commercial real estate can be used to purchase, expand or improve existing properties. With this type of loan, the property being financed serves as collateral. If you default on your payments, your lender can claim your property and sell it to recover their losses.
Down payments for typical commercial real-estate loans tend to be higher than their SBA CDC/504 counterparts. A down payment of 20% and up is typical, following the conventional “20% rule” for real-estate loans, although this tends to be somewhat flexible and some lenders may offer lower down payments.
Commercial Equipment Financing
Financing for commercial equipment can be used to lease, purchase or upgrade machinery and other business equipment, including technology items such as computers. Some commercial equipment leases, known as fair market value leases, come with the option of returning your equipment at the end of your lease term, buying it or renewing your lease. Others, known as dollar buyout leases, allow you to buy equipment at the end of your lease for $1. This type of lease often is used to finance equipment that will become technologically outdated by the end of the lease term.
The equipment being financed serves as collateral and can be seized if you default on payments. Because of this, most commercial equipment leases don’t require down payments. However, if your equipment will not be worth much at the end of your lease term, you may be required to make a down payment.
Invoice financing, also known as accounts receivable financing, offers an alternative to traditional loans for borrowers whose business model involves extending credit to customers. Under this type of financing, you sell your outstanding invoices to your lender, who pays you a percentage of their value up front. Your lender then collects your accounts receivable from your customers and pays you the remainder of their value, minus a fee that serves as their cut.
With invoice financing, your accounts receivable effectively serve as collateral. Because of this, invoice financing does not require a down payment.
Business Lines of Credit
A business line of credit works similar to a credit card. Your provider gives you access to an account with a set credit limit. You can withdraw money up to your limit and have it transferred to your business bank account. When you repay money into your account, it becomes available to spend again, an arrangement also known as a “revolving” line of credit.
Lenders extend lines of credit based primarily on your creditworthiness. Because this is the main qualification, business lines of credit don’t require down payments.
Your Down Payment Is an Investment in Your Business
While down payments can seem expensive in the short term, in the long term, they represent an investment in your business. The amount you put down as a down payment helps you secure a larger amount of money you can invest in expanding your business.