If it were up to the borrowers, small business owners would be able to qualify for business loans with no collateral or money down. Unfortunately, that’s not the way it works. Lenders need a reason to assume the risk of lending to you, therefore requiring some type of collateral or down payment. This is how they can justify letting you borrow thousands—or millions—of dollars.
Still, if you don’t have tens of thousands in the bank to cover the initial cost of securing financing, there are options available to your small business. We’ll show you everything you need to know about obtaining different types of small business loans with no money down.
Why Down Payments on Commercial Loans Matter
If you’ve ever applied for a personal or commercial loan, you know that lenders generally ask you to provide a significant down payment or some other type of collateral. They do this because they need you to have some of your own money invested into the loan. If not, their risk magnifies.
For example, if you had $20,000 to loan a relative to buy a pool, wouldn’t you feel better about them paying you back if they had to put up 25% themselves? That means they have $5,000 of their own hard-earned money into it, making it much more likely that they would work hard to pay for the pool.
While you may still be concerned about lending them the money, they’re related to you. Small business owners are just people that walk into a lender’s office and try to convince them that they’re reliable enough to be loaned thousands of dollars. Your banker won’t be at family reunions asking for their money, so they’ll have to find another way to lessen their risk.
How Lenders Determine Down Payments
Obtaining a business loan with no money down is difficult because it doesn’t help protect the lender’s investment. Even borrowers with the best credentials are asked to contribute cash to secure financing.
How much of a down payment you need for a business loan will rely on a few factors.
Some types of commercial loans mandate a certain percentage of the total loan amount be included as money down. The Small Business Administration requires an SBA 504 loan down payment of 10-20%, for example.
The principal amount has a large effect on a commercial loan down payment. When lenders see big price tags, they see big risks. Even though larger loans are generally only given to more-qualified applicants, banks will still want a big investment on your end to lessen their concerns.
From their perspective, if you can afford a million-dollar commercial real estate loan, you can afford the down payment.
The longer it takes you to pay, the more time you have to default. Because of this, obtaining long-term small business loans with no down payment is very difficult, if not virtually impossible.
Frankly, this approach would not be beneficial for your business in the long run, anyway. Putting up as much money as you can upfront means there is less principal to accrue interest on. This can save you thousands over trying to pay for a 30-year commercial real estate loan with no down payment.
Last—but certainly not least—are your business and personal credit scores. It can be challenging to obtain any type of financing if you don’t have a solid score that shows a history of being able to take on and pay off debt. Without it, applying for a significant business loan with no money down could be a nonstarter.
If you don’t have a long credit history, or certain factors have lowered your score, lenders will need money down to consider your application. To get better overall terms, try building up your business credit score to ensure that you don’t need to put too much money up front.
Money Down = Better Terms
Other than a high credit score, putting a down payment on a small business loan breathes confidence into a lender. Simply put, the more you can put down, the better. Not only does it lower the risk, it’ll lower the rates and fees that come with commercial lending. If you were to ask a bank if you can buy commercial property with no money down, they’d either politely decline your application or offer you a loan with a huge interest rate.
No matter how it happens, lenders find ways to recover any money they loan. If you can’t afford to pay money down you’ll have to find an option that either doesn’t require it or can accept collateral instead.
Money Down and Collateral—How They Differ
Unsecured loans that don’t require down payments or collateral sound like a borrower’s perfect scenario. However, the terms you would be offered in this scenario would be suited for riskier borrowers. Lenders, in turn, would require you to take a big risk, personally, if you can’t provide them some security. Instead of a down payment or normal collateral, unsecured business loan collateral takes the form of a blanket lien that puts your company in jeopardy, or a personal guarantee that places you at financial risk.
It’s always a good idea to put money or collateral up to secure a business loan, if possible. Unlike down payments, using assets such as real estate and equipment for collateral allows lenders to satisfy their need to be repaid if you go into default. For some types of loans, like equipment financing, the collateral is even built in.
Best Small Business Loans With No Down Payment
Although it can be challenging and may not get you the best interest rate, there are some ways to obtain a business loan with no money down that can help your company. Learning a little bit about each one can help you figure out the best fit for your situation and begin your search.
Business term loans are the most common long-term funding solution for small businesses. They allow you to borrow large amounts (into the millions) and feature repayment lengths up to 30 years, depending on your lender and what you use the money to buy.
One of the benefits of a term loan is that you don’t always have to put money down to secure one. If your lender looks over your credit and the rest of your application and deems you a fit, they may only ask that you put up collateral. If you’re using the funding to buy commercial real estate or equipment, however, they might use that asset as the collateral itself.
Interest rates for these financing products are generally lower than other options, and are typically reserved for high-qualified borrowers. If your business profile doesn’t match up, and if you don’t have enough for a large down payment, you may have to look elsewhere.
The Small Business Administration offers multiple financing programs that help owners like you secure funds if they’re unable to qualify for other options like bank term loans.
The two most popular programs—the SBA 7(a) and CDC/504—offer long repayment terms and high principal amounts to qualified borrowers with up to a 90% guarantee from the government. Of course, this comes with a tradeoff. Like anything that sounds too good to be true, there’s a catch; you’ll have to meet certain financial and business criteria, as well as put up to 10-20% down.
For startups and other small businesses that either don’t fit the strict requirements or can’t afford a 504 or SBA 7(a) loan down payment, there are SBA Microloans. These loans are for amounts up to $50,000, but usually fall between $10-15,000.
What makes them tricky is that the SBA doesn’t guarantee a percentage of them. They also don’t require a down payment, but you’ll be expected to offer up some type of collateral to secure funding.
Banks don’t usually offer funding with this low of a principal to average borrowers—especially startups—but the program aims to help minority-, veteran- and women-owned businesses, among others. Still, microloan applicants often have to turn to alternative lending options to find terms that fit their needs.
If you need funding to buy or replace any equipment for your business, you may not need to put money down. Equipment financing can cover up to 100% of cost, meaning the value of the piece of equipment itself will be enough to use as collateral.
Since they can recoup their money in case of default by seizing the asset, this type of financing is less risky for lenders. If the equipment itself will rapidly depreciate, however, they may not fund the full 100%, leaving you to come up with 20% or more for a down payment.
Unlike the previous examples that mainly use fixed assets for collateral, invoice financing—or accounts receivable financing—doesn’t require a down payment. This is because you essentially sell your unpaid invoices to cover the lender’s risk.
With this funding product, a lender pays you for up to 85% of your unpaid invoices, and uses the other 15% to calculate fees until they’re paid off. Think of it like this: They pay you instead of your customer, who, in turn, pays them. You get your money now, but pay a small fee to get it.
Invoice financing is a great option for small businesses that have long payment cycles and generally have cash flow issues because they have to wait for their customers’ money.
Business Line of Credit
Although they aren’t technically a traditional loan, business lines of credit are a great alternative to business loans if you have no collateral or money down. Acting much like the high-limit business credit card that you might already have, lines of credit give you the cash you need, when you need it.
They differ from a credit card in that they don’t have minimum monthly payments. Instead, you withdraw the funding you need and make daily, weekly or monthly payments until you’ve paid in full. Interest accrues during that time, but then you’re free to withdraw more when you need it.
Obtaining a business line of credit solves the cash-flow problems that make it impossible for many owners to put money down on a small business loan. You can offer up collateral to secure better terms, but it’s not always necessary.
How to Buy a Business With No Money Down
This is a question that’s frequently asked by owners looking to buy a business without the cash flow necessary to make a down payment. In most cases, buying a business with no money to put down is unrealistic. Banks and other lenders that offer amounts high enough to purchase businesses find these transactions risky. Because of this, they’ll usually ask for at least 10-20% down.
There are some ways to find no-money-down business acquisition loans, however—they just require a few circumstances to align.
Using the assets of the business you’re looking to buy—as well as your own—for collateral is called a leveraged buyout. The only catch is that the assets must be worth more than the total loan amount, which can be difficult to achieve within certain industries.
If you’re lucky, the seller of the business you wish to acquire may finance 100% of the purchase price. This is very uncommon, however, and a few stars will have to align to convince the seller to let you buy a business with no money down.
Usually, a seller must face at least one or all of these circumstances to consider this type of scenario:
- Their business doesn’t make enough profit to be worth the time and effort to run it.
- The business has enough problems that they’ll want to sell it off as quickly as they can to whoever wants to buy it.
- There are no offers for the business that come with a down payment.
Small business tip: While it’s possible to use your personal 401(k) funds as a business acquisition loan down payment, it’s not the ideal choice. Consider using it only if you’re confident enough in your investment to take the risk.
Down Payments for Commercial Property/ Real Estate
This is another question many small business owners ask, because everything we’ve ever heard about mortgages is that you need a hefty down payment. In some cases, however, a few of the examples of business loans with no money down that we’ve gone over can help you cover the upfront costs.
Unless there is an extreme case with a traditional lender—or the seller will accept a promissory note for a purchase-money mortgage—you’ll need a down payment for a commercial real estate loan. Instead of counting yourself out because you don’t have the cash flow, consider using alternative financing to come up with the money.
Although it’s unlikely that they can cover the whole asking price, you can use the following to obtain enough funding to cover a down payment:
Depending on your lenders, you might not be able to be approved for both types of funding in the span that you need them. Liens, collateral and other issues might make it impossible to finance a down payment for any future loans.
How to Apply for Business Loans With No Money Down
The first step in applying is finding out what you need. Go over the different types of loans we’ve covered and assess what fits what you require funding for.
If you need to purchase new machinery, look into equipment financing. If you need money for working capital in between payments, consider invoice financing. For general purposes, SBA microloans and business lines of credit are a great option.
Think about the collateral you can offer if applying for a loan that doesn’t have it built in, like equipment and real estate financing. If you need a down payment to purchase commercial property, reach out to potential lenders to see if it’s possible to borrow it in a separate transaction.
Whatever you do, don’t worry about not having cash on hand when you need funding. It’s more difficult, but it’s still possible to qualify for a business loan with no money down. You just might have to do a little more digging.