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You can keep your business running smoothly and pursue long term growth opportunities with a business loan. Depending on the type of loan you take out, you might need a down payment. A down payment is an upfront partial payment for the loan amount.
In this post, we are going to take a look at the types of business financing options out there and what you can expect from their down payment terms.
Do You Need a Down Payment for a Business Loan?
The business lender and loan type you choose will dictate whether or not you need a down payment. In addition, your credit history may also play a role. However, in most cases lenders ask that borrowers put at least some money down.
The larger your down payment is, the less risk you have and more likely you will get approved for a working capital loan. A large down payment may lead to a lower interest rate and more favorable terms. Other benefits of a down payment are a smaller loan balance and smaller monthly payments.
Down Payment Requirements for Business Loans
While down payment requirements vary significantly depending on the financing option you choose, these are common among many lenders and can give you an idea of what to expect.
SBA Loans
SBA loans offer many benefits including low interest rate, favorable repayment terms, and resources to help start or grow your business. SBA loans have lower requirements when it comes to down payments than other private business loans. SBA 7(a) loans and SBA 504 loans, the most common types of SBA loans require a down payment amount equal to 10% of the amount you’re borrowing.
Commercial Auto Loans
A commercial auto loan might be a good option if your operation transports customers, delivers products or services, or involves heavy travel. Since most auto loans are secured to collateral, which is the vehicle being financed, lenders usually have lenient down payment requirements.
General Purpose Loans
General purpose loans are just like what they sound like; they’re general, meaning you can use them to cover any business-related expense. Due to this, many small business owners find this loan option to be ideal.
Since general purpose loans are so flexible, their down payment requirements tend to be flexible as well. Regardless of whether you opt for an unsecured loan or secured loan, you may get approved with no money down. It’s important to note that a no down payment unsecured loan will likely come with a higher interest rate. With a secured loan that doesn’t require a down payment, you’ll have to put an asset at risk.
Equipment Loans
Chances are your business depends on equipment to meet its goals. An equipment loan can help you get the necessary equipment you need. They are designed for business owners who need to pay for new equipment or update old equipment. Depending on the lender and your credit, you may be able to get an equipment loan with a down payment of anywhere from 0% to 20% of its value. The equipment will serve as collateral for your loan.
The Bottom Line
Small business loan down payments are not created equal. Sometimes, you can get approved for a term loan without any money down. In the event this happens, keep in mind that you may still want to offer a down payment. A down payment can lead to better terms and save you thousands of dollars on the overall cost of your loan.
When you are looking around for business loans, pay attention to the down payment criteria. Look into SBA loans or other government sponsored loans that require lower down payments than private business loans.
