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Guide to business loan down payments

Depending on the borrower and loan type, some business loans may require a down payment to qualify.

There are plenty of business loans with no down payment requirements, but certain types — such as SBA loans, equipment financing and commercial real estate loans — often require an equity injection from the borrower to qualify.

What is a down payment for a business loan and how does it work?

A down payment, also known as an equity injection, is a percentage of the loan amount that some business lenders require up front to approve certain types of loans. Down payments reduce the risk for lenders, which increases the chance you’ll be approved for the loan. Basically, a borrower with a financial stake in the loan is more likely to repay it.

For example, a commercial real estate lender may agree to finance 90% of a $1 million property you want to purchase. That means you would be responsible for putting up $100,000.

The exact percentage required is calculated based on factors such as the purpose of the loan, the amount and your creditworthiness. If you can afford more than the minimum down payment required, you may qualify for a better interest rate. Typically, down payments are made at closing using a certified check, cashier’s check or wire transfer.

Do you need a down payment for a business loan?

Not every business loan requires a down payment. Down payments are most often required if you are buying large fixed assets such as real estate or heavy equipment. Down payments may also be required for startups, newer businesses or borrowers with lower credit scores.

How much is a down payment on a business loan?

Down payment requirements vary based on the lender, the loan’s purpose, the loan amount and borrower qualifications. Here’s an idea of what a down payment may cost you by loan type.

Loan typeLoan amountsDown payment cost
SBA loans$500 – $5.5M10% – 30%
Commercial real estate loans$25K – $5M+10% – 30%
Equipment loans$25K – $5M+0% – 20%
Business lines of credit$5K – $250K+None
Business term loans$5K – $2M0% – 20%
Microloans$500 – $50KNone
Online business loans$5K – $5MVaries
Invoice factoring80% – 95% of unpaid invoicesNone
Invoice financing80% – 90 of unpaid invoicesNone
Merchant cash advanceUp to $1MNone

What types of loans require down payments?

Only specific types of business loans usually require a down payment.

SBA loans

Some SBA loans that fall under the 7(a) and 504 loan programs require a down payment of at least 10% but could be as high as 30%, depending on the lender and other considerations. For example, 504 loans always require at least 10% down, but startups or some special-purpose properties may call for a larger contribution from the borrower.

Common loan purposes that fall under these categories include working capital, inventory, real estate and equipment, but they could include loans for almost any business need. In determining the exact percentage, lenders consider time in business, creditworthiness, loan amount and purpose.

Commercial real estate loans

Real estate loans generally require a minimum equity injection of 10% to qualify for the loan, but some lenders may require more than that. They’re similar to residential mortgages in that borrowers must invest a percentage of the purchase price to qualify for the loan. A higher-than-required down payment can result in more favorable loan terms.

An appraisal of the property also plays a role in determining the down payment, along with the financial health of the business and the owners’ credit history.

Equipment loans

Equipment loans fall into two categories: loans used to purchase equipment and loans used to temporarily lease equipment or machinery. Either way, equipment financing often requires a down payment of 5% or more, but that is not a hard and fast rule. Some businesses, particularly online lenders, may not charge a down payment at all. Still, others may accept collateral instead of a down payment.

Business term loans

Term loans for business purposes, like equipment financing, don’t always require a down payment, but you may have to put down up to 20% to qualify for the loan. The amount of the down payment depends on the lender, the loan purpose, the loan amount and other factors.

Online business lenders and Community Development Financial Institutions (CDFIs) are typically less likely to require down payments. You might also get a term loan from a bank if you put up collateral or sign a personal guarantee.

Compare business loans

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Factors that determine if your business loan needs a down payment

There are a number of factors that lenders consider when determining if you need to make a down payment and for how much.

  • Loan purpose. Certain types of business loans, such as those for real estate and equipment financing, are more likely to have down payment requirements.
  • Loan amount. Smaller loans are considered less risky, so lenders may not require a down payment. But if you want to borrow a large sum, you may have to put money down to qualify.
  • Collateral. If you use collateral to help secure the loan, a lender may take that instead of a down payment. Or, collateral could reduce the size of the down payment required.
  • Credit scores. In some cases, borrowers with excellent personal and business credit may not be required to put money down on a loan.
  • Time in business. Startups and newer businesses are considered riskier borrowers, so they may have minimum down payment requirements regardless of their ability to repay the loan.
  • Individual lenders. Some lenders, such as those that specialize in online business loans, may not require down payments at all. SBA loan lenders, on the other hand, often have minimum down payment requirements regardless of the borrower’s qualifications.

Tips to increase your chances of loan approval with no down payment

If you don’t have the cash to make a down payment, consider these options to boost your chances of loan approval without making a down payment.

  • Offer collateral. If you have sufficient business or personal assets, banks may consider that instead of a down payment.
  • Agree to sign a personal guarantee. If your personal credit is in good shape, some lenders may be willing to accept a personal guarantee and forgo the equity investment.
  • Apply online. Online business loans typically don’t have down payment requirements but interest rates may be higher and loan terms less flexible.
  • Request a lower loan amount. Smaller business loans may not require a down payment, although this option may not be feasible if you need a specific sum.
  • Get a cosigner. If you have a close friend or family member with good credit who is willing to cosign on your business loan application, you’ll have a better chance at securing a the loan.

Alternatives to down payment business loans

As mentioned, not all business loans have down payment requirements, so it’s worth looking into some alternatives that might fit your needs.

  • SBA Microloans. Microloans backed by the SBA offer loans up to $50,000 for small businesses and some nonprofit childcare centers. Microloans don’t require a down payment, but you may need to put up collateral or sign a personal guarantee.
  • CDFI loans. Community Development Financial Institutions (CDFIs) include banks, credit unions loan funds and other investors. These organizations offer loans to small businesses in low-income and underserved areas and typically don’t require down payments.
  • USDA loans. Businesses that operate in eligible rural areas may qualify for USDA loans that don’t require down payments. However, you’ll likely need collateral and a personal guarantee.
  • Short-term business loans. Shorter-term loans from online or non-traditional lenders or investors probably don’t require down payments. However, the overall cost of the loan could be significantly higher than for loans that require a down payment.
  • Business credit cards. Just like personal credit cards, business credit cards don’t require a down payment and can provide funding for a multitude of business needs. The downside is that borrowing limits are lower than other types of funding and interest rates may be high.

Bottom line

There is a business loan to suit almost any business need, and some require down payments from about 5% to 30%. Lenders that offer real estate loans, equipment financing, term loans and certain SBA loans are most likely to require down payments. However, the percentage depends on your business and personal credit, the loan amount, the loan purpose and other factors.

For business owners who can’t afford a hefty down payment, you may be able to offer collateral or a personal guarantee instead. Also, many other forms of business funding don’t require an equity injection at all.

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