If it was up to borrowers, getting a loan without having to put any money down or with no collateral would be very easy. Unfortunately, it is not up to the borrowers.
When giving you a loan, lenders want to make sure that you are serious about it. This is why they require down payment or some type of collateral. This is then used to justify extending your credit.
If you do not have huge amounts of money in the bank to cover the initial cost of securing a loan, you will still have options. Here is everything you need to know about obtaining different types of small business loans that do not require any down payment.
Table of Contents
- 1 Why is Making a Down Payment Important?
- 2 How Down Payment is Determined
- 3 What Does More Down Payment Mean?
- 4 What is the Difference Between Down Payment and Collateral?
- 5 How to Get a Commercial Loan With No Money Down?
- 6 How to Buy a Business With No Money Down?
- 7 How to Apply for Business Loans With No Down Payment?
- 8 Conclusion
Why is Making a Down Payment Important?
If you have ever applied for either a personal or a commercial loan, you would know that lenders prefer to ask you to provide a significant down payment or some other type of collateral. This is done because they need some of your own money to be invested before they can grant you a loan. It can help them minimize the risk and distribute it amongst the lender and borrower both.
How Down Payment is Determined
How to get a business loan with no money and bad credit is not an easy question to answer. Lenders do not get as much protection on their investment and borrowers with the best credentials, let alone bad credit, are asked to contribute to secure financing.
There are a few factors that help determine how much of a down payment is required for a commercial loan.
1. Loan Type.
Some types of business loans require a certain percentage of the total loan amount that is included as money down. For example, the Small Business Administration (SBA) requires you to submit an SBA 504 loan down payment of 10%-20%. This 10%-20% will represent a cash injection from the borrower which will be known as their equity in the business.
Even though the SBA can help small business owners with less cash or collateral to get a loan, they still might not be willing to provide business loans without any equity.
2. Principal Amount.
The principal amount can have a significant effect on a commercial loan down payment. Whenever lenders see big loan requests, they automatically see big risks. Even though these larger loans are only given to more-qualified applicants, banks still want a big investment on your end in order to put their worries to rest.
3. Term Length.
Lenders are aware that the more time borrowers take to repay a loan, the more time they would have to default on a loan. Because the risk is more, it can be near impossible obtaining a long term small business loan with no money down.
The last factor taken into consideration is your business or even personal credit score. It can be difficult to obtain any type of financing if you have a bad credit history that does not show you taking on a loan and paying your debts on time. Without a solid score, applying for a significant business loan with no money down could be challenging.
If you do not have a long positive credit history or certain factors that have ended up lowering your credit score, lenders will require you to make a down payment before they even consider your application.
In order to get better overall terms, you should try to build up your business credit score so you can ensure not a lot of money is put upfront.
What Does More Down Payment Mean?
If you provide more money down on a small business loan, it will only give your lender confidence. So the more you can put down, the better.
If you put down more money upfront, not only will it reduce the amount you will have to pay back over time but can also result in lower fees and rates from your lender. If you ask a bank whether you can buy commercial property with no money down, they would either politely decline your application or offer a loan that has a huge interest rate.
What is the Difference Between Down Payment and Collateral?
Unsecured loan that does not require putting any money down or collateral is every borrower’s dream. However, the terms you can usually get for these kinds of loans are the same as the ones available for riskier borrowers.
Since lenders know that their loan is not secured by assets owned by the business, they expect borrowers to give outside collateral.
So instead of a normal collateral or a down payment, an unsecured business loan collateral will take the form of a blanket lien that will end up putting your company in jeopardy or a personal guarantee that will make you respond if your business ends up defaulting on its loan.
If you do not have much cash that could be put as a down payment on the loan, you might want to consider providing additional collateral, the only option available for you. Unlike down payments, the usage of assets like real estate or equipment as collateral can allow lenders to satisfy their need to still be repaid even if the borrower goes into default.
However, borrowers should be aware that if they want their property or equipment to be used as collateral, they should be the outright owners of it. And if you already have loans securing these other assets, your lenders will not accept them as collateral on a new loan.
How to Get a Commercial Loan With No Money Down?
Even though getting commercial loans without any down payment can be a challenging task, it is not impossible. It may not get you the best interest rate but there are still some ways you can obtain a commercial loan without putting any money down.
1. Term Loans.
Business term loans are one of the most common long term funding solutions especially designed for small businesses. With these kinds of loans, you can borrow large amounts and repay them over a period of 30 years.
One of the benefits of these loans is that they do not always require you to put some money down to get one. If your lender takes a look at your credit and your application and is satisfied with it, they may only ask you for collateral and no down payment. If you are getting a loan to use the funding to buy commercial real estate or equipment, you might have to give up that asset as collateral.
The interest rates for business term loans are generally lower than other options and are typically kept reserved for qualified borrowers only. If you have a business profile that does not match up and if you do not have enough to make a large down payment, you may have to explore other options.
If you are looking to get funding to buy or replace equipment for your business from the loan, you might not be required to put the money down. Equipment financing can help you cover up to 100% of the cost. This means that the value of the piece of equipment can itself be used as collateral.
Lenders see this type of financing as less risky since they can recoup their money if you default by seizing the equipment. If the equipment will rapidly depreciate, they may require you to come up with 20 percent or more for a down payment instead of funding the full 100 percent themselves.
Since lenders are always sure that they would be able to take the equipment to satisfy their loan in the event of a default, equipment financing can be one of the easiest types of financing for new businesses to qualify. If you are a new business or do not have good business credit yet, equipment financing may be the first option available to you in order to get a good first time business loan.
3. Invoice Financing.
Where other types of loans depend on using fixed assets as collateral, invoice financing, which is also known as accounts receivable financing, does not require a down payment.
This is because in invoice financing, you are required to sell your unpaid invoices to your lender which are then used as collateral.
Invoice financing can be a great option for businesses that have a long payment cycle and cash flow issues just because they are required to wait for their customers to pay them for the work that has already been done.
Even though business lines of credit are not considered conventional business loans, they are still a great alternative if you do not have a collateral or money to put down.
These lines of credit are structured as a type of revolving financing and are pretty much like business credit cards in how they act.
They work somewhat like this:
- When you are approved for a business line of credit, you will be given a pool of money to borrow against. When you are in need of cash, you can just transfer it into your checking.
- Once you have drawn money against your line of credit, you will have to start making monthly payments to your lender in order to cover the interest charged on the money you have used. If you pay anything extra each month, it will go towards your loan balance.
- When you pay back your line of credit over time, the pool of funds available to you will start building back up and you can choose to draw them whenever needed. You will not be required to apply for a separate loan each time you want to access a line of credit through this process and it would not require you to make monthly payments that are above the interest you owe.
5. SBA Loans.
The SBA offers multiple financing programs for borrowers to secure funds if they have not been able to qualify for other options such as bank term loans.
The most popular programs of the two are the SBA 7(a) and CDC/504 which offer long repayment terms along with high principal amounts to qualified borrowers with up to a 90 percent guarantee from the government.
But like all good things, this also comes with a trade off. With a SBA loan, you will have to meet certain financial and business criteria along with putting up to 10%-20% of your money down.
6. SBA Microloans.
SBA Microloans is one of the small business or start up business loans that either do not fit the requirements of a typical SBA loan or cannot afford putting any money down.
However, the feature that makes microloans tricky is the non guarantee feature that conventional SBA loans have. And even though they do not usually require a down payment, you will still be required to offer up some type of collateral in order to secure your funding.
How to Buy a Business With No Money Down?
For no money down commercial real estate, buying a business can be tricky. And in some situations, even unrealistic. If you go to a bank or other lenders, you will find that lending you high amounts of money to purchase businesses is a risky transaction they are usually not willing to make without asking for 10%-20% down payment.
However, there are some ways you can find no money down business acquisition loans.
1. Leveraged Buyouts.
A leveraged buyout is when you use the assets of the business you are looking to buy along with your own personal assets. However, the assets must be worth more than the total loan amount which can be a difficult task to achieve in certain industries.
2. Seller Financing.
If you are buying a business from a friend or family member, you should find seller financing a possibility if you are buying a business that screams trouble or if you are buying from someone who has a lot of trouble trying to sell their business.
In scenarios like such, you may find the seller willing to finance 100% of the purchase price. However, this does not commonly happen and would require nothing short of a miracle to convince the seller to let you buy a business without putting any money down.
Alternatively, the seller might be willing to work with your and your lender if they are truly desperate to sell the business. This is a long shot but they might finance the remaining percent of the business that the lender is not going to finance.
In cases like this where you get some business loan down payment assistance, you can end up making multiple large payments each month without having to buy the business with money upfront.
How to Apply for Business Loans With No Down Payment?
The first step in applying for a business loan with no money down is finding out what exactly you need. Go over the different types of loans and assess which one fits your needs best.
For example, if you need to purchase new machinery, you should look into equipment financing. If you need funds for working capital in between the payments, you should consider invoice financing. If you are working on a start up, SBA microloans and business lines of credit can be great options for you.
If you are applying for a loan that does not have built-in collateral like equipment and real estate financing, you should think about the collateral you can offer. If you need a down payment to purchase a commercial property, you should reach out to potential lenders to see if you can borrow the necessary funds in a separate transaction.
So to answer the question, how to get a commercial loan with no money down, it can be difficult but certainly not impossible. However, whatever you do, you do not have to worry about not having cash in hand if you require funding. It can be challenging but getting a business loan with no assets is still not impossible. You might just have to do more digging than usual and try other ways through which you can get a business loan with no down payment.
If you are a small business owner, you should try to develop a cost-benefit analysis before you accept a loan offer. If you are still uncertain about how to proceed then you can go ahead and seek professional advice from financial or legal experts.
Ultimately, the best business loan you can get is one that you can truly afford. Whether it is a no money down business loan or not, that is up to you and your needs.