SBA loan down payment requirements vary depending on the program and the use of funds.
The SBA 7a loan down payment can literally be nothing in some instances and the SBA 504 down payment can be as little as 10%.
In either case, there are multiple, flexible options for coming up with any required down payment including the ability to borrow the down payment.
SBA Loan Down Payment – When You Don’t Need One
If you have an existing cash flowing business that you have owned long enough to be consistently profitable, and you are buying an “owner-occupied” business property then certain SBA 7a lenders will NOT require that you have a down payment.
The most common scenario is a “rent replacement” situation where your business is moving from renting to owning. These transactions are usually very straightforward as long as you have the right qualifications (good credit, cash flow, etc.) and you can show that your business can obviously afford the new payments.
Additionally, the terms offered by these lenders are very good as they can be as low as the mid 4’s on a 5 year fixed with a 25 year term and amortization as of this writing in January of 2022.*
If you cannot qualify with one of the lower rate lenders for some reason but your transaction is still approvable then you might have to settle for a floating rate at or below Prime + 2.75% (6% today) also with a 25 year term and amortization. Keep in mind that the prepayment penalty for the SBA 7a loan is very short and reasonable and it allows you to refinance with just a 1% penalty after 2 years or no penalty after 3, so there is an exit strategy to get out of a higher floating rate loan in the very near term.
Also, keep in mind that due to the hyper-flexible nature of the SBA 7a loan program all of the following can be financed along with your property purchase whether you are making a down payment on the loan or not:
- building renovations
- working capital
- moving costs including costs to dismantle and install heavy equipment
- equipment purchase or refinance
- business debt consolidation
- inventory (not every lender’s favorite, but possible for solid businesses)
51% or more of the proceeds of the loan would have to be used to finance the real estate in order for the loan to be fully amortized over 25 years. Also, regarding renovations, you can only finance improvements to the 51% or more of the space that your business would occupy. You cannot finance improvements to space that would be occupied by tenants.
Furthermore, you cannot use income from tenants to help you qualify.**
*It should also be noted that all of these lenders have minimum loan amounts, so generally speaking the most attractive 100% financing options are for loans over $500K, but loans down to $350K are possible if the deal is straightforward enough.
**there is some flexibility with ground up construction as there are lenders who will let you build out generic space that will not be used by the business immediately, but ground up construction requires that your business occupy at least 60% of the property square footage initially.
For more detail on SBA loans with no down payment, See this page: 100% commercial loans.
100% Financing for Business Expansion or Acquisition
There are also a few lenders who allow for 100% financing for an expanding business that is opening another location or purchasing a competitor. In this case, it is possible to purchase either a building, a business, or both, but if (and only if) it is a make sense transaction. i.e. that you are purchasing a business in the same industry, doing the same thing your business does. (And again, the transaction has to have what it takes to get a lender comfortable with the associated risks). This scenario is far less common, but transactions like this are routinely funded by certain lenders where there is no down payment on a purely goodwill purchase.
For more information on this type of scenario, click here: SBA loan for an online business.
Medical, Dental & Veterinary Practice Loans
Also, keep in mind that there are some specialty conventional (non-SBA) programs with exceptionally good terms for medical, dental and veterinary practices for practice purchase, building purchase or practice startup. Please contact us at 1-800-414-5285 if you would like more information on those programs.
SBA 7a Loan Down Payment – Acceptable Sources
Should you need a down payment then these are the acceptable sources per SBA rules:
- The down payment can be borrowed IF you have another stable source of income or a spouse with income and you can afford to make the payments on the borrowed funds from that other source of income.
- You can get a gift from friends or family
- You can have “investors” – again, typically friends or family who would typically contribute part of the down payment in exchange for a small percentage of ownership.
- You can rollover over a retirement account – which can be done tax and penalty free in some cases.
- The seller of the property or business can hold a second mortgage on “full standby” which means that you do not make payments to them while you have the SBA loan, but because the loan is on standby the lender can treat the seller held loan just like it is additional down payment funds from you. In this case, the SBA allows the seller to hold half of the required down payment, so for a transaction that requires a 10% down payment you would only need 5%. Many sellers are happy to do this as they are still getting 95% of the sales price of the business/building at closing and sometimes buyers will pay a little extra for the business or building (assuming there are no issues with the real estate appraisal or business valuation) in order to make this work.
- If you have equity in hard assets or another property (or on your business balance sheet) then it might be possible to pledge all or part of that equity in lieu of making a down payment. This is much harder to get a lender to allow, but not out of the question.
One major caveat: when employing any of these strategies a lender will require that have enough of your own skin in the game. How much is “enough” is case by case and up to the lender, but most are reasonable.
SBA Down Payment – When It Is Required
The most common situation where you could not get an SBA 7a loan without a down payment is when you are trying to get a 25 year fixed rate. 25 year fixed rates are possible with a few select lenders and the rates are usually excellent, but these lenders are generally more conservative in every way – in addition to at least 10% down, they require better credit and credit scores, more post-closing liquidity (reserves), and they won’t finance everything that the SBA rules allow, BUT they will offer a 25 year fixed and it is absolutely worth coming up with a down payment for a lot of business owners.
The SBA 7a loan program is obviously very flexible and does NOT have a specific down payment requirement for certain transactions as outlined above. Below are scenarios where borrowers are required to make a down payment:
- Startups require 10% down – period
- 10% down is required if buying someone else’s business and the transaction is NOT an expansion of your existing cash-flowing business.
- Any transaction using the SBA 504 loan. With the exception that they can both be used for long term commercial real estate or equipment financing, the 504 is a very different program from the 7a and has specific requirements for down payment depending on what you are looking to do.
SBA 504 Loan Down Payment
The 504 is an unusual program due to it’s 2 loan structure and it’s down payment requirements can be a little confusing but here are the basics.
- All borrowers must put down a minimum of 10% for any 504 loan.
- New or startup businesses must put at least 15% down.
- Special purpose properties (hotels, gas stations, wineries, theatres, family entertainment centers, golf courses, marinas, bowling alleys, etc.) also require at least 15% down.
- Transactions for new businesses/startups that are also special purpose require 20% down.
More info about the 504: SBA 504 Loans