The answer to the question: “How much down do you need for a business loan?” depends on what kind of business loan you are applying for and what you are financing.
Is it a business or a building (or both)? Partner buyout? Major equipment purchase, or a recapitalization and debt consolidation of your business?
The amount of loan also matters, the type of lender matters, how well qualified you are, etc.
The key takeaway is that there are very definitely situations where you can legitimately get a small business loan with no down payment IF you are expanding an already successful business by either buying property that will be occupied by the business or purchasing another business just like one you currently own.
For in depth information about what is possible please visit our 100% financing page here: how to get a commercial loan with no money down.
If you don’t qualify for a loan without a down payment, the good news is that most other transactions only require 10% down, and there is a lot of flexibility with the source of the 10% and in some cases the amount can be reduced to 5%.
Please note: at Green Commercial Capital we don’t have many options for loans under $350K and we have the most options for businesses in need of $500K or more.
The guidelines for how you can purchase a business – or a business and the business’s real estate – with no down payment are very specific and only possible for existing business owners, however, there are at least 5 flexible ways you can come up with the small required down payment when one is required.
Small Business 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 as well as enough post-closing liquidity – which is another way of saying “reserves.” How much is “enough” is case by case and up to the lender, but most are reasonable. Suffice it to say, you cannot use your last dollar for the down payment.
But also keep in mind, that if a lender feels your application is approvable, and depending on the nature of the transaction, many lenders will add working capital into the loan request. They do this for many reasons, not the least of which is to cover any “unknowns” that were not revealed in underwriting, but also for moving costs, signage, marketing, etc.
Small Business 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.
Small Business Loan Down Payment – When It Is Required
The most common situation where you typically could not get an small business 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, and they won’t finance everything that the SBA rules allow, BUT they will offer a 25 year fixed and for some business owners it is worth coming up with a down payment to get a rate that is fixed for 25 years.
The Small Business Administration’s 7(a) 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.
Use of Funds
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:
- goodwill
- 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. i.e. you cannot finance improvements to space that would be occupied by tenants.
Furthermore, you cannot use income from tenants to help you qualify.**
*As noted above, 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 immediately be used by the business. Also, new construction requires that your business occupy at least 60% of the property square footage initially.
Small Business Loan Terms
Additionally, the terms offered by these lenders are on par with what many SBA lenders offer assuming you were making a down payment. Floating rates as well as 3 and 5 year fixed rates are common and all have a 25 year term and amortization with no balloon.
If for some reason, you cannot qualify with one of the lower, fixed rate lenders but your transaction is still approvable then you might have to settle for a floating rate somewhere between Prime + 0.50% and Prime + 2.75% with the same 25 year term and amortization.
If you can only qualify for a floating rate – which will go both up and down depending on the Prime Rate – keep in mind that you might have an opportunity to refinance into a fixed rate in just a few years. This is because the prepayment penalty for the 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 you may be able to refinance into better terms quickly if you have 10% to 20% equity in the building within a few years.
Also, you are allowed to pay the loan down by up to 25% in each of the first 3 years.
100% Financing for Business Expansion or Acquisition
There are also a few lenders who allow existing businesses owners to purchase another business (with or without real estate) without the typical small business loan down payment.
The key is you have to be expanding your business by either 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 100% 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 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.
Additional Info:
- For more detail on small business loans with no down payment, see this page: 100% commercial loans. The Small Business Administration’s 7(a) program is a financial multi-tool of sorts and one of the reasons why is the flexibility that it gives lenders with regard to what they can offer. The SBA 7a loan down payment can literally be nothing in some instances.
- The 504 program is very different and the SBA 504 down payment needs to be at least 10% and it is a far more restrictive program.
- More info about the 504: SBA 504 Loans