In a perfect world, small businesses would be able to apply for commercial loans and get approved without having to put anything down. Unfortunately, this isn't the case. A lender often wants to see money down on a loan to justify the risk. Especially when it comes to small businesses, more and more lenders are hesitant to loan money without seeing something substantial down first. That, however, doesn't mean that it's impossible to find a no money down business loan. In this article, we discuss some options regarding what might be available to your business.
The Rationale Behind Down Payments
The banks want to know that you've got money invested into the loan—this then helps offset some of the risks that otherwise is involved with lending to a smaller business. Without this, they see it as potentially too much risk and thus the chances of your application being approved decrease.
In applying for any type of commercial loan product you are in essence trying to pitch them on the fact that you're reliable and will make your payments diligently and on time. You are presenting as much evidence to substantiate this as possible—from credit score to collateral, to yes, a down payment.
This is why it can be difficult to find loans out there that don't require any money down. Even if all else looks impeccable as far as your application, identifying no money down business loans can be a tough task.
You Get Better Terms With Money Down
When you can put something down on a loan, the lender is much more at ease and thus much more comfortable qualifying your business. As such, they may be willing to work with you a little more as far as terms; in other words, overall, your terms could be much more favorable if you can do a down payment. For one, having money down could lower your interest rate throughout the loan. Additionally, it could also help with some of the attached fees.
So what does happen when you can't afford to put anything down? Are you stuck? Do you have many options available to you? Below is a breakdown of some of the best small business loan products that don't necessarily require your company to provide a down payment.
Small Business Loans With No Down Payment
Keep in mind, finding these loans can be a bit challenging; plus, the interest rate you're likely to get is going to be higher and the terms not quite as favorable as if you were putting money down.
Term Loans - Traditionally a business term loan is going to be your most common type of loan. With terms up to thirty years, you can generally borrow into the millions if need be and utilize that money for whatever your business requires.
With a term loan, money down is not a given. If the rest of the application is up to par (meaning good credit, several years in business, healthy revenue, and potentially collateral/) you could be approved based upon these factors alone without a hefty down payment.
With this type of loan versus some of the others we will discuss, your interest rates are most likely going to be a bit lower. Thus, traditional term loans are generally granted to those who are otherwise well qualified. If your credit score isn't there and you lack collateral, for instance, you probably will not be approved for a traditional term loan through a bank.
Equipment Financing - When buying equipment, your best bet may be to look into equipment financing. Often the lender will approve you for up to 100% of the amount of the equipment you're looking to buy. This is because the equipment itself becomes the collateral on the loan. In other words, if you do default, the lender can then take back the piece of equipment and thereby sell it to recoup their loss. Do keep in mind, that certain equipment does depreciate, so depending on what you're buying, they may not be able to loan you the full amount.
Invoice Financing - With invoice financing, you are selling your unpaid invoices to a company who then, in turn, forwards you generally up to 85 percent of the value of those invoices. The remaining 15 percent goes toward fees and also they hold some until the invoices are paid. They are taking a risk as they're banking on getting the money from your customers to recover the loan. That said, because you are selling invoices, these then become the collateral and therefore money down is generally not required.
Business Line of Credit - Different from say a credit card, a line of credit is great because there's flexibility. You withdraw only what you need and then pay interest on that amount. You then start paying back the line either weekly or monthly. Once you've paid it back, you can withdraw more if needed.
Applying for a Business Loan Without Putting Money Down
For whatever project you may be considering, whatever type of equipment you may need to purchase, or perhaps you're considering real estate, with a little legwork and by talking to experienced lenders you can find a business loan solution to meet your needs.
Also, take stock of company assets and see if there is anything collateral wise that you may be able to apply toward the loan. Especially with no money down, having some collateral could certainly work in your favor. And if your credit score is less than stellar, you may want to take this time to strategize and try and find ways to build that score back up. The more positives you have in your application, the more these will offset the lack of a down payment.
It is possible to find and qualify for a loan without having cash on hand to apply toward it. You may have to get a little creative in your approach, but identifying the right lender with whom to work will make a huge difference. Additionally, for those in need of a loan with less than optimal credit, check out our business loans for bad credit page.
At First Union, we have helped many businesses get loans. We actually offer many loan products. Call today to find out how we can get you a loan!