No Money Down Business Loans: Do You Qualify?
Receiving a small business loan can help your business meet its short and long-term goals. However, many business lenders require down payments, which can be an issue if you’re a new business owner or don’t have access to enough cash flow. The good news is that it’s possible to secure a loan with no money down, but you’ll need to conduct research first and consider your business’s financial goals.
With a no money down business loan, you can secure the funds you need without coming up with a down payment. Instead of spending valuable funds on a down payment, you can put those funds towards other areas of your business.
In this post, we’ll review what no money down business loans are so you can determine whether they make sense for your particular situation.
What are No Money Down Small Business Loans?
No money down small business loans are exactly what they sound like: business loans you can take out without a down payment. While a no money down small business loan may seem like the ultimate funding option, there are some caveats you should be aware of before applying.
First and foremost, no money down financing almost always requires you to put down collateral, which is an asset you own like your equipment or inventory. While this reduces the lender’s risk of approving you for a business loan, it puts your asset at stake. If this asset is necessary to your operations, this could put your business’s future at risk.
Also, most lenders who offer no money down small business loans charge high-interest rates, which can significantly increase the overall cost of your loan. In fact, it may run you thousands of extra dollars that you may be able to save if you apply for a loan that does require a down payment.
Although you won’t have to offer a down payment, some no money down small business loans come with fees like origination and late fees. In addition, you may be on the hook for a prepayment penalty if you decide to pay off your loan early.
Before applying for a loan, ask your lender to list all potential fees. That way, you can calculate the total cost of the loan and avoid any surprise costs down the line.
The Pros of No Money Down Business Loans
The most significant advantages of receiving no money down financing include:
1. No Money Down
With a no money down business loan, you can receive the additional funds you need without a down payment. If you have cash flow issues, this is a huge benefit.
2. Lenient Requirements
Most no money down small business loans come with lenient requirements, so you may be able to get one even if you have no credit history or a bad credit score.
3. Flexible Funding
No money down financing is usually flexible, meaning you may use the funds on payroll, inventory, office supplies, real estate, equipment, or anything else you’d like.
The Cons of No Money Down Business Loans
1. Collateral Required
You’ll have to back a no money down business loan with collateral in most cases. If you fail to repay the loan, this can put you at risk of losing a valuable asset, such as equipment or real estate.
2. High-Interest Rates
Many no money down loans have sky-high interest rates. These rates can significantly increase the overall cost of your business loan.
3. Hefty Fees
No money down loans are also known for their hefty fees, which may add to hundreds or thousands of extra dollars. These fees may be for origination, late payments, and prepayments.
The Types of No Money Down Small Business Loans
There are numerous no money down business loan options you can choose from, such as:
1. Term Loans
With a term loan, you’ll receive a set amount of money upfront and pay it back via monthly payments over the loan term. Banks, credit unions, and alternative lenders all offer term loans, but their rates and terms will vary. Due to this, it’s imperative that you compare your funding options.
Loan terms can vary significantly but often range from a few months to several years. You may not have to put any money down but will likely need collateral.
2. Business Lines of Credit
A business line of credit is like a business credit card; the lender will look at your credit score and other factors to assign a credit limit. Then, you may withdraw as much or as little as you’d like up to your designated credit limit.
Once you receive your line of credit, you’ll repay the amount you borrow plus interest. Most likely, the lender will require collateral if you put money down on your business loan.
3. Invoice Financing
Invoice financing is where you receive money in advance in exchange for your unpaid invoices. Most invoice financing companies will give you up to 85% of your invoice balances and hold the remaining 15% until your customers pay the invoices. Typically, invoice financing providers don’t require recipients to submit a down payment.
4. Equipment Loans
Upon approval for this type of loan, you can receive up to 100% of the money you need to buy a piece of equipment. For example, you may not need a down payment unless the equipment financing company only fronts you 80% of the equipment cost.
5. SBA Microloans
The SBA Microloan is one of the few SBA loan programs backed by the Small Business Administration (SBA) that doesn’t have a down payment requirement. However, the SBA will still require loan applicants to submit a personal guarantee. While a microloan can give you up to $50,000, most borrowers borrow an average of $13,000.
Conclusion: You Don’t Always Need a Down Payment to Secure Additional Working Capital
As a small business owner, it’s reassuring to know that funding options are available, even if you don’t have the cash to cover a down payment.
However, before committing to a no down payment small business loan, review the pros and cons. Depending on your long-term goals and current financial state, saving for a down payment may allow you to land a loan with better rates and terms.
Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2022.