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Updated: July 12th, 2020
There is no time like the present if you’re thinking of accessing capital to grow your business. This is true for a couple of reasons. The low interest-rate environment makes borrowing costs more attractive than ever. You might need to make some changes to your business operations to comply with new social distancing standards as a result of the COVID-19 pandemic. But, cash flow is likely to be tight as you begin to reopen. Needless to say, you could use access to capital.
In FY 2019, the SBA green-lighted nearly 60,000 loans via its 7(a) and 504 loan programs across close to $30 billion to business owners like you. Here’s the catch: Don’t expect to be able to take advantage of the benefits that come with qualifying for an SBA loan — including below-market interest rates, large sums of money and long-term repayment terms — without providing some down payment.
The SBA loan down payment requirements can be stringent, so we’ve outlined what you can expect.
The SBA offers an entire suite of loans, and they’ve attached a down payment requirement to some of their most widely used products. Whether or not you’ll need to make a small business loan down payment depends in part on which product you select. The following SBA loans generally command a down payment:
If you’re pursuing financing from one of the SBA’s other offerings – such as a microloan, export working capital loan, or a disaster loan – you’re clear. For these small business loans, a down payment shouldn’t be a requirement.
If you have a mortgage, then down payments are nothing new to you. The SBA down payment requirements are not that different. Essentially, the agency requires borrowers to put down a percentage of the purchase price. Consider that the lender is the one taking on the risk, and the SBA is backing much of the loan. The SBA loan down payment percent provides them with another layer of evidence — in addition to your credit score and the health of your balance sheet — that you are likely to repay the loan as agreed.
The 7(a) loan is the most popular SBA product – and with good reason. Business owners can access up to $5.5 million in capital with repayment terms of anywhere from half a decade to 25 years.
The general rule of thumb for an SBA 7(a) loan down payment is that it should equal 10% of the loan amount. For example, a loan of $500,000, you’re looking at a $50,000 down payment, and so on. However, the SBA 7(a) loan is facilitated through a lender, not the agency itself. Considering that lenders have their own standards, the SBA loan down payment percentage could inch higher. In addition, the SBA 7(a) down payment jumps to 15% for startups or businesses that need the financing for a merger or acquisition.
The thing to keep in mind about the size of your SBA 7(a) down payment is that it will be commensurate with the amount that you are borrowing. You may also be required to provide some collateral to secure the loan, the details of which are based on the amount you’re borrowing.
A 504 loan, which is eligible for real estate purchases, is designed to give the business owner a chance to hold onto as much-coveted working capital as possible. The structure of the loan is as follows:
While most business owners can expect to provide 10%, the down payment percentage for an SBA 504 loan isn’t set in stone. For instance, the city or state of your business location may agree to provide a small percentage of the financing via a subordinate position. They might be inclined to do so if they’re looking to draw new businesses to the area. In this case, your SBA loan down payment requirement could be lower.
On the flip side, startups with fewer than two years of operating history must have a down payment of 15% of the loan size. The down payment amount increases to 20% of the size of the loan for particular use companies. The SBA’s small business loan down payment requirement is generally lower than that of traditional banks, which can require anywhere from 20-30% of the purchase price.
One business owner spotlighted by the Idaho Business Review explained how the 504 loan saved the day. It gave him the financing he needed to purchase land and construct a new building. The borrower put down 10% of the loan amount while the lender and the SBA covered the rest. He said, “It’s the only way we could have done it. Putting down 20-25% would have prohibited us from being able to do it.”
Providing a down payment when you’re trying to access financing may seem like a catch 22, especially if you’re borrowing a lot of money. Something to keep in mind is that you are free to borrow that amount, as long as it doesn’t originate from an SBA product. You’ve got other options for meeting SBA down payment requirements, too.
For instance, if you’ve socked away your savings in a 401(k) retirement plan, there are ways to access that money for an SBA loan down payment. You can do this through what’s known as a Rollover for Business Startups, or ROBS. But, you must meet the qualifications which include having more than $50,000 in your account. In light of the low-interest-rate environment, consider refinancing your mortgage or a loan on another asset. Then, direct the funds toward your small business loan down payment.
Jessica Holcomb is the Content Marketing Manager at Funding Circle, specializing in small business marketing and social media. She has a degree from the Fashion Institute of Design and Merchandising. Prior to Funding Circle, Jessica was a Marketing Manager at a successful social games company and a freelancer for many small businesses in the Bay Area. Her work can be seen in top retail, gaming, and financial small business resource sites.