No-money-down business loans are a rarity for companies looking to finance the purchase of assets like equipment, real estate, fund a business expansion, or need start-up funding. There are, however, several unconditional working capital commercial loans and cash advances that can be used for any purpose including asset acquisition.
We’ll review them below along with some down-payment advice to convert assets into cash. We also discuss start-up financing, business acquisition, and expansion loans.
Table of Contents
- Why Do Lenders Demand A Down Payment?
- A Warning About Down Payments and Upfront Loan Fees
- No-Money-Down Business Expansion Loans
- No-Money-Down Business Acquisition Loans
- No-Money-Down Business Start-Up Loans
- Use Retirement Funds for Start-Up Capital
- I Don’t Have the Cash – What are My Options?
- No-Money-Down Unsecured Business Loans
- No-Money-Down Secured Business Loans
- Invoice Financing
- No-Money-Down Equipment Financing
- No-Money-Down Equipment Leasing
- Small Business Administration (SBA) Loans
- SBA Export Financing
- SBA Patriot Express Loans
- Purchase Order Financing
- Free Up Cash Through Inventory Management
- Personal Business Loans
- Find an Investor Partner
- Merchant Cash Advances (MCA)
- Wrapping It Up
Why Do Lenders Demand A Down Payment?
The primary reason for demanding a down payment on long-term asset purchases is the reduction of lender risk. Non-land assets depreciate in value by use over time. The commercial lender’s goal is to keep the loan amount lower than the value of the purchased asset in case of default. In this way, if the lender is forced to confiscate and sell the asset, they’ll realize an amount high enough to cover the outstanding loan.
For example, if a lender provides 100% of financing to purchase a $100,000 piece of equipment, they expose themselves to significant losses should the borrower default. It’s often said that a car loses a third of its value when driven away from the car dealership. The same is true for most commercial asset purchases like buildings, machinery, and equipment. In the example above, if a company defaults with an outstanding loan balance of $90,000 and the lender can only sell the used asset for $60,000, they’re facing a significant loss.
Secondary reasons include:
Shared risk – a down payment shows the commercial lender that the company is backing its play with a significant investment.
Repayment potential – saving cash for a down payment implies the company can effectively manage its cash flow and can afford to repay the business loan.
The advantage to the owner is that a down payment reduces the amount of the business loan resulting in lower interest expenses.
A Warning About Down Payments and Upfront Loan Fees
At no point should you pay upfront fees to a loan broker or commercial lender to be approved for financing. Loan fees are paid on the backend meaning they’re paid after the loan is approved with fees due deducted from the proceeds.
A down payment on an asset purchase is paid directly to the vendor along with the loan proceeds to meet the purchase price. The down payment should never be paid to a commercial lender.
No-Money-Down Business Expansion Loans
Successful companies can find themselves short of working capital due to rapid growth. Cash earned from operations is used to fill orders from an expanding customer base leaving little opportunity for saving. Cash-strapped companies often find it difficult to fully capitalize on its success due to a lack of business expansion funds.
Companies with stellar credit ratings and a long history of meeting their payment obligations may be able to acquire no-money-down business loans from traditional commercial lenders. But most small business lenders are risk averse and demand that companies share the risk by investing at least 10% of projected expansion costs. We discuss several ways for companies to improve cash flow and accumulate a down payment below.
Other successful companies haven’t always been that way and may have a sketchy credit history from the start-up phase. Start-up businesses are hard work. It’s difficult to build a customer base to generate enough revenue to pay for operating costs. In the initial stages, more money flows out than flows in quickly eroding start-up capital. Eventually, payment terms are stretched and the company’s credit score declines.
That an entrepreneur has emerged from the start-up phase and built a thriving, profitable enterprise is a testament to their ingenuity and determination. But conventional commercial lenders tend to focus on past credit history rather than current success. Many small business owners find themselves being denied no-money-down business loans by traditional lenders because of normal growth struggles that all start-ups experience.
Non-traditional commercial lenders assess business loan risk using statistical algorithm software that creates a holistic view of the enterprise. While they do use FICO scores and payment to assess loan risk, the results don’t immediately disqualify a business loan applicant. Acknowledging the hardships of start-up businesses, they place greater emphasis on more recent financial results.
No-Money-Down Business Acquisition Loans
Some entrepreneurs choose to skip start-up phase hardships by purchasing an established business. It already has customers who produce revenue for the company. But those looking for no-money-down business loans may have difficulty in finding a commercial lender willing to take the risk.
Fully (100%) leveraged business acquisition financing where the assets of the targeted business act as security for the loan are common in high-level corporate but a rarity for small business owners. Most commercial lenders want to see a significant personal investment before greenlighting a business acquisition loan even for borrowers with excellent credit scores.
Established companies looking to acquire a competitor to increase market share have a better chance of being approved for no-money-down business loans. The combined assets of the business may be sufficient to alleviate lender risk.
No-Money-Down Business Start-Up Loans
Acquiring a no-money-down business loan from a reputable commercial lender for start-up capital is next to impossible, if not, impossible. The failure rate of small business start-ups is just too high. As a comparison, imagine someone approaching a bank for a loan with no assets, no job, and no income. It’s just not going to happen. An aspiring start-up business owner needs to leverage personal assets or find an investor partner to come up with a down payment. Even the Small Business Administration requires a significant investment on the part of the applicant.
Use Retirement Funds for Start-Up Capital
An alternative for acquiring start-up capital is to use your existing 401(k) and other eligible retirement accounts. Known as Rollover as Business Start-ups (ROBS), they allow account holders to use retirement funds to invest in start-up capital with no early withdrawal penalties or tax payments. It involves setting up a C-corporation and buying shares of your own company.
The upside to this business financing solution is that the funds aren’t debt, but equity. It’s still your money so there are no debt payments to be made from future cash flows. The downside is that you risk losing some or all your retirement savings.
Setting up a ROBS is a complicated legal process that is monitored closely by the IRS. Obtaining financial and legal expertise are mandatory to ensure a smooth transition and avoid costly tax payments and penalties.
I Don’t Have the Cash – What are My Options?
Fortunately, in today’s commercial loan marketplace there are several no-money-down business loans to be considered. We’ll also discuss some options to acquire funds for a down payment. Business owners are advised to carefully consider the company’s risks, costs, and repayment ability versus the urgency of the asset purchase.
No-Money-Down Unsecured Business Loans
It’s possible to borrow funds for a down payment or purchase the asset outright with a short-term unsecured business loan. The viability of this option depends on a variety of factors including FICO scores, current debt, and cash flow analysis. Unsecured commercial loans typically carry high interest rates further increasing the cost of the asset. Bad credit unsecured business loans are available from some commercial lenders however the interest rates are quite high.
This may be a financing option for companies that generally save money from operations but find themselves temporarily short of cash and urgently needs to replace vital profit-earning assets. Companies that operate on a pay-check-to-pay-check basis may find that acquiring two loans is beyond their capacity to repay.
It’s important to notify the primary equipment financer if you choose this option so that they can recalculate cash flow forecasts and ability to pay.
No-Money-Down Secured Business Loans
Companies that own considerable assets can use them as collateral for a commercial loan to be used for an asset purchase or a down payment. Short-term secured business loans generally carry significantly lower interest rates even for bad credit borrowers. Of course, in the event of default those assets are confiscated putting the future viability of the company in jeopardy.
Again, it’s important to notify the primary lender and adjust cash flow forecasts accordingly.
This business financing solution may be an option for businesses who issue invoices to customers. A company can use the invoices as collateral for a commercial loan to meet the down payment requirement. Companies can receive from 75% to 90% of the face value of the invoices. Customer payments are then forwarded to the invoicing financing company. This financing option is best suited to companies facing a cash shortage but normally have enough cash to fund operating costs.
No-Money-Down Equipment Financing
There are alternative online commercial lenders who will provide no-money-down business loans for equipment purchases. Eligibility for 100% equipment financing depends on FICO scores, equipment price, and the overall financial health of the company. Be prepared to open the books to the potential lender for analysis if you meet initial eligibility requirements. Remember that down payments typically reduce interest rates so be prepared for higher borrowing costs.
No-Money-Down Equipment Leasing
Some equipment leasing companies will purchase the asset and charge a monthly lease amount. Whether they will fund 100% of the purchase price depends on credit score, amount, and ability to pay. Bad credit borrowers will likely need a down payment. There are two types of leases to consider:
Capital equipment lease where the commercial lender finances the purchase, transfers title to the company, and charges a monthly lease amount. Because the company obtains ownership, the asset is used as collateral. There’s normally a buy-out option for the company at the end of the lease period.
Operating equipment lease where the commercial lender purchases the asset, retains title, and charges a monthly rental rate. Monthly charges are generally lower on operating leases than capital leases.
Small Business Administration (SBA) Loans
SBA Microloans up to $50,000 are available to qualifying small businesses. The loans are provided by intermediary commercial lenders who may or may not require collateral and backed by the federal government. Interest rates vary from 8% to 13%. SBA loans are not a quick fix for those looking for urgent funding. An applicant can start the SBA process while arranging short-term bridge financing to make the purchase. The proceeds from the SBA can then be used to pay higher cost debt.
SBA Export Financing
If the borrowing company is an exporter they can apply for no-money-down business loans through the SBA Export Financing Program. Loan proceeds can’t be used for asset acquisition. They’ll advance up to 90% of foreign purchase orders or letters of credit. This provides low-cost working capital financing thereby freeing up operating funds for asset acquisition.
SBA Patriot Express Loans
Veterans, reservists, and their spouses are eligible for the Patriot Express Program. Business loan proceeds can be used for start-up costs, business expansion, and asset purchases.
There are several SBA loan programs that provide financial assistance to women-, Native American-, and LGBT-owned business owners. There are also programs that assist business owners in economically disadvantaged areas. Federal and state grants may be available for business owners in the categories above.
Purchase Order Financing
Similar to invoice financing, commercial lenders will provide financing for company purchase orders on a discounted basis which can be used for down payment purposes.
Free Up Cash Through Inventory Management
Many businesses carry more inventory than they need. The philosophy is that if a customer does want a product, they’ll lose the sale if its not in stock. But today’s next-day delivery services make this philosophy out of date. Slow-moving, excess, and obsolete inventory deprives a company of operating funds. Check with vendors to see if a return is possible subject to a restocking fee or contact a liquidation company.
Personal Business Loans
A business owner may be able to finance a down payment using personal equity or guarantee as collateral. Owners of Limited Liability Companies (LLC) need to be careful of mixing personal and corporate activities as we discuss in LLC Loans: Everything You Need to Know.
Find an Investor Partner
Many companies succeed by finding investors who see growth potential. Many of the most successful companies in the world such as Apple and Facebook took on investors to realize their potential. It’s not a solution for every entrepreneur, but its an option that requires no monthly debt repayment.
Merchant Cash Advances (MCA)
As the name suggests, Merchant Cash Advances aren’t classified as no-money-down business loans but a business cash advance. Similar to payday loans, business owners can receive a cash advance to be repaid with future earnings. While the costs of MCA business financing vary from lender to lender, they are among highest cost commercial lending option.
But for business owners that have exhausted all other business financing options, have bad credit, and desperately need cash; MCAs are an option for solving urgent cash flow problems. Approval rates for Merchant Cash Advances are as high as 90% at some lenders with money advanced in just a few days.
MCAs are a short-term commercial financing solution to be used sparingly due to the high carrying costs and negative impact on future cash flow. Although they solve an immediate cash problem, business owners need to investigate and resolve the causes of their cash flow problems to prevent future shortages.
Wrapping It Up
No-money-down business loans are possible but only for established companies with high credit scores and a history of profitable financial results. For others, most commercial lenders demand down payments for long-term asset acquisitions. We’ve provided several possible ways to squeeze cash from current assets along with several short-term business loans that may provide funds needed for a down payment.
Short-term business loans and cash advances can satisfy urgent working capital needs. They can also act as a bridge financing option while applying for long-term financing solutions from the SBA. While short-term commercial loans are common it’s important for business owners to address causes for cash shortages.
Small business owners should develop a cost-benefit analysis before accepting a loan offer. If you’re uncertain on how to proceed, seek professional advice from financial or legal experts.