All small business lenders – banks, private lenders, alternative financing companies, SBA, etc. – have one major thing in common. They require some form of down payment.
Let’s say that you are requesting an unsecured business loan from your bank. And, you are asking for $80,000 that you want to use to purchase some inventory and supplies as well as to bolster your marketing efforts.
And, your bank approves that request. However, they only approve 80% of your requested amount or $64,000. What?
Or, your business is in need of a new routing machine to handle your ever increasing customer load. The equipment costs $50,000. Your lender approves your request but will only fund $40,000 or 80% of what you need. Huh?
Or, your business has $100,000 in outstanding invoices just waiting to get paid by your customers. Yet, you have new orders coming in everyday that you just do not have the cash on hand to start or complete. Therefore, you approach an asset based lender or accounts receivable factor and ask for an advance on those invoices that will pay within the next 30 days. However, the lender will only fund 80% or $80,000 against those invoices – even though they take control of 100% of their face amount. Really?
Why do lenders require down payments? It all started with banks centuries ago. They determined, through trial and error – mostly error – that if a borrower were to put at least 20% down – have 20% of their own money attached to the loan – then they are 80% less likely to just walk away from that loan should the going get tough.
Thus, they determined that 20% in a down payment was both enough to better ensure that their borrowers will repay those loans – the one thing they want the most – and that 20% was enough of an amount (high and low) that only serious borrowers would and could be able to raise that amount.
In fact, when the government got involved in the banking and lending industries, this down payment figure of 20% was one of the first things that they agreed on as a standard practice and now hold these lenders to that standard. visit website to get details
Bottom line is that having a down payment in nearly all lending – mortgage loans as well as business loans – is now the standard and is already calculated in their underwriting process. Thus, you request a business loan for $100,000 – the lender already marks it down by 20%.
Now, leave it to the SBA to throw a wrench into this discussion. The SBA has a business loan program – their 504 loan program – which helps local small businesses finance commercial real estate or business equipment in their local areas. These loans are secured – 100% – by the real estate or equipment. Thus, with this specific loan program – this secured loan program – the SBA lowered its down payment requirement to 10%. Still a down payment but less of a burden on the borrower.