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Down Payment for SBA Loans: Overview
The down payment for SBA loan ranges from 10% to 30% of the total loan amount. Down payment varies by borrower’s qualifications and loan type availed. Some loans do not require a down payment.
SBA loan programs are most sought after as they are affordable and offer low or competitive interest rates with longer repayment terms as compared to traditional business loans.
U.S. Small Business Administration facilitates loan programs for small businesses by facilitating borrowers and lenders. SBA guarantees payment for a portion of the loan so that lenders can offer more affordable interest rates for business owners.
A borrower applies through a bank, a credit union, or any other form of a lending institution to the SBA for the loan guarantee. The loan guarantee by US Small Business Administration, makes the loan less risky, thereby encouraging competitive interest rates and better chances for loan approval.
The maximum loan amount guarantee can be up to 85%. This helps in determining the down payment amount too.
SBA loans require down payment as a signal to show the commitment by the owner or in other words, how much the business owners are invested?
Small Business Administration (SBA) also assists business startups. Its earlier program known as the 7(J) Management and Technical Assistance Program, is now renamed the “Empower to Grow” program.
Factors Affecting SBA Loan Down Payment Amount
- Minimum Statutory Requirement: US SBA has provided minimum down payment requirements for certain categories of loans like 10% to 12% is the range for 7 (a) loans and 504 loan programs.
- Minimum Credit Score: The higher the credit score, the lower the down payment requirements and the better the chances of loan approval. A borrower’s credit history and repayment pattern impact the credit score.
- Usually, the minimum credit score requirement for SBA 7 a loan program is 640
- SBA Microloans minimum credit score is around 620
- SBA CDC 540 loan program has a minimum of 680 credit score requirement
- There is no minimum SBA credit score requirement for Disaster loans, EIDL, and Physical Injury loans
- Loan Type: Certain loans do not require any down payment and certain loans do have a certain fixed range for down payment. For example, microloans do not require any down payment at all.
- The value of Collateral: More collateral reduces the down payment requirement to an extent, but it cannot go less than the minimum statutory requirement.
- Borrowers Finances: Cash flows and revenue affects the repayment probability and can reduce the down payment requirements.
- Business Type: A startup attracts a higher down payment than a business with an existing and proven revenue model and better cash flow.
SBA Loan Down Payment by Loan Type
SBA 7(a) Loan – 10% Down Payment
SBA 7 a loan program provides loan amount up to $5 Million and the payment tenure can range from 5-25 years.
A business owner can utilize SBA loans for the following purposes:
- Buying inventory
- Purchasing real estate
- Buying machinery
- Financing working capital
- Capital for business startups
- Debt refinancing
- Export assistance
The interest rates for the loan can be fixed or variable, and it is calculated by adding a percentage to the prime rate.
All 7 A SBA Loan programs require SBA FORM 1919 and certain categories may require additional procedures mentioned by third-party lenders.
SBA 504/CDC Loans – 10% Down payment Down Payment
The 504 CDC (Certified Development Company) loan program offers loan amount up to $5.5 million and the payment tenure varies from 10, 20, or 25 years.
SBA 504 CDC Loan programs is a partnership between small business owners, CDC (Certified Development Company), and a third-party lender.
A business owner can utilize SBA 504 CDC Loan for the following purposes:
- Financing real estate acquisition
- Purchasing commercial real estate like land and buildings.
- Debt refinancing
- Purchasing machinery and equipment
- Community development and job creation
This SBA loan is for the long term with a fixed interest rate and aims to finance major asset purchases.
SBA CAPLines – Around 10% Down Payment
SBA CAPLines business loan is a part or type of 7 a loan where the down payment requirement can be around 10% and the maximum payment tenure is up to 10 years.
SBA CAPLines aims to help small businesses finance working capital needs and meet short-term requirements. Due to this, there are different CAPLines programs and the interest rates and repayment terms are negotiated between SBA lenders and small business owners.
CAPLines loans take longer approval due to specific documentation and collateral requirements by many SBA lenders.
SBA Express loans – Around 10% Down Payment
The approval time for SBA Express loans is around 36 hours only, justifying the name “Express”. The maximum loan amount is up to $500,000 and repayment tenure is up to 10 years (buying a business or working capital financing) and 25 years (purchasing real estate).
The interest rate for SBA Express Loans is variable and is tied to a prime rate, on which at spread is determined by the third-party lender.
SBA lenders require their own forms and procedures for an express loan in addition to SBA Form 1919.
| SBA loan type | Maximum loan amount | Down Payment | |
| 1 | 7(a) loans | Up to US $ 5 million. | 10% or more. |
| 2 | SBA 504 CDC Loan | Up to US $5 million (up to US $5.5 million for select projects). | 10% to 20%. |
| 3 | SBA Express Loans | Up to US $500,000 | 10% |
| 4 | SBA Export Loans | Up to US $500,000 | Not Required. |
| 5 | SBA Microloans | Up to $50,000. | Not Required. |
| 6 | SBA Disaster loans | Up to $2 million. | Not Required. |
SBA loans with no down payment requirement
SBA Disaster loans – Zero Down Payment
SBA Disaster loan has a loan amount of up to $ 2 million and its repayment terms are up to 30 years. The disaster loans help businesses affected by “declared disasters” and help to rebuild or repair after the insurance claim is being paid.
SBA offers various types of disaster loans:
- Economic Injury Disaster Loans (EIDL)
- Physical Disaster Loans
- Home and Personal Property Loans
The maximum interest rates for disaster loans is 8%.
SBA Export loans – Zero Down Payment
SAB Export loans are meant to enable small businesses to either expand or foray into international trade. SBA loan program for exporters has two programs: the Export Express Loan Program, and the International Trade Loan Program (ITL).
Export Express Loan is to help small businesses that have potential for exporting. It helps in export-related activities including purchasing inventory, financing export transactions, etc. The maximum loan amount for this SBA loan is $500,000 with a very short turnaround time of 36 hours.
Export SBA Loans have a variable interest rate and it is determined by the lenders by adding their spread over the prime rate.
SBA Microloans – Zero Down Payment
Microloans have interest rates ranging between 8% to 13% and have no required down payment requirements. SBA Microloans are disbursed by intermediary lenders offering loan amounts up to $50,000 with payment terms of 6 years.
The microloans as the name suggests are not meant to buy real estate or big machinery but microloans are used for rebuilding, repairing, or upgrading the business.
A microloan can take up to 2 months to get approved, though microloans have flexible collateral and other requirements as compared to other SBA loans.
Funding Your SBA Loan Down Payment
Some SBA loans require a down payment while there is zero down payment for certain loan types which require smaller amounts. Following are the ways to fund your sba loan down payment requirement:
- Personal savings: Using your personal savings for a down payment can be frugal as you need not have to depend on an outsider or owe the money to somebody.
- Personal loan: In case your personal savings are not available, then raising money on personal credit from relatives, friends or family can be the next best option to finance the down payment.
- Cash flow from Profitable businesses: As a business owner it is always beneficial to retain some part of the profit into the business and pay a down payment for an SBA loan. In this manner, the business funds itself, but for this a positive cash flow is necessary to keep up with the interest payments.
- Loan from a Business Partner: A business loan from a business partner can finance the down payment for sba loans. Additionally, the loan from the business partner can also be offset in your financial accounts.
- 401(k) Account: Diverting your retirement savings from a 401(K) account can help you raise funds from an SBA loan.
Conclusion
SBA loan down payment requirements reduce the risk exposure of the lenders and enable them to offer affordable interest rates for small businesses. Taking a business loan is a risk as well as an opportunity for business owners as debt leveraging can give strategic advantage culminating in growth and expansion, on the other side the conventional risks of debt do
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