Almost all small business lenders - banks, private lenders, alternative funding companies, SBA, etc . - have one major thing in typical. They require some form of down payment.

Let's say that you are requesting an unsecured business cash advance from your bank. And, you are asking for $80, 000 that you would like to use to purchase some inventory and supplies as well as in order to bolster your marketing efforts.

And, your bank approves that request. However , they only approve 80% of your respective requested amount or $64, 000. What?

Or, your company is in need of a new routing machine to handle your ever increasing client load. The equipment costs $50, 000. Your lender approves your request but will only fund $40, 000 or maybe 80% of what you need. Huh?

Or, your business has $265.21, 000 in outstanding invoices just waiting to get compensated by your customers. Yet, you have new orders coming in daily that you just do not have the cash on hand to start or complete. For that reason you approach an asset based lender or accounts receivable factor and ask for an advance on those invoices which will pay within the next 30 days. However , the lender will only fund 85% or $80, 000 against those invoices - whilst they take control of 100% of their face amount. Really?

Down Payments

The reason why do lenders require down payments? It all started with banking institutions centuries ago. They determined, through trial and error - mainly error - that if a borrower were to put a minimum of 20% down - have 20% of their own money attached with the loan - then they are 80% less likely in order to walk away from that loan should the going get tough.

Hence, they determined that 20% in a down payment was each enough to better ensure that their borrowers will repay all those loans - the one thing they want the most - and that twenty percent was enough of an amount (high and low) that just serious borrowers would and could be able to raise that amount.

Actually when the government got involved in the banking and lending industrial sectors, this down payment figure of 20% was one of the first things that they agreed upon as a standard practice and now hold these lenders to that particular standard.

Bottom line is that having a down payment in nearly all financing - mortgage loans as well as business loans - is now the standard and it is already calculated in their underwriting process. Thus, you ask for a business loan for $100, 000 - the lender currently marks it down by 20%.

Now, leave it towards the SBA to throw a wrench into this conversation. The SBA has a business loan program - their 504 loan program - which helps local small businesses financial commercial real estate or business equipment in their local places. These loans are secured - 100% - through the real estate or equipment. Thus, with this specific loan system - this secured loan program - the SMALL BUSINESS ADMINISTRATION lowered its down payment requirement to 10%. Still the down payment but less of a burden on the borrower.

Types Of Collateral

Now, there are essentially two forms of legitimate down payments.

1) Simply cover the 20% with your own cash. You need $80, 000 for your equipment purchase, the bank will provide 80% as well as $64, 000 and you cover the other $16, 000 from your own pocket.

2) You have built in equity in the product being bought with the loan. Here, you are buying a industrial property to expand your small business (and quit paying crazy rents). The purchase price is $250, 000. Yet, that price are only 80% of its market value - the market worth is $312, 500. Thus, the difference between the purchase price as well as the true value of the property is the 20% - 20% value in the property.

Where To Get That Down Payment

There are several ways that a person - the business borrower - can get that required downpayment as most small business owners either do not have that kind of cash available to cover the 20% or just do not know where to obtain this.

Don't Pay It:

1) Negotiate with the lender. Could does not provide you the equity to put down - it may alleviate that requirement all together. If your business is strong enough plus the lender really wants to work with you - then negotiate that will requirement away - and get that lender to cover totally of your needs.

2) Negotiate with the seller. If you are purchasing a physical asset like equipment or commercial real estate after that negotiate the price to 80% of the asset's value. Type of hard to do these days with property values being as low as they may be and that most equipment vendors do not have control over their own prices - but , if the person wants to sell because bad as you want to buy - then they will find a way to use you - they always do. MSRP prices tend to be more wish lists then actual prices.

Find The Money:

3) Personal loan. Do you have equity in your home or other personal property? Can you get a personal loan based on the personal income you do possess? Can you tap some other source of personal income or fairness - that 1) does not relate to your business and 2) does not put an additional burden on your company?

Most loan companies will find out about all of your business debt and most within your personal debt during their approval process. Know that with the company debt, they will include that in their underwriting process whenever approving your business loan request. And, if they find out that you simply took another business loan to cover your down payment - are likely to frown on that. But , if they find out you have a personal loan - even if they know that you did that to pay for your down payment - it is still a personal loan the other that ties you personally to that new loan obtain - means you might get away with it.

Or, try to get an individual loan from a friend or family member. This way, it is not reported anywhere and incredibly hard for the new lender to find out about it. This could be financing or even an equity injection for stock or possession in the company. Either way, it should not directly affect your new mortgage request.

The idea here is simple. Let's say that you need a business college loan for $100, 000. You request that amount at 8% for three years. This would set your monthly payment at $3, 134. But , if the lender will only approve and account 80% or $80, 000 - then your required transaction would drop to $2, 507 - leaving the main of $627 to cover that personal loan you need for the sign up ($627 is more then enough to cover the $20, 000 personal down payment loan for the same term at the same rate).

4) Sell off unneeded or unused assets - individual or business. This way you get needed money from possessions that you don't need or want and you don't have to pay in which money back - it is free and clear for you to use. As a result, while you are only getting 80% of your requested loan quantity - you only have to pay for that 80%. And, the $627 difference - outlined above - is money that you just now don't have to pay to any lender - it is additional money in your pocket or for your business.

5) Finally, use your business. Let's say that your business needs a $100, 000 to expand. Now, it could get a loan now or simply it could save up its own money - its own profits rapid for the next 3 years (your business has to be generating some form of earnings for you to be able to afford the loan payments in the first place - therefore, it can just save that money itself).

But , unwilling to or not seeing it as a viable option to wait 3 years instructions your business can just save that money (profits) for this down payment only - save for 7 months approximately to get that needed 20% - then request the actual loan. This would have the same benefits of selling off assets for your needed cash without losing the use of those assets. The only necessity here or burden on the business is time aid the 7 months.

Conclusion

Down payments are one of those facts associated with life like death and taxes. If you are seeking a business mortgage loan, you have to think about how you will come up with the down payment.

Know that along with anything in business - this challenge can be overcome exactly like you overcome all other challenges - by working them away. This means that where there is a will there is a way and the easiest way to handle this financing requirement is to know about it up front as well as plan for it from the very beginning.

Far too many business owners - who else finally get to the point that they can seek outside financing to be given growth opportunities - end up only getting that put in slap down - having not known of the requirement before trying to get their business loan and ultimately getting that request rejected.

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