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SBA Loan Down Payment: The Essential Guide

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SBA loans are often considered the “gold standard” of small business financing. The government-backed loans offer the highest borrowing amounts at the lowest interest rates and most extended repayment terms.

However, SBA loans have their drawbacks as well. It’s challenging to qualify for an SBA loan, and the application process is long and tedious. One of the most significant barriers to entry is the down payment requirement.

Not every SBA loan requires a down payment, but most do. Borrowers are expected to make a minimum down payment of 10% for most SBA loans.

This guide covers SBA loan down payment requirements and how you can apply for a loan. Specifically, we’ll answer these questions and more:

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    What are SBA Loans?

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    The SBA loan program consists of a suite of financing products to meet just about any business need. The US Small Business Administration (SBA) oversees the program, provides guidelines for lenders, and provides loan security.

    The SBA does not service loans or provide loan funds. Instead, small business owners apply to an approved SBA lender. SBA-approved lenders are commercial banks, credit unions, or alternative business financing facilitators like United Capital Source.

    Lenders must apply to the SBA for approval. The SBA sets rules for lenders to follow and partially guarantees up to 85% of the loans.

    With the backing of the government agency, lenders can offer more significant loan amounts at lower interest rates and extended repayment terms. SBA loans consist of several financing packages:

    • SBA 7(a) loans.
    • SBA 504/CDC loans.
    • SBA microloan.
    • SBA Disaster loans.
    • SBA CAPLines of credit.
    • SBA export loans.

    Depending on the loan, small business owners can use SBA loan proceeds for virtually any business purpose. Loan amounts go up to $5 million.

    What SBA Loans require a down payment?

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    The following SBA loans almost always require down payments or equity injections.

    SBA 7(a) Loans

    • Down payment amount: 10%-30%

    The SBA 7(a) loan is the program’s most common and most popular loan. There are several subsets of the 7(a) loan, including CAPLines of credit, but the primary 7(a) is a traditional business term loan.

    Borrowers can get up to $5 million with loan terms of up to 10 years or 25 years for commercial real estate. SBA 7(a) loan interest rates are pegged to the prime rate and capped by the SBA.

    A small business owner can use SBA 7(a) loan funds for just about any business purpose. Examples include:

    Most SBA 7(a) loans will require a minimum of 10% down. Depending on the lender, the loan amount, and your credit history, the requirement could go as high as 30%.

    SBA 504/CDC Loans

    • Usually, 10% except in specific circumstances.

    The SBA 504/CDC loan program provides funds for purchasing commercial real estate, equipment, for other major fixed assets. Terms go up to 25 years for the commercial real estate loan and ten years for all other purposes.

    Obtaining a 504 loan requires working with a Certified Development Company (CDC), which is one of the SBA’s community partners. The CDC provides 40% of the loan, the SBA lender provides 50% of the loan, and the borrower provides a 10% down payment. One of the reasons you must work with a CDC is because the project you’re funding must either create jobs or fulfill a public policy goal.

    Only some CDCs and SBA lenders provide 504 loans to startups and businesses younger than two years. The few lenders that service SBA 504 loans for younger businesses require a down payment of 15%.

    What are the other requirements for SBA Loans?

    The SBA sets basic eligibility requirements for small businesses. Your business must meet the following requirements:

    • Be a for-profit business.
    • Operate and be physically located in the US or its territories.
    • Meet the small business size standards as defined by the SBA.
    • Not be eligible for or receiving loan funds elsewhere (SBA loans are “last resort financing”).
    • Have invested time and money (equity) into the business.
    • Possess a commitment to success and relevant management experience.
    • Provide a personal statement attesting to having good character.
    • The business owner cannot be incarcerated, on parole, or probation.
    • The business owner cannot be currently under indictment or other forms of criminal charges.
    • The business owner cannot have previously defaulted on federal loans, such as student loans.
    • Must own at least 20% of the company.

    One of the most essential requirements is to have the cash flow to support repayments. Per the SBA:

    “The cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral. Thus, if the Lender’s financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment.”

    Most lenders set their own credit score, time in business, and revenue requirements. At UCS, approved companies we work with generally meet the following minimums:

    • Credit score: 650.
    • Time in business: 2 years.
    • Annual revenue: $360k.

    How to Apply for an SBA Loan:

    United Capital Source can help you apply to an SBA-approved lender following these steps.

    Step 1: Ensure You Qualify

    You’ll need a credit score between 650-700 and a healthy, consistent cash flow. How you intend to use the money plays a significant role as well. You’ll need a detailed plan of how the funds will help you invest in and grow the business.

    Step 2: Gather Your Documents

    Be prepared to provide:

    • Driver’s License.
    • Business license or certificate.
    • Voided Business Check (for business bank account information).
    • Bank Statements.
    • Credit Report/Statement of Personal Credit History.
    • Business Tax Returns.
    • Credit Card Processing Statements.
    • Personal Tax Returns – 3 Years.
    • Business Tax Returns – 3 Years.
    • Business Plan (Not in all cases).
    • Personal Financial Statement.
    • List of Real Estate Owned or Business Leases if applicable.
    • Debt Schedule/Loan/Rent/Lease Documentation
    • Deeds/Title/Ownership documentation for any collateral/Security
    • Current Profit & Loss Statements and Balance Sheet Year-to-Date
    • A/R and A/P Reports
    • United Capital Source 1 Page Application

    Step 3: Fill Out the Application

    You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.

    Step 4: Speak to a Representative

    Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.

    Step 5: Receive Approval

    SBA Loans through our network generally take 3-5 weeks to process. Once approved and your file is closed, funds should appear in your bank account in a few business days.

    What are the pros & cons of the SBA loan program?

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    SBA loans are often considered the most advantageous business loans available, but they are not without downsides. The application process is often long and tedious, and you must meet strict approval requirements.

    Here are the benefits and drawbacks of SBA loans.

    Pros:

    • High borrowing amounts – up to $5 million.
    • Low interest rates and long repayment terms.
    • You can use the funds for a variety of business purposes.

    Cons:

    • Lengthy application and approval process.
    • Large amounts of paperwork.
    • It might require collateral.
    • It almost always requires a personal guarantee & down payment.
    • Requires good to excellent credit.

    Frequently Asked Questions

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    Here are the most common questions about down payment requirements for SBA loans.

    How can I get a down payment for an SBA Loan?

    There are several strategies to consider when generating the required funds for a down payment on an SBA loan.

    Take Out a Loan

    One of the unique features of the down payment for an SBA loan is that you can generate the funds from another loan. Most loan structures don’t allow a down payment from borrowed money. But you can use funds from a personal loan for an SBA loan down payment.

    Leverage Existing Assets

    If you have an IRA or 401(k), you can consider a Rollover for Business Startups (ROBS). You could also consider refinancing your mortgage or another loan. Some business owners will sell or refinance business assets for down payment funds.

    Bring in an Investor

    Another option is to sell a portion of your company’s equity to an investor and use those funds for the down payment.

    Government Funding for SBA 504 Loan Down Payments

    In some cases, you might be able to get the funds for an SBA 504 loan from the local government. Since the loan requirements include using funds for job creation and public policy goals, some local municipalities might be invested in the project.

    For example, you might get a loan to renovate a commercial building and the street on which it’s located. That could include adding curbs, street lights, parking facilities, etc. Since the renovations not only help your business but also support economic growth in the area, you might be able to negotiate the down payment funds from the government.

    Why do SBA lenders require a down payment?

    SBA lenders often require a down payment on SBA loans because it demonstrates financial responsibility and a willingness to share some risk of the loan. When you make a down payment, you put some “skin in the game” and show that you’re invested in paying off the loan.

    The SBA also prefers working with small business owners who can put some of their own equity into the loan. The SBA refers to the down payment as “the equity injection.” When you create an equity injection, all three parties – the SBA, the lender, and the borrower – all share some risk.

    Can I get an SBA Loan without a down payment?

    There are several SBA loans that do not require a down payment. However, most of these loans are designed to solve a specific challenge.

    • SBA Microloan: Term loans up to $50,000 for startups and younger businesses.
    • SBA Disaster Loans: Recovery loans specifically for businesses in a declared disaster area.
    • SBA Export loan: Loans to help start or grow an export business.
    • SBA CAPLines of credit: Business lines of credit.

    What are my alternatives to SBA Loans?

    Unfortunately, SBA loans won’t work for every small business. Some business owners can’t come up with the down payment, while others might not meet other eligibility requirements.

    In any case, plenty of small business loans and financing options are available. Consider any of the following funding small business loan options for your business:

    Conclusion

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    SBA loans are the most advantageous small business financing you can get, but you must prepare before applying. One of the most critical aspects of putting an SBA loan application together is generating the funds for the down payment.

    Not every SBA loan package requires a down payment, but the most common loan, the SBA7(a), does need it. Even when it’s not required, a down payment can help increase your approval odds.

    Contact us if you have additional questions or are ready to apply for a small business loan. Our loan executives can help you find the right financing option for your business needs.

    We will help you grow your small business.

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