As a business owner, you’re already aware that running a business requires investment. The daily operations, business purchases, and other expenses within the business need money. Some business owners who have already started operating reach a level where they must turn to a lender for financing. Some lenders will require a down payment before lending you anything.
You’ve heard of down payments for acquiring cars and houses. The same applies to some business loans. You may have some money that you’ve saved up for a different purpose. Alternatively, it could be that you don’t have any money at all. So, you’re probably wondering how to get business financing with zero money in the bank.
Why Do Lenders Need a Down Payment?
Investing personal money indicates to lenders that you mean business and are committed to paying back the loan. In case you can’t pay them back, the lender will be able to recover some of the money. The amount of the down payment depends on the credit history of the borrowers and their collateral sufficiency. Borrowers with low scores can start working on improving their credit scores so that they can qualify for low down payments and better terms.
No-Money-Down Business Financing Options
Invoice financing, also known as ‘accounts receivable financing’, enables businesses to borrow money against unpaid customer invoices. Businesses usually offer credit for goods and services to their big customers. Unfortunately, a lot of credit can hold up money that the business needs for efficient operations. To cover business expenses and other requirements, invoice financing is a viable option.
Invoice financing can be done by factoring or discounting. With factoring, the borrower will ‘sell’ the compiled outstanding invoices to the lender who will give between 70% and 85% of the total amount. When the invoice financing company receives the full outstanding amount of the invoices, they then give the 15% to 30% to the business. You will then pay a lending fee or interest.
These lenders are more interested in the profitability of owing customers than your business. They rely on the customers’ payment to get their money back. The downside of invoice factoring is that the lender gets the payment back directly from the customers. This gives the customer a bad image of the business. However, invoice discounting ensures that the customer does not know about the agreement because you receive the payment directly. The business gets up to 95% of the amount from the lender and pays it back after collecting from the client.
This type of financing is growing more popular with businesses. They use it to acquire the necessary business equipment. Fundera conducted a survey which revealed that a shocking 42% of business owners require funds to buy equipment. Examples include commercial ovens, printing equipment, company vehicles, and farm equipment.
The lender will not need a down payment, but rather a claim on the equipment. They usually fund 80%, leaving you with 20% to finance yourself. After full payment of the loan, you will have full ownership of the equipment. The repayment period is usually between several months and ten years and the interest rate is between 4% and 12.75%.
This is the most popular type of financing on the market. Although it does not require a cash down payment, you will have to provide some form of collateral depending on your lender’s requirements. It comes with a set repayment schedule, typically on a monthly basis. This makes it easy to include in your business budget and ensures you make timely payments.
Prior to giving you the money, the lender will assess the business’s financial statements. This loan comes with a fee called an origination fee according to www.justrightloans.com, which is a small percentage of the total amount. This fee caters for loan processing.
Business Line of Credit
This type of funding is similar to a business credit card and is more flexible than a traditional business loan. Instead of receiving a lump sum of money, you gain access to a certain amount of credit – normally between $1000 and $250,000. You can use and repay as much money as you need and as often as you want. Be sure not to surpass your limit and make your payments in time.
Traditional lenders like banks will require that your business has been operational for a few years with an impressive revenue. If the business needs a large amount, you’ll need to attach collateral which will be seized if you don’t pay up.
While online business lenders have less stringent requirements, they might charge higher interest rates and provide lower credit limits. The minimum requirements are $25,000 in yearly revenue and six months in operation.
A down payment sounds like an annoyance to the borrower. Remember though that the lender needs to protect their interests. However, it also benefits the borrower. The amount of money you need won’t be as much as it would have been without it. This means lower monthly payments and interest. Most lenders that ask for money down are lending large amounts of money because the bigger the loan, the higher the risk.
Whether a loan requires a cash down or not, it’s still debt and you have to repay with interest. If your financing requirements aren’t urgent, consider setting up a savings account for that If you’re pushed to the wall with no money in the bank, no worries! The above suggestions will surely help. It all depends on the type of business you have and what your specific requirements are.