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Business loans can help businesses of all sizes to cover cash shortfalls, buy equipment, purchase assets and expand, amongst many other things. There are many different business finance options available; the key is finding the right one with great rates and terms that suit your needs. When looking at obtaining a business loan, the first question many business owners ask is do you need a deposit for a business loan?
How much deposit do you need for a business loan?
Whether or not you need a deposit for a business loan will depend on the type of loan, the purpose of the loan and your credit rating. In general, a large proportion of business loans don’t require a deposit due to the way they are structured.
If a deposit is required it will likely be due to a poor credit rating. For start-ups that don’t have an established track record or credit history, you might find that your personal credit history is considered in the application process. The lender may also require you to provide documentation of your finances to date, as well as a business plan that clearly outlines your intentions to create revenue and how you propose to utilise the funds supplied.
If you are looking for a business loan that doesn’t require a deposit there are many options out there. The most common are secured and unsecured business finance, equipment finance, invoice financing, insurance premium financing and trade finance.
Secured business loan
In the case of a secured business loan, the asset you are borrowing the money to purchase acts as collateral against the loan, so a deposit is not required. If you default on your loan, then the lender has the authority to take possession of the asset and sell it to recover the money owed to them.
Unsecured business loan
An unsecured business loan doesn’t require an asset to act as collateral and doesn’t typically require a deposit unless your personal circumstances require the lender to ask for one to reduce their risk. With this type of loan, the interest rates tend to be higher and the loan terms shorter with larger weekly, fortnightly or monthly repayments as the lender is taking on more risk.
With invoice financing, in most cases, a deposit isn’t required as your business’s invoices act as collateral against the loan. With an invoice finance facility, the lender will typically lend you up to 80% of the value of your invoices. They then chase the payments from the clients and provide you with the remaining 20% once all invoices have been paid for. The facility does come with interest and fees which are payable whilst funds have been drawn.
Like a standard business loan, equipment loans can be both secured and unsecured. With equipment finance, a deposit is not normally needed as the piece of equipment or machinery being purchased will act as the collateral. If the loan is unsecured and the equipment isn’t being used as collateral, higher interest rates will offset the lender’s risk.
Are there any advantages if you choose to use a deposit for a business loan?
Whilst you generally don’t need a deposit for a business loan it can be one way to reduce the size of your weekly, fortnightly or monthly repayments. By putting down a deposit you will reduce the total amount you are borrowing and the interest that will need to be repaid. It also reduces the lender’s risk which can help when it comes to getting the loan approved.
Another benefit of a deposit is a potentially lower interest rate. If you are worried that you might not obtain loan approval or are looking to reduce the cost of repayments, then looking to put down a deposit could be a worthwhile consideration. You will need to weigh up the benefits of using a deposit vs having those funds available for other uses that may be more beneficial.
Do you need a deposit for a business loan FAQs?
I’m still unsure if I will need to put a deposit down
The best thing to do is to speak to your chosen lender. Based on the type of loan you are looking at, your individual circumstances and credit rating they will be able to tell you if a deposit will be needed.
If I put a deposit down for a business loan, can I get that money back?
Unfortunately, no. Once a deposit has been paid and a loan agreement signed, the lender will not pay that money back to you.
If it turns out I do need a deposit for a business loan how much is required?
This will largely depend on the type of loan and your personal circumstances. For example, commercial real estate loan usually requires a deposit between 10 and 30%.
Are there any other options other than putting down a deposit for a business loan?
If you are looking to purchase a vehicle or piece of equipment or machinery for your business, another common approach is to take out a loan with a balloon payment. A balloon payment will help reduce the cost of your repayments over the period of the loan.
If you are considering applying for a business loan we offer a variety of options. For more information contact one of our loan specialists today.