Can I Get a Business Loan With Zero Down Payment?

Starting a business is simple but staying in business requires significant effort and money. Unfortunately, if you have never availed debt for your business, the lender may require you to provide a down payment for your business loan. But does this mean you will never be able to get a loan with Zero down payment? Let us figure it out in this article.
 

Why do financial institutions ask for a down payment? 

Well, the simple answer is to mitigate the risk of lending to your profile. Financial institutions are wary of lending to start-ups or businesses that have never received a loan before. This is solely due to a lack of credit history.
 
When you apply for a loan as a business owner, you must provide financial records, and the lender conducts a hard inquiry to obtain a credit report from the credit bureau. They will then examine your company's financials and credit report to determine your repayment capacity. If any of these documents are missing, the lender will require you to make a down payment on the loan. They do this to ensure that you will not default on a loan. Moreover, if you can pledge your company's assets as collateral, your chances of approval increase significantly.
 
Also Read: Mistakes That First-Time Small Business Loan Recipients Make
 

How to get a business loan with no down payment?

If you are a business owner but have never taken a loan before, you can obtain a business loan with no security if you do the following:
 

• Business plan

  The entire purpose of a credit appraisal is to determine your repayment capacity. Approval is likely if the area in which you intend to invest the funds has the potential to increase your company's profitability.
   
  Prepare a well-researched business plan before contacting a lender for business financing. Explain to them, along with supporting documents, your revenue forecast, expansion plans, how the new project will benefit your business, and so on.
   

• Adequate cash flow

  Cashflow provides information about your company's liquidity position. A negative cash flow indicates that your funds' outflow exceeds the funds infused into your business. Stockpiling and having more employees than needed are the two most possible causes of poor cash flow after poor budget management.
   
  Some suggestions for improving your cash flow position to qualify for a small business loan are as follows:
   

• Prepare a list of obsolete assets, sell them, and put the proceeds in your business reserve.

 

• Avoid blocking your funds by not storing raw materials far ahead of their requirements.

 

• If possible, introduce a new product into your business’ portfolio; it may help you increase sales and cash inflow.

 
Also Read: Have you tried these 11 ways to improve cash flow in your business
 

• Know your requirements

  Assess your needs before submitting your business loan application. In some cases, financial institutions may be willing to lend you a smaller loan. However, your lender may reject your application if you apply for an amount higher than your requirements or for what you qualify.

What are your options for business financing with no down payment?

 
If you are an experienced business owner with a company that has been in operation for five years or more, you have several funding options to cover your business expenses. These are described as follows:
 

1. Term Loans

   Term loans are widely used in business financing. The loan is sanctioned without any collateral and down payment. The lender determines the fund value based on your credit history, business vintage, financial records, and existing debts. When you receive a term business loan, the lender expects you to repay it within 36 months. The maximum amount available under this loan is Rs 25 lakh, and you are free to use it for whatever business purpose you see fit.
    
   Term loans are ideal for business expansion, purchasing raw materials, paying employee salaries, and purchasing advanced technologies. 
    

2. Business Line of Credit

   A business line of credit is another form of revolving business finance. You are not obligated to use or withdraw the entire amount under this financing arrangement. When the funds are credited to your loan account, you can withdraw a portion of them whenever you need. Another advantage of this loan is that your lender will only charge interest on the amount you have withdrawn and not on the entire sanctioned limit.
    
   When approving a business line of credit, the lender is primarily concerned with two things: your company's credibility and your current account transactions. Therefore, this type of loan is appropriate if you require funds to cover your business’ recurring expenses such as utility bills, employee salaries, and so on.
    

3. Invoice financing

   Invoice financing is a type of business loan in which the lender provides funds in exchange for outstanding invoices payable by your customers. Account receivables serve as collateral in this financing arrangement, and you must ensure that your customers pay on time. Invoice financing, also known as bill discounting, is a short-term loan that is ideal for handling petty expenses.
    

Also Read: Why invoice discounting is great way to improve cash flow for SMEs
 

1. Equipment Loans

   Equipment financing is a form of secured loan and is offered for purchasing business plants or machinery. For example, if you are a registered medical practitioner or run a diagnostic centre or hospital, you can avail this loan to purchase x-ray machines, CT scanners, etc. The minimum fund amount available under this loan is Rs 10 lakh and its interest rate starts at 11%. The loan has a maximum repayment period of 7 years, and you can choose the payback period that best fits your budget.
    

2. Business Credit Card

   A business credit card functions similarly to a regular credit card. Your lender determines your card limit after evaluating your company's financial health and current debt-to-revenue ratio. If you pay your credit card bills on time, you will not be charged any interest on your business credit card. However, if you miss any payment deadlines on your card, the interest penalty will be 2% to 3% per month.
    
   Business credit cards are appropriate for meeting small business expenses because the limit offered by them is insignificant. Moreover, in case you use more than 30% of your business credit card limit, your company's credibility will suffer.
    

3. Working Capital Loan

   The working capital loan is another form of secured financing and is offered against underlying assets such as inventories in your business. Financial institutions offer this loan for an LTV of up to 80% or Rs 5 crores. You can use this loan to cover the daily operational expenses of your business. 
    

To conclude

 
Financial institutions ask for a down payment amount in the rarest of rare cases. Typically, they do not lend funds to start-ups due to a lack of business and credit history. In case of established businesses, they assess the business’ creditworthiness, annual profit, debt-to-revenue ratio, and cash flows for approving funds at an inexpensive business loan interest rate.