How to Save Up a Down Payment for an SBA Loan
Why do you need a down payment if you want the SBA to approve your loan request? It's because the SBA considers your personal investment a sign that you’ll be more motivated and careful with the finances of your business, as well as its overall success. They’ll see less risk of you defaulting on an SBA loan (which would put the SBA on the line to repay at least a portion of the balance you owe), improving your chances of loan approval. Think of your down payment as a solid promise to repay your SBA business loan in full.
You’ll need to offer up to 30 percent of your total loan request as a down payment if you want the SBA’s attention. If your cash on hand isn’t that high, there are still several ways you can meet the SBA’s requirement for lending.
Have a Business Partner Make Your Down Payment
A business partner — or even an investor — may be willing to provide your required down payment to the SBA in exchange for equity in your business. Some may even be satisfied with equity and not need to be a part of your daily business activities (as long as your business stays on top of performance and profits).
Using Business Assets for Down Payments
If you have a business with great enough existing assets (real estate, vehicles, etc.), you could either sell some of those business assets or ask an escrow company to handle its refinancing and sale. If using an escrow company, they’ll be able to do both at the same time and hand over any required SBA down payment funds.
Savings and Stocks for Down Payment Funds
Any sufficient personal savings account can provide a quick way to source SBA down payment funds. If your personal savings aren’t enough to meet the SBA’s 20-30 percent requirement, selling stocks and bonds could be another relatively quick means to cash — and approval.
Using Personal Credit and Loans
You may choose to ask your current personal bank or credit union for a loan to make your SBA down payment. You could also use an existing credit card to take out a cash advance (although beware of sky high interest rates on these transactions). Another option is to free up room for cash advances on existing cards by transferring the balance to a fresh card at low or no initial interest. You’re allowed to borrow the SBA down payment amount if you have an additional unrelated income source and can also prove you’re able to afford the additional payment.
Make Your Down Payment with Family Gifts
The SBA 7(a) program in particular accepts gifts from family members as your down payment. Income from a spouse’s job is another permitted source.
Using Retirement Funds for Down Payments
Any funds in existing IRA or 401(k) accounts can be used for your SBA down payment through a Rollover for Business Startups (ROBS). You can qualify for a ROBS your tax-deferred retirement account is over $50k. If you meet the requirements, a ROBS means there’s no additional debt for you to repay, nor large amounts of payable interest.
Generate Down Payment Funds by Refinancing
Refinancing your mortgage can be an option to cover your SBA down payment if your home value is high and interest rates are low. Vehicles such as cars and boats might also be options for refinancing if the conditions are right.
Hard Money Loans
Any hard money loans must be secured by real estate, and also require much faster repayment with much higher interest. You’ll also be allowed a smaller loan than traditional mortgages provide (50-60 percent versus 80 percent of your real estate’s confirmed value).
Coming up with 20-30 percent of your total SBA business loan request may seem daunting, but if you get creative, you’ll find plenty of resources to make it possible. And don’t hesitate to ask your own circle of cheerleaders to invest (knowing, of course, they’ll want a piece of the action in return).