FAQ: Single question

MYTHBUSTER: Do you have to put money down for a small business loan?

Among the many concerns which hold back small business owners from seeking a business loan, the uncertainty regarding a down payment ranks quite high. In fact it is a common misconception amongst entrepreneurs that they must pay a deposit in order to secure finance. In fact this sometimes acts as a barrier to them applying for business finance, fearing that they may have to give up precious equity or worse still, pay an advance when they have no surplus cash.

Whilst there are some finance scenarios which require a borrower to put down a certain amount of money, (for example new car purchase on finance), this is not the case in business lending.

With a business, the reality is a loan can make a huge difference and it is rare to find an SME that would not benefit from borrowing. Whether that is improved cash flow, expansion or growth, to pay off or consolidate existing debts, to make investments, purchase new equipment and also cover day-to-day expenses that sometimes mount up, especially if the business is seasonal.

But is a small business loan worth it? Firstly, let us dispel the myth of needing to place a deposit to take out a business loan. This is not the norm and you should do vigilant due diligence on any lender that is asking this of you.

What is fairly common when borrowing money for your business, is to offer up security when taking out finance on behalf of your business, and this could be either personal security or belonging to your business. Whether it’s commercial property, residential property or in fact the loan is secured against your existing physical business assets or invoices these are all examples of business finance where the customer must offer something to obtain it – but usual it’s based on existing assets and never a cash deposit.

For a small business which is already concerned about its growth prospects, coming up with an advance payment to acquire finance would be a huge challenge. Fortunately, it is not necessary.

Business Cash Advance

For businesses which have no collateral to offer, secured loans may not be so easy to obtain. Luckily for them, there are alternative finance providers that offer unsecured loans to businesses which they believe have the potential to thrive with the added capital made available with a loan.

Businesses which accept payments in the form of card transactions from their clients can apply for loans known as Business Cash Advance. It is an unsecured loan for which entrepreneurs are not required to make a down payment or give up anything as collateral.

Business owners which utilise this type of finance may receive up to 125 percent of their monthly card volumes, depending on the financial lender they approach. Usually with this type of funding, the sum is calculated on the takings made from the business card and it can be used for any business purpose, which is why it is a hugely popular choice.

Invoice Finance

Businesses which invoice their clients often face a cash flow crisis. It may be due to clients that do not process payments on time, or it could be the nature of the business itself and its seasonal fluctuations that may be responsible for the slowdown.

Whatever the circumstances, a business which has not received payments on time may find that it is difficult to continue the day-to-day operations involved in running the business and without healthy cash flow., many businesses do not survive.

But their outstanding invoices also make them eligible for a type of finance known as invoice finance. This finance can resolve the monetary strain that a business may be experiencing due to delayed payments.

All that a business needs to do to access this type of loan is to submit their ‘ledger’ (the record of their sales and unpaid invoices) to the commercial lender. Based on the value of these invoices, the lender offers a loan amount which can be accessed whilst they await payment from their customers – no longer being at the mercy of another business’ payment practices.

In this way, invoice finance can go a long way in resolving the cash flow crisis that small businesses are subjected to, from time to time.

Other Types of Credit

There are many businesses who accept different types of payment, rather than invoicing their clients – they may also not accept card payments. A third option is Asset Based Lending, where funding is secured against your personal or commercial assets.

A business which has assets such as property, machinery or stock can use them as collateral to secure a commercial finance loan. This type of finance is known as Asset Based Lending.

But there are also small businesses which do not own any assets. In such cases, the small business owners can use their personal property as collateral and raise the necessary finance for their business. Such business loans which are secured by a personal property are known as Property Finance.