There comes a point in most people’s lives when they have to borrow finance. Whether it’s a payday loan in an emergency or an overdraft when you need to urgently pay for something, borrowing finance is more common than you think. Businesses use finance a lot, and it’s something that takes a lot of time to research to ensure you choose the option that’s right for you. There are some additional things to consider when utilising business finance, and one of those is business loan down payments. So, to help you get a better idea of this subject, we’ve put together a handy guide. Keep reading for more information…
What Is A Business Loan Down Payment?
You might know what a down payment is when it comes to a mortgage or a car, but you may be unaware that some business loans also require them. Essentially, a down payment is a percentage of your total borrowing amount that you pay upfront. For instance, if you were to borrow $10,000, you may be required to pay a 10% down payment. This means you’ll need to pay the lender $1000 before you can receive your loan.
When Do I Pay It?
Any business loan down payment needs to be paid upfront, otherwise, you won’t receive your loan. Even if your application is approved, failure to provide the required down payment will forfeit you receiving the money. You’ll be advised by your chosen lender when exactly you need to pay your down payment, so make sure you read any communications from them carefully and make the payment on time.
How Much Will I Pay?
How much your down payment is will vary from lender to lender. Some may charge 10%, others 20%, and if you’re lucky, only 5%. One factor that can influence their percentage is your credit score and history. Typically, if you have a good credit score, your down payment will be lower. This is because the payment is viewed as a type of collateral, meaning that if you can’t afford your repayments, the lender will still have some security to fall back on. Having a higher credit score usually means you’re better at paying off previous debts so lenders won’t view you as a risk to lend to, making your down payment lower. You may also have to provide collateral and a down payment. If this is the case, your down payment is usually cheaper as you’ve provided another source of security.
Why Do I Need To Pay It?
Each time a lender approves a loan application, they’re taking a risk. However, by using a down payment, they mitigate that risk as you’re proving to the lender that you’re sincere about the loan. Some people may apply for a loan in a time of need and not think through the repayments, landing themselves in hot water with the lender. But with a down payment, it causes people to assess their application and show their dedication to paying it off. They also benefit you as a business as they decrease the total amount you need to pay back. This can then allow you to have lower monthly repayments which can make the whole procedure much more affordable for your business in the long run.
Will I Pay One For Every Loan?
Although down payments are common, they aren’t required with every business loan. Some lenders will promote not having a down payment as a way to encourage customers to borrow from them over their competitors. However, if you think about the benefits of a down payment, you may be better off going to a lender that does require it. If you’re applying for a large business loan, you can pretty much guarantee that they’ll require you to make a down payment. This is because the larger amount you borrow, the bigger the risk it is to lend out. If you’re ever unsure, don’t hesitate to ask the lender beforehand. That way you can be confident in your decision.
Minimum VS Maximum
Some down payments for smaller loans will have a minimum and a maximum amount you can pay upfront. Both can have their benefits, but they can also have their drawbacks too. Paying the minimum amount can be good if you don’t have the cash to pay right away and if you’ve only got to pay a small amount that you already have, you can get your loan quicker. Paying the maximum amount can mean that you have lower monthly repayments, but it can be hard to come up with the full amount if you don’t currently have it. If you’re unsure which amount to pay, try thinking about what will be more beneficial for your business. You’ll soon be able to make the right decision.
Down payments on business loans may seem like a tough concept to get your head around, but essentially it all boils down to risk. Lenders want to be sure that if they lend your business their money, they will get it back. Providing them with a down payment can be a great way to demonstrate your seriousness and dedication to your business and repayments, so it can work in your favour. If you don’t need to apply for a loan right away, spend some time saving for a down payment. This way you’ll be prepared no matter how much you’re asked to put down.