SBA Loan Down Payment – When Can It Be Borrowed?
Depending on what you are borrowing for and which program you are using, you can borrow the down payment for an SBA loan.
- You can borrow the down payment for SBA 7a loan if you have another source of income outside of the business that you are borrowing the money for AND if the payment on the borrowed money is something you can comfortably afford.
- Your business can borrow the down payment on an SBA 504 loan as long as you can prove that the additional payment on the amount you borrow will not negatively impact your business. This is less common but available to stronger, more established businesses, especially those with significant post closing liquidity.
Re: the down payment for the 7a loan, the Small Business Administration states the following regarding acceptable forms of down payment:
Cash that is borrowed through a personal loan to the business owner with repayment demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify).
Typical sources of down payment:
- A Home Equity Loan or line of credit
- A Self Directed IRA or 401k from a former employer (these can be used tax and penalty free in certain situations)
- A gift – usually from friend or family
- An investor – in exchange for some percentage of ownership in the business
- The Seller of a business or building can hold a portion of the down payment in the form of a loan*
Probably the most common scenario is to borrow against home equity as the payments are usually affordable and many borrowers have a spouse with income and some have either a “regular” job or another business or other source of income. This is especially common when a business being acquired or started is the type where the business owner does not need to be on site full time. For instance, a self storage business or a hotel or motel.
100% Financing – An Alternative for Existing Businesses
Keep in mind that there is a 100% financing option with the SBA 7a loan for existing businesses undergoing an expansion to new locations or buying real estate for the business. It is not without it’s shortcomings, but it can be a very good solution for some businesses. Click here for more info on 100% loans.
If you have a question about your situation feel free to e-mail me at jking(at)greencommercialcapital(dot)com.
*Seller financed debt must be on “full standby” for as long as you have the SBA loan. Full standby means no payments can be made on the loan. This sounds like it would not be useful, but it is very common as most Sellers are happy to get 95% of the proceeds of the sale at closing.