Do You Need a Deposit for a Business Loan?

Business loans can be incredibly useful, and help businesses to manage cash flow, buy equipment, grow a business, or purchase assets.

There is a range of options available in the market with flexible repayment installments at differing rates. Getting the right business loan with the best rates and terms is essential to ensure that your business runs smoothly and doesn’t incur unnecessary expenses.

Whether or not a business loan needs a deposit depends on the type of loan, the purpose of the loan, and your credit rating. Some loans, because of their structure, do not need a deposit, but the reality is, and the amount of deposit will vary according to individual circumstances.

Why Do Business Loans Require Deposits?

The main reason a business may need a loan is to reduce the risk it faces. Lending firms also evaluate the risk of their borrowers and try to find ways to minimize the possibility of non-payment.

The deposit against a business loan is a commitment. It shows that the borrower is willing to put in some of their money, reducing the risk to lenders.

A deposit also demonstrates the solvency of the business and the business owner, as it shows a percentage of investment in the contract. Deposits come in two forms:

  • Cash down payment
  • Collateral on an asset

Most business loans only require one of these two deposit conditions for the credit to be approved.

What Is The Typical Deposit Amount?

There is no set deposit amount for business loans, as each business is unique. Most lenders need 10 – 30% of the loan value as a deposit. This money can come from savings, working capital, alternative finance instruments or as an external investment. The deposit amount you’ll need for your business loan depends on various factors: These include:

  • The amount of money borrowed
  • The purpose of the loan
  • Your personal credit history
  • Your business credit history

Common Business Loans

Each type of loan comes with differing deposit requirements. Loans serve various purposes and also come with different levels of risk, and so the deposits or collateral they’ll require also differs.

The main types of business loans sought include:

Commercial Real Estate Loans

Commercial real estate loans are vital to the health of a business. They are among the more popular loans for businesses and help a business to property without hemorrhaging cash flow.

A business could choose to purchase a commercial building, residential property, or farmland according to its needs, and each type of loan comes with its own unique down payment requirements.

Commercial Equipment Financing

Equipment financing loans allows a business to purchase machinery needed in the operation of the company. Most lenders consider the machinery as the collateral, and the chances are that as a borrower, you may not have to furnish additional deposit to get the loan facility approved.

If a deposit is required, it will typically be smaller and will range from 10-20% of the value of the loan.

Invoice Financing

Invoice financing turns the money owed by clients into a short-term cash advance from lenders.

The business gives the client invoices to the lending firm. The lender then provides them with up to 80% of the value upfront. The lender then recoups any payments from the clients and gives the business the remaining 20% once all invoices have been collected. This service is offered with interest and fees, which are due for as long as it takes for the last invoice to get settled.

Most invoice financing arrangements do not require a deposit and give cash to the business in exchange for interest payments and fees. The clients’ invoices act as collateral.

Lines of Credit

A business line of credit offers businesses an amount of capital from which they can borrow over a specific period. Companies can utilize part or the entire amount on the line of credit, with famous examples being business overdrafts.

The lender will only charge interest on the exact amount borrowed, and the business can call on this facility as often as it needs to within the period specified in the line of credit terms.

Short-term Loans

Short-term loans provide businesses with a lump sum of cash in exchange for fees and interest payments over a set period.

Most short-term loans are unsecured and do not require deposits. Because of this, lenders assess applications carefully and only approve loans which they think the business can afford to repay.

Contact Commercial Experts for the Best Business Loans

Contact us today to tell us more about your commercial loan needs, and we will help you to determine the best loan for you.

Our expert team will walk you through the process and present you with all the options available from our various lending partners.

We’ll submit the loan application paperwork and also liaise with our partner lenders on your behalf. Get in touch today by calling on 1300 338 297 or filling in the contact form on our website.

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