Financing down payments on a business loan
In common parlance, a down payment means a part of the total price of an item that is required when the item is bought on credit (American Law Dictionary). It is also referred to as earnest money or the percentage sum of money that a buyer pays on accepting a contract to indicate his or her bona fide and an ability to settle the balance.
In business finance, most lenders will insist on having the borrower to commit themselves to paying the loan by setting down a certain amount. For example, Small Business Administration (SBA) lenders require down payments that will depend on the type of business being bought and other general standard requirements by the lender.
Although the sources of down payment for loans can be derived from nearly all the financing sources available in the market, the following are more appropriate.
Personal savings and cash
Savings and cash in your possession can play a critical role as far as down payments are concerned. These will come with no strings attached and can be considered to be the best mode of financing down payments on a business loan. Business people may also want to know that it is important not to deplete all your savings on down payments. In fact, most lenders will not want to leave your accounts “naked” as they understand the importance of personal liquidity during the nascent days of a business.
Retirement funds
Nearly all countries have state run retirement plans for their citizens. In the United States, the 401K can be cleverly used to fund down payments for business loans. Lawful access of money from these schemes is the key avoiding penalties. For example, withdrawal of money when one is still in employed and below the age of 59 years may attract strict legal repercussions. It is important to consult widely on the tax implication of using this method.
Home equity
Home equity, simply speaking, is the difference between the true market value of the home and the loan or debt outstanding. It therefore follows that the more you reduce your debt the more you increase your home equity. Although home equity is not tangible, it can be used to borrow or can be pledged as a down payment for business loans. The structure of the contract entered into between the lender and the borrower will determine how home equity will be used.
Angels
Most small to medium sized businesses depend on closely knit associations to be set up and even progress. Strictly speaking, angel investors will always want something in return for their investments and trust in the business being financed. However, some may not necessarily expect monetary returns. It is therefore possible to seek funds from family and friends for the purposes of funding your down payment for business loans.
Down payments are a great source for building your credit history. It is therefore important to gauge the needs of your potential lender in order structure your payment plan. As much as down payments are important, an investor should be able to only look out for lenders who do not place so many conditions to borrowing.
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