How to get a no deposit business loan with a 100% commercial loan
Using a guarantor, offering property or an asset as security can save you from putting down a deposit.
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If you're interested in a commercial loan but don't want to put up a deposit, you'll need a 100% commercial loan. It's possible, with a little bit of ingenuity.
Cash flow is a major concern for many businesses and poor cash flow is a bigger indicator of future business failure than any other factor. It makes sense, then, that business owners would be reluctant to deplete their cash reserves to put down a deposit for a commercial loan. While many businesses may be able to afford the ongoing loan repayments associated with a commercial loan, they may not have the means to put up 20–30% of the amount of the loan as a deposit in advance.
The obvious solution is a 100% commercial loan, but is this a viable option? Do any commercial lenders offer a no deposit business loan? On the face of it, it may seem as if all commercial lenders require some kind of deposit. However, by combining different loan options and essentially creating your own loan terms, you may be able to negotiate a 100% commercial loan. Here's how:
3 ways to increase the amount of a loan
The most common way to increase the amount offered under a business loan is by offering residential property as security for the loan. This type of secured business loan will not only increase the amount of the loan but will usually attract an interest rate discount, bringing the rate down from higher commercial rates towards much more favourable residential mortgage rates.
A commercial loan secured by residential property will usually extend to up to 80% of the value of the property for a standard commercial loan and up to 90% of the value of the property for particularly strong applications, including medical practitioners, lawyers and accountants. Commercial loans secured by commercial property could fetch loan amounts of up to 70% of the value of the commercial property for standard commercial properties or up to 60% for purpose-built commercial properties like backpackers hostels or aged care facilities.
Business loan with guarantor
Another way to increase the amount of a commercial loan is to apply for a business loan with guarantor. The terms of a guarantor loan are usually very similar to a business loan secured with a residential property. This is because the guarantor, although not a true party to the loan, is putting up their own residential property as security for your business loan. Similarly to offering residential property as security, residential property offered by a guarantor will fetch a loan amount of up to 80% of the value of residential property or up to 70% of the value of commercial property.
A final way to increase the amount of the loan is to offer your own business assets as additional security for the loan, such as suitably valued business equipment, vehicles and equipment, client books or even the goodwill in the business. Sometimes known as balance sheet lending, this form of security involves a lender extending a commercial loan against the value of the business itself. The lender will usually base their business valuation on the balance sheets of the business over the past two years and may also ask for up-to-date asset valuations.
Business assets will never trigger a 100% commercial loan by themselves, but they can lead to an increase in the amount offered under a commercial loan secured by other means.
Creating a 100% commercial loan
Combining security to increase the loan amount
Particularly strong applicants may be able to find a 100% commercial loan by offering suitably valued residential property. In most cases, though, even residential property will only fetch a maximum of 80% of the value of the property, leaving the applicant to find the remaining 20% by way of a cash deposit.
The trick to creating a 100% commercial loan is to work with a lender who is willing to combine different forms of security to increase the total amount offered under the loan. For example, your residential property may have sufficient equity to give you 70% of the value of the loan. You may then be able to introduce a guarantor who will offer their own residential property as additional security to bring the loan amount up to 100%. Alternatively, the lender may be willing to take some of your business assets, such as appropriately valued equipment or the goodwill of the business, to increase the loan amount to 100%.
Comparing lenders and loan terms
The trick to applying for a 100% commercial loan is finding a lender who is willing to accept multiple forms of security to effectively obviate the need for a deposit. Since commercial lenders are not subject to the same regulations as lenders offering residential mortgages, commercial lenders are free to impose interest rates, fees, charges and other terms as they see fit, which can vary significantly from lender to lender and depending on the circumstances of the applicant.
For this reason, it is essential to compare business loans to ensure you are speaking with lenders who are willing to take your unique circumstances into account and create a loan option that does not require a deposit, while still offering competitive interest rates, flexible loan terms and transparent fees and charges.
Consider the following when comparing lenders and loan products:
- Interest rates. Consider the advantages and disadvantages of fixed versus variable interest rates, along with the quoted interest rates themselves.
- Loan term. A longer loan term is not always the best option. The loan term should reflect the purpose for the loan and your intended loan repayment schedule. For example, if the purpose of the loan is to purchase commercial real estate, a long loan term could be advisable as it will help you to spread out the repayments over a longer period of time, making each payment more affordable. If the purpose of the loan is to purchase equipment without a predicted lifespan of 5 years, a 10-year loan term will see you paying off equipment that has long since expired or been fully depreciated.
- Fees and charges. Interest rates are important but should not be the only financial consideration you make when comparing different lenders and different loan products. Whether applying for a 100% commercial loan or any other type of business loan, consider the schedule of fees to ensure that you understand the full cost of the loan before you sign on the dotted line.
- Loan flexibility. Consider how your business' financial needs may change in the future and whether your loan term will be flexible enough to accommodate these needs. For example, does the loan allow you to pay out the remaining balance in full without penalty before the end of the original term? Or would early exit fees prevent you from exiting the loan earlier in the event of a financial windfall?
Before applying for any loan products, compare your options to make sure you understand the full cost of the loan and your obligations under the loan contract. With more and more smaller and independent lenders entering the commercial finance industry all the time, you as the applicant are in the driver's seat and have the opportunity to compare loan products and choose the solution that best fits your circumstances.
Business lenders to consider
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
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