The real answer is “it depends”!
It depends on strengths and weaknesses. It’s a balancing act. The lower your down payment (weakness), the higher the monthly payments, which means, there’s more pressure on the owner to make the monthly debt obligations. (weakness).
So as an owner do you want to put more down payment up front and sleep at night knowing there will be less pressure on monthly payments later, or less down payment up front and keep up at night hoping you can sell your product or service, when you have no control over the economy and consumer spending. This is one of the aspects of that balancing act.
Many have heard the word Cash Flow and it sounds really cool but what does it really mean? It’s the ability to make the loan payment every month without stressing. For some banks the rule is you must have $125 in your pocket for $100 in business expenses. The more money you have in your pocket, (net profits on tax returns) the more likely the cash flow aspect gets a tick mark. The less money you have in the pocket (low net profit or loss), the more it is perceived as an inability to make the loan payment.
Next: is there adequate Collateral to cover the bank’s risk of lending you the money?
If not, that’s a problem. If you have more forms of collateral (and your shoes don’t count for collateral nor does the liquor – inventory – in your store), then the bank should or must collateralize themselves to the fullest extent.
Know that it’s not a birth right but a privilege to get a loan.
Next: Experience of the individual means a lot in today’s credit environment. Lack of experience is typically perceived as business failing within 18 to 24 months. I am not saying this, it is a historical fact. Your credit score is a reflection of how you have handled your debt obligations.
Next: Do you have Reserves for a rainy day? If customers don’t walk in, you still have to make loan payments. Don’t confuse reserves with down payment. This is in addition, not including.
Once all such risks are evaluated, then there are certain other variables such as SBA or Conventional.
Down payment rules vary greatly between the two. On the SBA side, I like to start down payments 15 percent and depending on the debt service ratio, I tweak the down payment, up or down. On conventional typically owner occupied can be 20 percent to 25 percent, non-owner occupied can be 30 percent or greater.
Remember: Your down payment is “owners’ equity” or “guarantor’s risk” or “your skin in the game”. The less risk or skin in the game from the guarantor, the more you send wrong messages to the lender.
To summarize, there is no easy answer to the question around a down payment, because as you saw, it depends on many variables. Just like you shouldn’t tell a doctor how to treat patients, leave this work to the experts. Hire our services so that we can prepare you to be bankable today and for tomorrow. We have the experience, trust, ethics, reputation, banking relationships and we can speak the finance language, but we are on your side and we work for you!