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The down payment is the real qualification

By  ·  Published  ·  6 min read

The short answer

On an asset-based deal the deposit is the qualification. It closes the gap between what a lender can advance and what they could recover, and it is the reason you will protect the asset in a bad month. It usually runs twenty to forty percent — and it does not all have to be cash, which is the part most borrowers do not know.

Part of our guide to Collateral Loans — what it is, what it costs, and who it suits.

Not sure this is the right product at all? The Idaho small business funding guide covers every option an Idaho business has.

Borrowers arrive at asset-based lending having been told their credit is the problem. Then they discover the deposit is the problem, and it is a harder one, because no amount of explaining improves it.

It is worth understanding why it exists, because that is what tells you what will be accepted.

What the deposit is actually doing

Two jobs. It closes the gap between the purchase price and what the asset would realistically recover in a forced sale, so the lender is not underwater on day one. And it gives you something to lose, which is the only reliable predictor of behaviour when a business gets tight.

That second job is why the lender cares where the money comes from. A deposit borrowed on a credit card at a higher cost than the loan itself does not do the job it is there to do, and experienced lenders ask.

What counts besides cash

  • A trade-in. The equity in the machine you are replacing counts toward the deposit on the one you are buying.
  • Other collateral. Equipment you own free and clear can be pledged alongside, standing in for part of the cash.
  • A security deposit held by the lender, in some structures, rather than money paid out to a seller.

This is the single most useful thing in this post. A contractor in Nampa with no deposit in the bank and two paid-off machines in the yard is not short of a deposit — he is short of someone having told him the yard counts.

Why it runs higher on some deals

The percentage tracks the lender’s confidence in the resale, not their opinion of you. Expect the higher end on anything harder to sell quickly: older units, specialised equipment, thin used markets. Expect it on structures where nobody is examining credit at all, since the deposit is then carrying the entire file.

Work out the deposit before you shop. Knowing you can assemble thirty percent on a two hundred thousand dollar machine tells you to look at machines up to two hundred thousand, which is a far more useful search than finding the right machine and then discovering the gap.

The arithmetic worth doing first

  1. What cash can leave the business without creating a second problem in sixty days?
  2. What is the trade worth, honestly, not optimistically?
  3. What do you own free and clear that you would be willing to pledge?
  4. Add those. That number, divided by roughly 0.25, is the ceiling of what you should be looking at.

Doing that before you look costs ten minutes and saves the conversation where a seller is holding your money against a deal that cannot fund.

Common questions

Can the deposit be financed?
Rarely in cash form, and lenders ask. Pledging other collateral in its place is the normal route and is openly accepted.
Is the deposit refundable if the deal falls through?
Money paid to a seller follows the seller’s terms, which is why eligibility should be confirmed before any deposit changes hands.
Does a larger deposit improve the terms?
Generally yes, because it directly reduces the lender’s exposure. It is the most reliable lever a borrower controls.
What if I have the asset but no deposit at all?
If the asset is owned outright, a sale-leaseback may be the better conversation — it raises cash rather than requiring it.
Klark Sparks Headshot

About the author

Klark Sparks, co-founder and commercial finance broker at Sparks Family Finance.

Klark works with owners at the two points that decide everything: when they are working out whether to start, and when the business is running and needs capital to keep going. He would rather give someone the honest answer — including that borrowing is the wrong move this quarter — than place a deal that looks good this month and hurts next year.

More about Klark and Sparks Family Finance

Products covered here

Collateral LoansEquipment Financing

Where this comes up most

NampaBurleyRexburgCoeur d’Alene

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