Nearly every mortgage loan requires a down payment. For real estate investment loans (as opposed to homeownership loans), those down payments are high indeed — 15-30% minimum. Many investors think they need to raise capital or rely on personal or business savings to satisfy those hefty down payment requirements.
This is increasingly not the case. More and more institutional lenders of real estate debt will accept other debt as down payment funds. Working capital loans have emerged as one of the most popular investor funding options.
Munoz Ghezlan Capital routinely helps real estate investors secure unsecured working capital loans to act as down payment for investment mortgage loans, resulting in effectively 0%-down investments. This article will explore in detail the legal and practical implications of such a strategy, and how to execute it effectively with managed risk.
Key Takeaways:
- It is legal to use borrowed funds, including unsecured business working capital loans, as down payment on a mortgage loan, provided that you disclose the use of borrowed funds to the lender and the lender signs off on it.
- Whereas almost no lenders used to accept borrowed funds as down payment, more and more now do so across specific lender categories, including DSCR lenders, hard money lenders, and commercial lenders.
- Using borrowed working capital as down payment increases the risk profile of the investment, creating the risk of overleverage, mismatched debt timelines, appraisal risk, and documentation risk.
A DSCR will take into account all loans into their DSCR calculation for underwriting purposes — not just the DSCR loan itself, but any loans the investor intends to use as down payment funds.
Why Working Capital Is Becoming a Go-To Down Payment Strategy
Small-portfolio real estate investors are no longer competing against each other for deals — they are competing with mega-funds like Blackrock and foreign investors who deploy massive amounts of capital to suck single-family investment opportunities off the market.
To compete, an independent investor cannot wait for their coffers to fill up with enough money for a down payment, and then be limited by that savings account balance for the deal in front of them.
What if it’s just a little too big, or the LTV is just a little too low? In 2025 and 2026, investors need to constantly source deals, move quickly to take down the deal, and be able to finance a down payment of any size. Anything less will drastically stunt their ability to scale a portfolio in a reasonable amount of time.
Business working capital loans are an ideal source of down payment funding because they are often unsecured, relatively long-term, and reasonable in their cost of borrowing compared to other investment funding options, with high loan balance caps for qualified borrowers.
What “Working Capital” Really Means in Real Estate Investing
Working capital (WC) is cash that a company can access to finance daily operations or major initiatives. It might be used to cover payroll, day-to-day expenses, make a large inventory purchase, make capital investments, bankroll a marketing push, launch a product, or any operational or capital expense the business might need it for.
A business working capital loan can be secured for any such purchase. There are relatively few rules as to the uses to which the loan proceeds can be put once the loan is approved.
These loans are:
- Typically unsecured.
- Either term loans or lines of credit.
- Fast approval and funding, often in the range of 24-72 hours.
- Term loans with terms of 2 to 7 years (though far shorter loans are available).
- Monthly payments fully-amortized, though some shorter-term loans require weekly or even daily payments.
- Typical interest rates between 7% and 11%, though some go as high as 25%, with short-term loans sometimes using a high-cost “factor rate.”
- Maximum balances anywhere from $50,000 to $500,000 and beyond.
To qualify for a business working capital loan, a company must meet the following requirements, though lender policies vary:
- Have a valid business entity — corporation, LLC, etc. — with an EIN (employer identification number on file with the IRS for business taxation).
- A certain amount of operational history, usually 2 years (although some WC lenders will consider newer businesses).
- Track record of revenue, usually $15,000-$30,000 annually (though requirements again vary, either lower or higher).
- Acceptable business credit score established through accepted trade lines, usually 600+ (varies).
- Acceptable personal credit score for the business owner/guarantor, usually 680+ (varies)
Depending on their track record, real estate investors may meet all of these requirements, and access an unsecured business loan for down payment or any other purpse.
Is It Legal to Use Borrowed Working Capital for Down Payment?
It is legal to use borrowed working capital for down payment on an investment property — as long as the lender is aware of it.
The misconception that this strategy is illegal arises from a conflation of the law and lender policies. It is illegal to try and use borrowed working capital as down payment without disclosing this fact to the lender. To attempt to do so constitutes mortgage fraud, exposing the borrower to criminal and civil liabilities.
The problem in the past was that nearly every lender had a policy against accepting borrowed funds as down payment, working capital loans or otherwise.
Adding to this impression is the fact that Federal mortgage institutions FMAE (“Fannie Mae”) and FHMC (“Freddie Mac”) specifically forbid borrowed funds as down payment in their guidelines.
Fannie and Freddie are not lawmaking institutions, but they are well-known Federal institutions whose guidelines many lenders conform to (these are known as “QM” or “qualified mortgage” lenders).
As such, it was effectively illegal to use borrowed working capital for down payment, because if you disclosed this intent to the lender they would always say “no.”
However, this trend is on the decline. More and more real estate investment lenders are now open to the use of borrowed funds as the source of their down payment. Not every lender does so, and no QM lender that conforms to Fannie/Freddie guidelines will do so. But enough lenders are open to the idea to make borrowed working capital for down payment a real possibility for qualified real estate investors.
Which Loan Types Allow Working Capital for Down Payments
As mentioned above, only certain categories of lenders allow borrowed working capital as down payment for an investment mortgage. Not every lender within these categories will accept it (which is why Munoz Ghezlan Capital keeps careful records on which ones do).
However, if you want to use an unsecured business loan for down payment on investment property, these are the categories of lender where you will find willing takers:
DSCR Loans
DSCR loans are long-term investment property loans similar to traditional QM mortgage loans, but approval is based not on the personal income, employment history, and debt-to-income ratio of the borrower, but rather the income potential of the property.
They tend to have higher down payments and cost of borrowing than QM mortgages, but they remain very affordable compared to other loan categories.
Hard Money Loans
Short-term, high-interest loans that often include construction or renovation funds, popular for fix-and-flip deals.
Private Lenders
“Friends-and-family” lenders, people in the investor’s network with money to lend and agree to originate a mortgage for the borrower based on their personal relationship of trust.
Commercial Real Estate Loans
Commercial real estate lenders use entity-based underwriting and focus on cash flow, creating an opening for them to accept borrowed working capital as down payment.
Conventional And Agency Loans (limitations)
Usually not allowed, but may be acceptable if the working capital loan goes to a separate, profitable business of which the borrower is at least a 25% owner, and then gets distributed to the owner as income or a bonus.
The funds must meet seasoning requirements, and the lender must be satisfied that the borrower didn’t disrupt operations of the borrowing business to obtain the distribution. This is a paperwork-heavy burden of proof, and also a taxable event — not the simplest of investor funding options.
Unsecured Business Loans for Down Payments: How They Actually Work
Let’s take a more in-depth look at how it actually works to use borrowed working capital as down payment:
What Unsecured Business Loans Are
A loan is “unsecured” when there is no collateral. Unlike the mortgage loan, no lien is created on any property — real property, personal property, liquid assets, or any other asset. There is nothing attached to the loan that the lender can automatically seize in the event of default.
This doesn’t mean the lender has no recourse. The lender can sue a borrower in default and ask the court to seize assets or wages. However, the foreclosure process on a mortgage lien is much easier for the lender.
Instead of being secured by collateral, unsecured business loans are approved based on the personal credit of the guarantor, the business credit of the company, and the documented revenue history of the company.
Typical Loan Terms in 2025
- Term: 2-7 years, fully amortized
- Loan Balance: $50,000-$500,000
- APR: 6.7-11.7% for qualified borrowers
Funding Speed And Flexibility
Business working capital loans are known for fast approval and funding. If the borrower is qualified and all their documentation is in order, approval and funding can take as little as 24-72 hours.
Working capital lenders also have broad latitude in their underwriting policies — no narrow boxes from institutions like Fannie Mae or Freddie Mac to adhere to. As such, a wide variety of working capital lenders exist to serve a broad range of borrower business needs.
Why Lenders Allow Real Estate Use
Investment mortgage lenders will allow an unsecured business loan as down payment for several reasons.
Even if the down payment funds are borrowed, it still satisfies their risk-management policies of loan-to-value ratio. Lenders use the down payment as a cushion against the property losing value due to mismanagement or a decline in the market. If the lender has to foreclose, they want to make sure they are acquiring a property worth at least as much as the outstanding loan balance.
Other factors that might make a lender amenable to borrowed working capital as down payment include:
- Strong verifiable deal metrics like high DSCR or high ARV.
- Strong track record of success on the part of the investor.
Munoz Ghezlan Capital keeps careful track of which DSCR, hard money, and bridge lenders are open to deals that include working capital loans as the down-payment layer of the capital stack.
Why Lenders Might Not Allow Real Estate Use
Why would a lender not allow the proceeds from an unsecured business loan for down payment? If the goal is to insulate the lender from market downturns, what does it matter where the money comes from?
For a lender, everything is a risk assessment. Guarding against market corrections isn’t the only use of a down payment.
A down payment is also “skin in the game” for the borrower, making sure they have some of their own money on the line so they aren’t tempted to just walk away from a failing investment. If the investor simply borrows the down payment funds, they don’t have any actual “skin in the game.”
Lenders also see the use of borrowed funds for down payment as a sign that the borrower might become “over-leveraged” — the investor has taken on so much debt that even small problems can sink the entire deal.
Structuring Working Capital Correctly for a Down Payment
Business Entity Setup
Working capital loans must be funded into a business entity like an LLC, corporation, or trust. For the borrower’s own protection and according to the policies of most WC lenders, the loan cannot fund into the borrower’s personal name. Additionally, the loan must be funded into a business bank account held by the entity, not the borrower’s personal bank account.
Fund Flow Best Practices
To work as investor funding options, the funds should flow directly into the business bank account with enough time to meet any lender seasoning requirements. DSCR lenders usually require less seasoning time than traditional lenders, but there still may be a seasoning period of 30 days or longer. Additionally, the loan proceeds should never be commingled with personal funds or funds from unrelated businesses.
Documentation Lenders Expect
Mortgage lenders will expect to see bank statements, loan agreements for the outside loans, and disclosures on the allowed and/or intended use of funds.
Timing Considerations
In addition to seasoning requirements, the loan proceeds must arrive in time to meet earnest money deadlines and the contractual closing deadline.
How Working Capital Affects DSCR, Cash Flow, and Risk
DSCR
Done correctly, DSCR (debt service coverage ratio) calculations do not just use the debt service on the mortgage loan being requested. They calculate all debt service, including any loans that might be used as the down payment.
This is one reason why DSCR lenders require you to disclose the source of down payment funds, as you are legally obliged to do. If you intend to use an unsecured business loan for down payment, the DSCR lender will add service on that business debt into their DSCR calculation, alongside the mortgage loan the borrower is requesting from the DSCR lender.
DSCR is calculated by dividing NOI by total debt service. Since adding a working capital loan makes the total debt service higher, the NOI must be higher to achieve the same DSCR. DSCR lenders are not likely to budge on their minimum DSCR requirements just because an investor wants a 0%-down investment — the investment will have to pass the DSCR test with all loans included.
Cash Flow
Adding a working capital loan to the capital stack of an investment means that there is more debt service — payments due on the mortgage, and payments due on the working capital loan. If the investor wants positive cash flow, he/she will need to take this extra debt service into account. In practice, this will probably require strong rent potential on a property acquired at a very favorable price.
Since working capital term loans have shorter terms than DSCR mortgage loans — say, 5 years as opposed to 30 years — this means they will amortize toward retirement more quickly. In the case of a 5-year term loan, after five years of repayment the debt will be retired. If the investor has no plans to exit in that time frame, he/she will see a major expense disappear and enjoy increased cash flow and solvency.
However, because they are shorter-term and often higher-interest, payments on a much smaller working capital term loan balance can be quite large indeed, maybe even rivaling the mortgage payment itself. This is significant cash flow pressure, which the investor must account for.
Risk
The more debt an investor takes on, the more risk he/she takes on. If the market experiences a downward correction, the property may be worth less than the debt the investor took on to acquire it. True, the working capital loan is not collateralized by the property, but if the correction occurs at the wrong time, the investor may end up upside-down on the deal, taking a loss at sale instead of a profit.
The cash flow pressure of a second loan also creates risk of over-leveraging. If the property experiences major damages, a system failure, a problem tenant, or an extended period of vacancy, service on the debt could quickly become unmanageable. Even without the property as collateral, default on a working capital loan hurts the borrower's credit and opens them up to lawsuits and asset seizures.
Common Deal Structures Using Working Capital for Down Payments
Long-Term Buy-And-Hold with DSCR
The business working capital loan can be used as down payment for the DSCR mortgage used to finance the long-term buy-and-hold investment property. Market rent will need to be strong enough to justify the DSCR loan even with the debt service on the working capital loan taken into account for the DSCR calculation.
When the working capital loan is retired, the investor will enjoy increased cash flow as the debt service on the working capital loan has ended. However, the NOI will not change, meaning the value of the property does not change for the purpose of sale, refinance, etc.
BRRRR Strategy (bridge → refi → repay capital)
The business working capital loan is used as down payment for a bridge or DSCR loan. Even though the intent is to refinance, the deal must still pass DSCR calculation with the working capital debt service factored in. Working capital loan proceeds can be used for renovation expenses.
When the renovation is complete, the investor can refinance the property into a larger DSCR or traditional loan, hopefully with a balance that can retire both the original DSCR mortgage loan and the working capital loan. However, paying off the working capital loan may leave the borrower with less money left over from the cash-out refi than they need to cover the down payment of the next deal, an integral part of the BRRRR strategy. (Refinance, Repeat.) The investor may need to consider another working capital loan to finance the next down payment.
Seller Financing + Working Capital Hybrid
If the seller agrees to partial seller financing, the investor can use a working capital loan to pay any down payment the seller requires to cover the rest of the purchase price. Sellers who agree to seller financing often prioritize cash flow or want to avoid large capital gains tax hits. This often makes them amenable to extremely favorable repayment structures — interest-only payments, no interest, even no payments.
These structures relieve cash flow pressure significantly, enabling investors to take on a greater burden of working capital debt service with less risk. Sellers may not care about DSCR, ARV, or borrowed funds as down payment the way institutional lenders do.
Delayed Financing Exception Setups
The delayed financing exception is one of the lesser known investor funding options. It allows property owners to do a cash-out refinance on property immediately after purchase if the property was purchased with all-cash. Normally you have to wait 6 months or longer to do a cash-out refi.
A working capital loan can be used to finance the “all-cash” purchase and then (potentially) qualify for an immediate cash-out refinance to retire the working capital debt. This is a viable strategy for an acquisition that is rent-ready and the borrower needs to close quickly, leveraging the fast approval time of working capital loans.
Risks, Pitfalls, and Mistakes Investors Make
Overleveraging Short-Term Capital
High-interest, short-term working capital loans put significant pressure on cash flow and deal solvency. If a major expense or problem arises, the investor may not have enough free cash flow to absorb it, putting the deal at serious risk.
Mismatched Debt Timelines
Having debt that retires on multiple timelines — a 30-year loan stacked with a 5-year loan, for example — may cause delays in short-term or immediate needs resolution, including problems that cannot wait for the short-term debt to retire. Over the long run the ROI and IRR may be attractive, but the front-loading of debt can create significant problems for meeting investment benchmarks.
Underestimating Appraisal Risk
The property does not appraise at the value needed to fund the loan, the borrower may find themselves with a working capital loan balance that comes up short, making them wish they had borrowed more. However, borrowing more working capital has a negative effect on the short-term DSCR, potentially putting the investor out of range of approval for their chosen DSCR lender.
Not Disclosing Borrowed Funds
Borrowers are required to disclose the intention to use borrowed funds as down payment. Not to do so is mortgage fraud, a crime and a civil violation. The “seasoning requirement” (making sure the funds have been present in a bank account for a specified period of time, usually 1-6 months) is meant to guard against such fraud, but passing the seasoning requirement is not an excuse. It’s just a risk-management practice on the part of the lender. Even if the loan proceeds have been sitting in a bank account for the required seasoning period, the borrower is still obliged to disclose the funds as borrowed.
Treating Working Capital As “Free Money”
Although unsecured working capital loans have no collateral, the borrower must still make a personal guarantee. In the event of default, the WC lender can still pursue recourses like lawsuits, to which assets including the property itself can be attached for seizure. It’s not as easy for the WC lender as foreclosure on a mortgage lien, but it is a serious liability for the borrower should they default.
Who Should—and Should Not—Use Working Capital for Down Payments
Good candidates
- Experienced investors with a business entity, business credit, and a history of revenue that will help them qualify for a working capital loan.
- Strong operators with a track record of success in similar investments.
- Investors with a clear exit strategy that the WC loan can effectively contribute to.
Poor candidates
- First-time investors with no track record or revenue history.
- Deals with thin margins and low DSCR.
- Speculative plays that depend on fast appreciation of the property due to unpredictable market conditions.
Step-by-Step Framework: Using Working Capital Safely, Legally, and Effectively
- Deal Analysis: Underwrite DSCR, ARV, operational strategy, and exit strategy.
- Loan Selection: Select a working capital loan the borrower is eligible for and aligns with the deal analysis.
- Capital Stack Design: Map out all loans and sources of capital, forecasting cash flow implications, amortization, and retirement of debt.
- Lender Compatibility Check: Present the strategy to the mortgage lender and confirm that it is acceptable to them.
- Documentation Preparation: Gather loan documents, bank statements, entity formation documents, deal purchase agreement, inspection reports, and property financials.
- Closing Coordination: Coordinate closing on all loans with transfer of title to the property.
- Exit Execution: Repay loans, sell the property, or refinance existing loans to retire all initial debt and take capital out of the deal.
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The Future of Working Capital in Real Estate Investing
As investment mortgage lenders loosen their restrictions on the use of borrowed funds as down payment, we expect the use of borrowed working capital as down payment to become more and more common for small-portfolio real estate investors.
We anticipate the trend of acceptance of borrowed funds as down payment to increase and become formalized, with more and more standardized policies across institutions, making working capital loans even more attractive among investor funding options.
However, we also anticipate tightened disclosure requirements to create more barriers for non-disclosure, putting the onus on the borrower to meet stringent documentation requirements and avoid fraudulent uses.
Ultimately, the real estate debt market will reward sophistication, not shortcuts — experienced investors who know how to use debt wisely to expand on an already-successful track record.
Bottom Line
Using an unsecured business loan for down payment on a real estate investment is not only legal — it is becoming more and more common. As long as the borrower discloses the source of funds and the lender agrees to the strategy, real estate investors can use this strategy to preserve their capital and scale their portfolio without constantly tying up capital for years.
However, using borrowed working capital as down payment carries with it the risks of overleverage, short-term cash flow pressure, and strict documentation requirements. As attractive as 0-down real estate investing can be, investors should tread carefully when considering this strategy.
If you think a working capital loan might be the ideal source of down payment funds for your deal, don’t leap before you look — get a second opinion from a Munoz Ghezlan Capital expert on a free strategy call we offer to all real estate investors. We can help investors not only find the perfect working capital loan for the deal, but also a DSCR, hard money, or bridge lender who will accept borrowed funds as down payment.
We can even help you determine whether a deal you are considering is an appropriate use case for a working capital loan down payment.
