What is a low-doc loan?
Low-doc business loans and no-doc business loans are alternatives to standard business loans. When you approach a bank for a traditional business loan, you will be required to provide tax returns from the previous two years, financial statements (including Balance Sheet, Income Statement, and Cash Flow Statement) and proof of consistent income.
Sometimes, especially for a new business, you will have to provide a business plan when you apply for a loan. If you are new in business, it’s a good idea to create a business plan but it can take several weeks to do this – and you probably don’t have the time when you start your own business. It’s possible you don’t have the detailed accounting data that other lenders require which goes back for two years, especially if you have a new Australian business that you run on your own.
Established businesses can have challenges getting loans as well. This can include not showing a high income due to large write-offs or reinvesting funds in the business. You could also be late in paying taxes to the ATO.
Low-doc business loans can solve these challenges. You don’t need to provide detailed documentation to be eligible for a low-doc business loan. This makes it good for start-ups and small businesses that don’t have the track record and documentation to apply for a traditional bank term loan. It’s also a time-saver as it sometimes can take up to three months to get approval for a bank business loan.
Advantages and disadvantages of low-doc business loans
Besides being simpler and taking less time to get approval and funds, most low-doc loans are unsecured. This means you don’t have to pledge collateral and supply supporting documentation.
If you have bad credit or no credit history, you can still qualify for a low-doc loan. It may mean you pay a higher interest rate.
Disadvantages of low-doc business loans in Australia are that they have higher interest rates compared to traditional loans and larger down payments may be needed.
What is a no-doc business loan?
No-doc business loans in Australia are not offered through banks but through specialist lenders, who are willing to take on the risk. With this type of loan, the borrower self-declares their business income and no documentation is required.
No-doc business loans are asset-backed, with the value of the property used as security at a higher value than the loan amount. This is why they are also called ‘asset-lend’ loans. Although there’s no documentation, no-doc lenders will usually do some type of credit assessment – which includes checking the credit score of the potential borrower – before approving the loan.
Advantages and disadvantages of no-doc loans
The main advantages of a low-doc loan are that it doesn’t require any documentation and can be approved fairly quickly.
One disadvantage of no-doc business loans is that they have higher interest rates due to their higher risk. They have a term of six to twelve months, so you will need to find a new loan relatively quickly after the loan term is up. No-doc loans also require property as security. The property needs to meet specific requirements, including being in good condition, not in a remote location and easily sellable. This won’t be suitable for business owners and sole traders seeking unsecured loans.
A no-doc business loan can be used to buy a commercial investment property, with a loan-to-value ratio of between 60% and 80% used, depending on the type of lender.
Another disadvantage of no-doc business finance is that they are not regulated by the National Consumer Credit Protection Act 2009. This means that lenders can charge expensive exit fees if extra repayments are made or if the loan is refinanced before its fixed-rate term ends.
An alternative to low-doc and no-doc business loans
Low-doc business loans and no-doc business loans require little paperwork and save time – but there are other alternatives to consider. One that has been growing in popularity with small business owners are unsecured business loans. These loans require minimal documentation, have an easy application process and can be approved within 24 hours.
Moula, for example, uses leading-edge technology to quickly, safely and securely analyse your finances (online bank or accounting data) to make a lending decision. If you meet the criteria, the business loan is approved within 24 hours. Once approved, the funds are immediately transferred into your account. With terms of six to 24 months, Moula’s unsecured business loans are classified as short-term business loans.
Check out our business loan calculator to get an estimate of principal and interest repayments.
Find out more about unsecured business loans from Moula.