BUSINESS FINANCE
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By Sean Callery
What is a low-doc business loan?
Low doc (low documentation) and no doc (no documentation) business loans allow small businesses, sole traders and self-employed borrowers to access cash flow when they cannot provide the financial statements or supporting documentation required for traditional business loan approval.
They are often used by small businesses with a relatively short operating history. Owning a small business isn’t always easy, and having fast and simple access to business funds can make a massive difference.
- Low-doc loans are used when you are unable to meet qualifying criteria for a standard business loan. That’s usually because you cannot provide business financial statements and tax returns for the past two years, but you can provide some documentation.
- No-doc loans are used when you are unable to provide any evidence of your business income or supporting documents.
Phil Collard, Money.com.au Commercial Finance Expert
"Low doc loans require very little supporting documentation. Aside from the standard ID and application details, borrowers may be able to get approval with a lender without needing to provide evidence of business turnover or profit. But lenders will usually have a limit on what they’re willing to lend under a low doc application. There will also be some qualifying criteria to meet the requirements of a low doc loan. Your broker will be able to guide you on whether your business qualifies for a low doc loan."
Phil Collard, Money.com.au Commercial Finance Expert
Benefits and drawbacks of low and no-doc business loans
Pros
- Fast access to funding for small business
- No security and minimal documentation
- Simplified application process
- No need for a detailed credit check
Cons
- Higher interest rates typically versus standard business finance
- Some lenders also charge a 'risk fee' on low doc loans
- Lower maximum loan amounts
How do low-doc business loans work?
In many ways low-doc and no-doc business loans are similar to traditional secured and unsecured business loans. The main difference is in the documents required as part of the application process.
In summary, low-doc and no-doc business loans in Australia:
- Require limited supporting documents for approval
- Can be accessed more easily from non-bank lenders
- May have a factor rate applied instead of a percentage rate
- Will have higher interest rates and fees than a standard business loan
- Can be used for almost any business purpose
Depending on the business and its needs, other ways of sourcing credit quickly can include invoice finance, a business line of credit and a business overdraft.
Key features of low-doc business loans
Here's what's usually on offer with a low-doc business loan:
- Borrow from $5,000 to $150,000
- Fixed or variable interest rate
- Repayments to suit your budget
- Terms from one month to five years
- Secured & unsecured options
Who is eligible for a low-doc business loan?
To qualify for a low-doc business loan you'll generally need to meet these criteria:
Own a business and have an ABN
Business is GST-registered
Australian citizen or permanent resident
Trading history requirement on low doc business finance
Traditionally all low-doc lenders would require 24 months of ABN and GST registration. But now there are lenders offering loans with a lower bar for trading history. They’re targeting the likes of tradies who have come from PAYG and opened their own business, but haven't been trading that long and don't have financials yet. Instead, lenders are basing the approval on a self-declaration from the director outlining what the business is turning over on a monthly basis.
Self-employed (sole trader) business loans
Low-doc business loans are designed for business owners who have difficulty in meeting the standard bank approval criteria.
This is why they are incredibly popular with new businesses, small businesses, sole traders and self-employed individuals in Australia.
These kinds of borrowers benefit from the fast approval times offered by non-bank lenders. These lenders require minimal paperwork and offer loans for a wide range of purposes.
Loc doc and no-doc business loan purposes
The majority of sole trader loans are used to either purchase a vehicle (37.4%) or to provide working capital for day-to-day operations (29.3%), our recent business lending data shows.
But there are generally no restrictions on how you can use a low-doc or no-doc business loan. Common purposes include:
- Purchasing stock
- Paying BAS or tax owed
- Taking on staff
- Renovating/fitting out your offices
Best low-doc (sole trader) business loan rates
Interest rates on low-doc business loans vary between lenders. The actual rate applied to your loan will be dependent on a number of factors, including:
- The trading history of the business
- The length of the loan term
- The credit history of the business (rates will likely be higher if you need to apply for a bad credit business loan)
- The value of any deposits or security — if any — used on the loan
As interest rates are assessed based on the level of risk the borrower represents for the lender, low-doc loans will have higher interest rates than standard business loans, and no-doc loans will have higher interest rates than low doc loans.
Factor rates on low and no doc business loans
Similar to unsecured business loans, low doc and no doc lenders may apply a factor rate to your loan instead of an interest rate.
A factor rate is expressed as a multiple of the loan (e.g. 1.2, in which case the loan amount would be multiplied by 1.2 to arrive at the total amount to be repaid).
If a factor rate is applied by the lender, the amount of interest you pay on a low doc business loan will be calculated based on the initial loan amount. In contrast, with a standard business loan interest is calculated based on the current balance which reduces over time.
How to qualify and apply for a low doc business loan
For low doc applicants, figuring out how to get a business loan approved is a slightly different process. For starters, you may not be able to apply with some of the major banks and other mainstream lenders. In fact, getting a business loan with low documentation is generally easiest through non-bank or specialist lenders.
You may also be asked to sign an income declaration, and you’ll still need to meet basic lender criteria and have:
- An ABN
- A GST-registered business
- Citizenship or permanent residency
- A letter from your accountant
Expert tip: Keep your credit history clean
Phil Collard, Money.com.au Commercial Finance Expert
"Particularly if it's a low doc application, a busy and active credit file could cast some doubt with prospective lenders. Although your application may otherwise be very strong, applying for credit with various lenders across a relatively short period of time is not a good look in the eyes of a typical lender. Needless to say, it doesn’t help your credit score either."
Phil Collard, Money.com.au Commercial Finance Expert
Low doc business loans: Bank vs non-bank lenders
Applying for a low doc loan with your bank can be a time-consuming and stressful process. Fast approval without needing to provide endless amounts of supporting documents is the main reason businesses apply for loans with non-bank lenders.
If you do choose to apply with your bank, you’ll need to supply extensive documentation about your business, such as:
- Your balance sheets for the past two or three years
- Profit-and-loss statements for the past three financial years (provided by your accountant)
- Business revenue projections for the next 24 months
- A debtors and creditors report
- Copies of any significant contracts or sales agreements your business may rely on for continued revenue
- Your personal and business credit records
- Details of any assets you wish to use as security on the loan — such as vehicles and property
- A business plan, showing your understanding of the market and how your business will compete with other, similar businesses to maintain a profit
- A detailed business case indicating how you will use the funds and how you plan to repay the loan
For the majority of self-employed individuals or small businesses, collating this much supporting documentation can be an arduous task. Even if you are able to provide this documentation, there is no guarantee you will be approved by your bank, and if you require fast access to finance, the length of the process may make applying a waste of time.
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