If you're applying for a business loan, you'll usually need to provide proof of income to demonstrate your capacity to repay the money you borrow. However, if you can't provide this proof – for example, if you're a startup with insufficient income history or if you're self-employed – you may need to consider a low doc business loan.
These loans allow you to access the business financing you need without providing extensive financial statements, but it can be difficult to get approval. Keep reading to find out how to maximise your chances of finding a loan.
How does a low doc business loan work?
Low doc business loans don't require the same level of financial statements and documentation as ordinary full doc business loans. This makes them a viable option for any business that can't provide the necessary tax returns and financial statements that are usually required to qualify for financing, such as:
- Self-employed borrowers
- Businesses with complex structures
- Any businesses that can't demonstrate a high income, for example if you have been reinvesting funds back into your business
However, because lenders accept a higher level of risk when they approve loans to low doc borrowers, this type of financing usually attracts higher interest rates than ordinary business loans. You'll also need to sign a declaration confirming your current business income to qualify for a loan, and offer an asset as collateral for the loan.
What are the types of low doc business loans?
There are three types of low doc business loans to consider:
- Low doc loans. If you can't provide business financial statements and tax returns for the past two years, you'll typically need to apply for a low doc business loan.
- Lease doc loans. Designed to suit commercial property investors, these loans allow you to use the income from your lease as proof that you can afford to repay the money you borrow.
- No doc loans. If you can't provide any evidence of your income whatsoever, you may need to apply for a no doc loan. These attract higher interest rates to reflect the increased level of risk the lender will accept.
How much can I borrow with a low doc business loan?
Lending criteria and maximum loan amounts vary between lenders. However, as a general rule most lenders will allow you to borrow up to 80% of the value of the property you offer as security for the loan.
In cases where your loan-to-value ratio (LVR) is below 65%, it may be possible to negotiate a reduced interest rate with your lender.
How to compare low doc business loans
Remember to consider the following features when weighing up the pros and cons of different low doc business loans:
- Interest rate. Low doc business loans feature higher interest rates than full doc financing. Compare rates across a number of loans to see which lender offers the most affordable repayments.
- Loan fees. The total cost of a loan is also impacted by the fees that apply, including upfront establishment fees and ongoing monthly fees. Also, be aware of any additional fees or charges such as penalties for late repayments.
- Maximum LVR. Depending on the lender, you may be able to borrow up to 80% of the value of any property you offer as security for the loan.
- Loan amount. Check the fine print to find out the lender's minimum and maximum loan limits. Remember also that the maximum loan amount available will vary depending on your financial circumstances.
- Repayment schedule and flexibility. Once the interest rate and fees have been taken into account, what will your regular repayment amount be? Can the repayment schedule be tailored to suit your business cash flow? Are you allowed to make additional repayments if your business budget allows?
- Documents required. It's worth checking with each lender to find out exactly what sort of documentation you'll need to provide when applying for a low doc loan. You'll find more information about application requirements in the next section.
Is my business eligible for a low doc business loan?
Just because you're applying for a low doc business loan doesn't mean that you won't be asked to provide any financial information. Most lenders will request you to sign an income declaration verifying your current business income. Depending on the lender, you may also need to provide:
- A letter from your accountant
- Business Activity Statements
- Bank account statements
You may be asked to provide business income forecasts that have been verified by your accountant, while you'll also need to provide real estate as security for your low doc loan.
Lenders will have their own criteria regarding the properties they will accept as security for your loan. For example, while non-specialised properties (such as offices or residential properties) are usually fine, other properties with reduced appeal to potential buyers (such as properties in remote rural areas) will commonly be rejected.
Things to avoid about low doc business loans
One key risk to be aware of with low doc business loans is having your application rejected. Since taking on low doc borrowers comes with a higher level of risk for the lender, many banks take a conservative approach to this type of financing. As a result, if you have bad credit, a security property in a high-risk location or a poorly prepared application, you may be rejected – which can in turn make it harder to access financing elsewhere.
As with any other type of loan, you should also take care not to borrow more than you can afford to repay. Remember, low doc business loans have higher interest rates than full doc loans, so make sure you don't get in over your head.
Frequently asked questions about low doc business loans
Can I offer a residential property as security for my low doc business loan?
Yes. You can offer residential or commercial property as collateral for your loan.
Will I be able to switch to a full doc loan at a later date?
Yes. As a general rule, lenders will allow you to switch to a full doc loan after you have made on-time repayments (and not missed any repayments) on your low doc business loan for a period of two years.
Are there low doc loans available for borrowers with bad credit?
Yes. While it can be difficult to qualify for a loan, there are lenders willing to offer low doc business loans to borrowers with bad credit. However, you'll need to provide an explanation for your credit history and satisfy a range of other criteria.
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