The low doc alternative
If your business doesn’t fall into that category – or if you need to move fast or simply don’t want the hassle of preparing such extensive documentation, don’t despair.
There’s an alternative: the low doc loan.
Also known as an unsecured business loan, this form of business finance is easily accessible to most established businesses in Australia, including those who are self-employed and have very little chance of securing bank finance.
In fact, there is a booming alternative finance market, with lenders offering fast cash to businesses of all shapes and sizes.
If you’re still in the start-up phase you’ll probably have to look elsewhere for funding (consider peer-to-peer lending, crowdfunding or angel investors), but if you’ve been trading for at least six months there’s a good chance you’ll be able to access a low doc unsecured business loan.
You’ll still need to meet the lender’s basic criteria, the most important of which is capacity – i.e., your ability to service your loan repayment obligations. This is for your protection as well as the lenders’ – they need to recoup their investment, with interest, while you need to keep your business solvent.
To apply for a low doc unsecured loan, you’ll still need some supporting documentation, but far, far less than for ‘full doc’ bank finance. Prepare yourself with:
- Your bank statements for the last six months.
- Proof that you meet the lender’s minimum turnover requirements.
- Your credit sales / merchant statements for the last four to six months.
- Proof that you have been operating for the lender’s minimum required period.
- Personal identification documents.
You may be asked to provide a personal guarantee for your unsecured business loan, so you may also need to provide evidence of your personal income such as your latest tax return.
Expect the lender to check both your business and personal credit ratings – although a poor credit rating need not be a barrier provided you are willing to pay more for your finance.
Before applying for a low doc loan
Before you apply for your unsecured business loan, there are some important steps you need to take.
Build a business case
While most small businesses eventually reach a point where they need to take out a loan, business finance always comes at a cost. It’s vital that you consider how you will use the funds to grow or support your business and examine whether the benefits will outweigh that cost at this time.
There are many reasons why you may need finance – for example to boost your working capital and keep your cash flow steady through income fluctuations. Since running out of cash is the number one reason small businesses fail, this can be critical – but a short-term, flexible facility like an overdraft or business credit card may be a more suitable financing option in these circumstances than locking yourself into a low doc loan.
You may plan to use your business loan to buy essential equipment, move into bigger premises or take on more staff to boost your capacity.
If so, be wary of making major purchases, hiring a bigger team or upscaling your facilities unless they will definitely enable you to generate extra net profits. You may be better to wait until you have cash reserves on hand to finance these upgrades.
If your reason for taking out a loan is to pursue growth opportunities, caution is also needed. Many businesses, big and small, go under because they grow too fast, increasing costs at a faster rate than profits. For example, buying more stock so you can make more sales (or buying in bulk to access discounts) can leave you with much higher warehousing costs, which can quickly eat up your margins.
If you’re considering an acquisition, be sure to perform extensive due diligence and make realistic assessment of the costs involved in integrating your businesses.
When creating your business case, note that a low doc unsecured loan is likely to be more expensive than bank finance, to compensate for the increased risk – and be sure to test your sensitivity to increases in interest rates.
Choose the right lender and loan product
There are so many finance providers offering low doc unsecured business loans that it can be very difficult to compare your options. It’s important to compare the full cost of each loan rather than the advertised rate, since many of the loan products on offer will have set-up fees, ongoing administration costs and a range of other charges such as transaction fees which can substantially increase the amount you will pay for your finance.
Be aware that many unsecured business loans may charge a factor rate rather than an annual interest rate – for example, 1.15 times the loan balance. While you’ll still make regular repayments over the course of the loan, the amount of interest you pay will be calculated on the initial loan principal rather than the reducing balance. See our Factor Rate to APR calculator here.
As well as the cost, the structure of your loan will be important and must be tailored to suit your business. Variable factors include:
- The term of the loan – most low doc unsecured loans are for between six months and five years .
- Whether your interest rate will be a fixed or floating rate (this will impact the amount you pay, whether or not you have the flexibility to make early repayments, and how exposed you are to changes in interest rates).
- Your repayment schedule – will you pay equal monthly payments or variable payments to match your cash flow?
- Whether you have a flat or table loan – will you pay off more of your principal up front to reduce your overall interest bill, or pay more manageable equal instalments?
Be aware that some lenders may impose restrictive conditions to compensate them for the additional risk of a low doc loan. For example, you could be prevented from offering credit terms to your customers, or from dealing with customers who have a poor payment history. It’s important to take the potential impact of these conditions into account when evaluating loan products .
The type and structure of your loan can have a major impact on your financial circumstances, and the costs can be substantially influenced by your tax position. It’s wise to seek independent financial advice to help you select and structure your loan.
If you have impaired credit, you may still be able to get a low doc loan.
How to apply for your low doc loan
Once your preparations are complete and you have assembled your supporting information, applying for a low doc loan should be quick and straightforward.
Most providers offer an online application process, where you’ll complete a short form and upload your background documents.
In some cases, lenders will make an on-the-spot automated assessment and you could have loan approval within minutes. Others will follow up with a call from a loan advisor, especially if they require more information.
If your application is approved, you can expect to have funds in your account within days. It is this speed and agility that makes low doc loans appealing even to established businesses, who may prefer to pay the extra costs of unsecured finance than waste weeks or even months applying for a bank loan.
The big bank low doc loan...
To apply for a bank business loan you’ll need to supply extensive documentation about your business, which is likely to include:
- Your balance sheets for the past two or three years, showing how much equity you have in your business and any existing debt finance.
- Profit-and-loss statements for the past three financial years to show your trading history and profit margins.
- Analysis of any exceptional circumstances that have influenced your turnover or operating performance over the past three years.
- Sales and cash-flow projections for the coming 12 – 24 months, including a statement of your assumptions.
- Strategic plans for your business, including market and competitor analysis.
- Detailed business case for the loan indicating how you will use the funds.
- A comprehensive report on your debtors and creditors to show your credit management capabilities and outstanding bad debtors.
- Copies of key contracts or sales agreements.
- Key liquidity, efficiency and profitability ratios.
- Your personal and business credit records.
- Details of the assets you propose to offer as collateral for your loan, including valuations and proof of ownership.
Preparing and collating these documents can be very time consuming, and in many cases a wasted effort. Banks have extremely strict lending criteria, and generally only very well-established businesses will qualify.
Unless you have a high minimum turnover, at least two year’s profitable trading history, collateral to offer and a first-rate credit rating you are likely to be rejected.
The long-term prospects for your industry, the quality of your management team and your position within your market can also play a significant factor.