How do I qualify, and can I get a business loan? These are the main questions every new business owner asks.
There are many types of business finance, but the main qualifying difference between loans is the documents you supply. The more documentation you supply to the lender, the more comfortable the lender will feel and the less risky the loan. These loans attract the lowest interest, and they are called Full-Doc loans.
However, you may have just started your business and you may not be able to supply financial documents. This approach qualifies you for a Low Doc loan. It costs more in interest because they have more risk, but for now paying a bit more in interest could give you the start you want.
So, a Low-Doc loan means low documentation and Full-Doc means a Full Documentation loan.
A Low-Doc business loan is available for any business owner who may not have sufficient documentation to prove their income, or the time required to complete a Full-Doc loan. They work in the same way a regular loan works, except the only supporting paperwork required is an Application Form which has a Privacy Act to sign, as well as Proof of Identification (Drivers License and Medicare Card). Low-Doc gives you access to similar loan types as Full-Doc, but without the need to run around trying to find all the necessary documents and paperwork need for a Full-Doc loan.
You can use them for most business purposes, such as:
- Office Equipment; and
- Most equipment required for a small business.
The size of Low-Doc loans varies with the funders. But most wheel-based equipment can be Low-Doc, funded from $100,000 to $150,000.
Other Low-Doc lenders will lend up to $75,000 per loan, depending upon the case.
Some businesses utilise different lenders to purchase items of equipment using Low-Doc loans. Each loan application is tracked on the client’s credit history, so a funder has the ability to assess if a business is applying for too many loans.
Full-Doc Loans are quite different. A Full-Doc Loan is usually used for larger loan amounts, with reduced risk. They require far more paperwork and information to assess the loans viability.
The business may need $250,000 for their next project. The funder then requires validation of income, references and business background checks and other relevant information to reduce their risk.
Depending upon the loan, you may be required to complete forms and supply the following documents:
- Application form
- Privacy act – signed
- Tax Portal information
- 2 Years of Financial Accountants
- Current years internal management accounts
- Asset & Liability Statement
- Commitment Schedule
- Brief business and owners company outline and plan since the beginning
- Outline what the purchase will do for the business, including income projections
- Up to 3 quotes for the equipment being purchased– this is not needed
The Funders then consider the information to ascertain if the business can afford the repayments. This all takes time. But a positive result can mean a lower interest rate and a larger loan.
It is difficult for small business to produce the documentation required for a Full-Doc Loan and their profit margins and relative security are lower than larger businesses.
Small business is always looking to reduce the tax burden. This is good for the business, short term, by lowering taxes you lower your profitability. The adverse effect is the business shows less profit, making the company less attractive to a lender.
Yes, it is true that Low-Doc Loans often attract a higher interest rate than Full-Doc Loans, but they are much easier and quicker to fund.
There is definitely scope for both Low-Doc and Full-Doc loans, for most businesses.