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Low doc, no doc, & startup business lending: Special report

This article discusses the key concepts associated with applying for commercial finance with little to no verification of company records. It is oriented to new companies and existing corporations who do not want to have a detailed examination of their corporate records performed for the purpose of getting finance approval.

Jump to section:

Getting approved for a loan has to be difficult, right?

Can I get approved for a loan if I have no company financials or company tax returns?

What’s the difference between a low doc and a no doc loan?

I have no company financials because I just started my business. I can’t get a loan, right?

What kind of business requirements can I finance as a low doc or no doc?

I know how much I want to borrow, but I am unsure what I want to offer as collateral

I’ve decided I want to offer property as collateral, what kind of LVR is realistic?

This all sounds too good to be true, what’s the catch?

Conclusion

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Getting approved for a loan has to be difficult, right?

Wrong. Getting approved for a loan covered by the NCCP Act has to be difficult because the Australian law requires steps to be taken to ensure that your financial position, requirements & objectives are consistent with the loan being applied for. This translates to time consuming verifications of paperwork & figures along with a raft of compliance centric forms and processes that must be followed.

Commercial lending (AKA non-code lending), doesn’t have to be so complicated because it is not governed by such laws. If there is any ‘difficulty’, it usually relates to the need for the borrower to get solid advice from a professional credit adviser and legal adviser prior to making a binding commitment to a lender. This is because the loan offers made in the commercial lending world, by and large, are more complex than regular consumer credit and there is little to no protection for borrowers against harsh loan terms. As such, there is a need to approach these loans with proper caution.

 

Can I get approved for a loan if I have no company financials or company tax returns?

Yes. Obviously the reason behind why you have no company financials, the size of the loan and the cost (i.e. the interest rate & fees) of the proposed finance will play a part in what options make sense for your business. The general rule of thumb is that company financials are not supremely important if there is collateral being offered for the loan or if there is verifiable cash-flow by way of bank statements (preferably coupled to raw data from your financial ledgers). This type of lending where little to no verification of company performance is required is often referred to as ‘low doc’ or ‘no doc’ lending.

What’s the difference between a low doc and a no doc loan?

The differences will vary between the specific lender and product you examine, however, the following differences are fairly consistent across the Australian finance market.

Low doc:

  • ABN & GST registered for a period of at least 12 months, with a general preference for 2 years.
  • No financials required but will often request a letter from a suitably qualified accountant discussing the ongoing and sustainable nature of the business enterprise and its associated cash-flows.
  • Will typically require copies of business bank statements for the applicant. Will also usually want to see the personal bank statements of the company directors in small business entities.
  • May allow for copies of leases to replace the need for business financials or other verifications for commercial investment property purchases or refinances where the premises is tenanted out.

No doc:

  • ABN (and typically GST) registered for at least 1 day.
  • Will typically require collateral.
  • Bank statements optional dependent on circumstances and collateral offered.
  • No financials required nor is there a requirement from a suitably qualified accountant discussing the nature & characteristics of the business operations.
  • Will generally require the applicant to have clear credit unless the collateral being offered is real estate.
  • Will require the gearing level proposed on unencumbered equipment or real estate to be very low (typically under 50% LVR).

I have no company financials because I just started my business. I can’t get a loan, right?

Wrong. You can get finance for your new corporation as long as the company has an ABN registered for at least one day (and is preferably registered for GST as well).

The factors that will decide what options are available to you are as follows:

  • Loan size. New businesses will generally not have loans above $10,000 made available to them if they have no collateral to offer. Exceptions apply to professionals (doctors, solicitors, accountants, engineers) who have strong CVs and the new business is in their chosen profession.
  • Credit history of the company directors. Generally speaking the company directors will need to have clean credit if they want an unsecured loan. If there is collateral on offer, for example a vehicle, property or equipment, credit impairment is not necessarily fatal to an application – it will merely make the finance more costly and/or lower the maximum LVR available.
  • Loan purpose. Loans for fit-out, secured against strong trade debtors (such as government bodies or public companies) and just about anything with a serial number are fairly easy to get approved. Finance for working capital will require at least 6 months trading history and preferably company directors who are property owners.

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What kind of business requirements can I finance as a low doc or no doc?

Purchase or refinance of corporate assets:

  • Real Estate (including land banking).
  • Motor Vehicles.
  • Plant & Equipment.
  • Caravans, Trucks, Heavy Vehicles up to 4.5 tonnes.
  • ATMs, Gaming Machines.
  • Vending Machines.
  • Taxis, VHA vehicles etc.
  • Medical & AV & Sound Equipment.
  • POS Systems, Photographic equipment.
  • Coffee Machines, Printing equipment.

Working capital:

  • Provide a credit line for growth.
  • Debt consolidation. NB: Will require property or unencumbered equipment or motor vehicle as collateral.
  • Receivership and pre-insolvency issues. NB: Will require property as collateral.
  • Tax Liabilities. NB: Will require property as collateral.
  • Mezzanine Finance – Typically to provide the remaining monies to demonstrate adequate funds to complete a property development at planning stage, or to handle cost overruns in a project that has already been commenced.
  • ‘Caveat Loans’ can be for any purpose.

I know how much I want to borrow, but I am unsure what I want to offer as collateral

This is a typical situation most businesses find themself in. We’ve prepared the following general guide to help you understand what is realistic in terms of collateral requirements for the loan size you had in mind.

Type of loan collateral offered
Loan Size ($) None

(you must be a residential or commercial property owner & preferably running a commercial entity with a trading history)

Trade debtors

(aka invoice finance or factoring)

Equipment Motor Vehicle

& Yellow Goods

2nd Registered Mortgage

Over Real Estate

1st Registered Mortgage

Over Real Estate

$1,000 x –  – 
$5,000 x x x x
$10,000 x x x x
$15,000 x x x x
$20,000 x x x x
$25,000 x x x x
$30,000 x x x x x x
$35,000 x x x x x x
$40,000 x x x x x x
$50,000 x x x x x x
$100,000 x* x x x x x
$150,000 x* x x x x x
$200,000 x* x x x x x
$250,000 x* x x x x x
$300,000 –  –  x x x
$400,000 –  –  –  –  x x
$500,000 –  –  –  x x
$500,000+ –  –  –  x

* Only applicants with an extremely financially robust credit profile would be considered for approval. 

I’ve decided I want to offer property as collateral, what kind of LVR is realistic?

Type of collateral offered
Max LVR Rural Vacant Land, Specialised Rural

or Large Commercial Farm

Small Scale

Commercial Farm

Specialised Commercial or Industrial Property or Non-specialised Industrial or

Commercial Property in Non-metro location

Regular Commercial or Industrial in Metro Location Residential Property Owned in a Corporate Structure (Metro Location)
40 x
50  – x
60  – x
70  – x
80  – x

 

This all sounds too good to be true, what’s the catch?

Cost. It’s really that simple. There is no such thing as a cheap loan (read: pricing on par with a fully verified loan) that requires no verifications, no trading history and no collateral. Generally speaking, you can make the loan cost comparable to a fully verified loan with collateral. Alternatively, you can provide a few forms of verification (i.e. a low doc) and the price will generally be noticeably lower than what is on offer with a no doc. For those with new businesses or credit impairments, one has to be realistic about the risk the lender is taking when evaluating the cost of the finance. This is especially so when there is little to no collateral on offer.

 

Conclusion

“The ladder of success is best climbed by stepping on the rungs of opportunity” – Ayn Rand

Low doc and no doc finance is suited to business borrowers who can solidly rationalise that the opportunity cost of not having finance in place is more consequential to their business than having to pay a price premium for the money they need.

The team at Naritas specialise in advising business borrowers how to navigate the complex world of commercial lending with an eye to minimising borrowing costs whilst adhering to the strategic objectives of the business. Presently our lending panel has over 60 major lenders on it combined with scores of private lenders who are seeking to invest in transactions that are far outside of regular bank criteria. To have a chat about how to achieve your business borrowing goals, click here or call us on 1300 558 887 to discuss.