Secured v’s Unsecured loans
The array of paperwork and records required for a regular business loan can be enough to make some give up on the whole process. There is however, an easier way. Low doc, short term or unsecured loan allows a business to access finance without the full inquisition sometimes required by a bank for a traditional loan. Let's take a look at some of the advantages and disadvantages of low doc business loans.
As the name implies, a low doc loan requires less documentation than a standard loan. This means that you may be eligible for a low doc loan even if you cannot provide tax returns, profit/loss statements and other financials to support the application. Assessment of your credit rating can also factor into loan applications, and this may be avoided with some low doc loans as well.
Lower levels of paperwork also make for faster application times. You can get the funds needed to expand or improve your business sooner. This can be a big plus for any business where time sensitivity matters.
A regular loan secured by an asset will usually have limits for the loan value relative to asset value (LVR). Having an LVR of less than 80% is typically required for a loan, however, a low doc may negate this requirement.
The lender providing a low doc loan is naturally taking a higher risk without checking as many of the borrower s business credentials. As a result, you can expect higher interest rates to apply.
Interest rates, however, are only one of the costs the borrower should take into consideration. Lender fees can play a major role, as well. The 'comparison rate' is one measure used to take into account fees when working out the cost of a loan. For example, one loan with a 7% base interest rate may show a comparison rate of 7.9%, another 7.6% once upfront and monthly fees are taken into account for each.
Alongside fees, repayment frequency and loan term with each product will vary, so check this out when weighing the pros and cons of the low doc loan option, and how it affects the total cost of the loan.
Regardless of which way you go, try to work out what records and financial details are required by the lender to process a loan application. Having these prepared will save plenty of time, plus help avoid loan refusals which can be bad news for your credit rating.
Disclaimer: Information is of a general nature. Please consult your Account or Financial advisor for advice.