With interest rates currently being on the rise businesses requiring low doc finance may be concerned around any tightening of conditions with higher rates.
This is a specialist type of business finance, not as widely available as finance for fully documented applications and can include special conditions as requested by individual lenders. Cost-effective rates can apply but all applications are assessed individually. It can be, in simple terms, harder to get than finance for established businesses.
Due to these specific features and factors, it would be only natural that in the light of the recent and ongoing RBA
rate hikes, that some businesses requiring this type of finance may be concerned. Concern may exit can exist around whether this type of finance is harder to get, will attract premium interest rates and/or whether tighter and restrictive conditions may apply.
We cover off on what is involved with Low Doc Business Finance, what loans are available, what business should and may expect and how the rising interest rate market may or may not have an effect on this type of finance.
Low Doc Business Finance
Low doc finance and no doc loans are required by businesses that do not have all the documentation that is generally requested by lender to complete a business application form. The reasons that the documentation is not available, is typically because the business is in the initial stages of setting up. As such, it has not been trading long enough or at all, in order to accumulate the necessary documents.
These documents can include BAS returns, bank statements, annual accounts as prepared by an account, profit and loss statements and similar financials. Documents that would be accumulated over a period of time. Low doc loans may also be applicable to businesses that do not meet other lender criteria such as minimum trading periods.
Types of Finance Products
The difference between ‘low doc’ or ‘no doc’ is simply the quantity of documentation that is provided. The term refers to the business applicant and not a specific finance product. Low Doc Finance can be obtained for a full selection of business finance products, through specialist lenders such as Business Finance Australia
Low Doc Finance
- Asset Acquisition Products for financing trucks, motor vehicles and equipment. These include Chattel Mortgage, Leasing, Commercial Hire Purchase and Leasing.
- Business Overdrafts for short term or ongoing purposes.
- Secured and Unsecured Business Loans for a range of non-asset acquisitions and purposes.
- Insurance Premium to spread the cost of large insurance premiums over a number of instalments rather than one annual payment.
- Debtor Invoice Funding which is provided to businesses with slow-paying clients.
Low doc finance is not as readily available as finance and loans for businesses that can fully complete the standard business application form. This aspect on its own can create anxiety for those needing finance in order to get their businesses off the ground.
As with most types of finance, the cheapest interest rates advertised by banks, finance companies and other lenders, will be for applicants that have a good credit rating. Where the businesses applying for the low doc finance is new and/or small and in some other instances, the credit profile of the business owner(s) and/or directors may be assessed.
Structures such as sole traders and one director businesses, reviewing the individual’s personal credit rating is to be expected. Individuals can look to improving their credit score
if they are issues following established steps.
Lenders may apply conditions to Low Doc Finance around the total finance approved, the finance term and request additional security or a personal guarantee. The finance amount may need to be reduced in order to be approved. This may be approached by selecting lesser priced goods or through the payment of a larger deposit.
Security may need to be put up by the business owner. This should be considered by applicants so they are prepared when the time comes.
On all these conditions, your Business Finance consultant will be negotiating on behalf of the business to achieve the most workable conditions and overall finance solution.
Rate Rise Effect
It is not a standard feature or condition that low doc finance attracts a higher interest rate than fully documented finance applications. Each application is assessed by our lenders based on individual inclusions especially the credit score. If the credit profile of the business and/or individual are in the good band and other criteria satisfy the lender, then extremely competitive and cheap interest rates can be achieved. Low doc finance is not considered in the same way as bad credit finance where a higher risk is a given and a higher rate applies due to the increased risk.
The RBA cut the official cash rate and held it at a record low 0.1% for over 20 months. But with pandemic support no longer deemed required and inflation soaring, the RBA Board commenced raising the cash rate at its May 2022 meeting. The cash rate now sits at 1.85% with further rate rise imminent.
Increases to the cash rate flow into general lending markets with lenders lifting their rates according to their guidelines and policies. A higher rate market as a result of this process may have an effect on low doc finance through the lender conditions around the total amount of the loan.
When assessing the application, a lender would typically add the total interest applicable to the loan to the principle to establish the total amount of the finance. As mentioned above, lenders may have maximum amounts that they will approve for low doc finance. As interest rates rise, the total loan amount would also rise. This may put the requested amount above a particular lender’s threshold for low doc finance.
If this occurs, businesses can look to the options as mentioned above to reduce the amount requested to meet the approval threshold. These are general indications only and business owners should contact us to discuss solutions to meet their specific requirements.
Contact Business Finance on 1300 000 033 to discuss low doc business finance.
DISCLAIMER: THE SPECIFIC PURPOSE IN PROVIDING THIS ARTICLE IS FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED AS THE SOLE SOURCE OF FINANCIAL INFORMATION ON WHICH TO MAKE BUSINESS FINANCE DECISIONS. BUSINESS OWNERS WHO REQUIRE ADVICE OR GUIDANCE AROUND THEIR SPECIFIC FINANCIAL CIRCUMSTANCES ARE RECOMMENDED TO CONSULT WITH AN ADVISOR OR ACCOUNTANT. NO LIABILITY IS ACCEPTED IN REGARD TO ANY MISREPRESENTATIONS OR ANY ERRORS RE ANY DATA, SPECIFICS, POLICIES AND OTHER INFORMATION AS SOURCED FROM OTHERS.