An old adage is that you need to spend money to make money, and for everyone trying to manage their own business, this seems very much true. While many people may benefit from borrowing money, not everyone has the right documentation to get the deal they need, and this is where no doc commercial loans come in handy.
As the name implies, no doc commercial loans require no paperwork to prove income to the lender. There are some obvious benefits and disadvantages to getting a no doc commercial loan so those who are considering it should think carefully and find out if their circumstances are the most appropriate for this kind of borrowing solution.
Let’s take a look at the top things to know about no doc commercial loans.
Why would I need one?
At the most basic level, the reason for getting a no doc commercial loan is because you can’t produce the adequate income history to borrow traditionally. This could be for a range of reasons, but primarily people who are self-employed with limited financial history find themselves accessing this borrowing option.
The people who primarily use no doc commercial loans are:
- Self-employed people
- Startup businesses
- A business that has a complicated structure
- A business that fails to demonstrate a high income, usually because they are re-investing fund back into the business
Due to the inherent higher level of risk associated with no doc commercial loans, they will almost always have higher interest rates attached to them. You’ll also often be required to provide some kind of security for the borrowed amount, such as an asset that can serve as collateral.
How much can be borrowed?
Without proving any income, you can normally borrow up to 65% of the property’s value. Some people can even qualify for a no-doc commercial loan when they have bad credit history.
How does a no doc commercial loan work?
This type of borrowing arrangement is often referred to as an “asset lend” because the bank is primarily anchoring their risk around the stability and value of your security assets rather than your ability to repay.
This requires the borrower to sign a declaration that confirms you are knowledgeable about the repayments and are able to afford them. Normally, you won’t have to demonstrate your income at all but you may be able to get a better interest rate if you are able to.
Because of the nature of the lend, you won’t need to give any supporting paperwork such as business activity statements, accountancy letters, bank statements or tax returns. There may however be other paperwork related to the property itself, any existing amounts you have borrowed and the evidence of your security deposit.
You are permitted to use the money for investments in property, investments in shares or for using as working capital. The money is not allowed to be used on personal expenses or residential property because then the borrowed money would need to be regulated by the NCCP.
If it’s regulated by the NCCP (National Consumer Credit Protection Act) then the lender will need to make sure of your income, at which point it would no longer be a no doc commercial loan.
Should you get a no doc commercial loan?
Your suitability for no doc commercial loans depends on the aforementioned factors that are individual to your circumstances. Primarily, this borrowing option is born out of necessity for those who have no other means to prove their income or have some other complicated reasoning.
Due to the higher interest rates and reliance on collateral assets, these borrowing options might not be the most appropriate for those who aren’t confident they can meet the repayments. Ultimately there is a trade-off when it comes to borrowing without robust paperwork behind it.