No-Doc Business Loans Explained: How It Works & Requirements (2024 Update)
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Summary:
No-documentation business loans, more commonly known as no-doc loans, are financing options for businesses that don’t require as much time or extensive documentation as conventional loans. No-doc loans are often ideal choices for businesses that need quick access to funding or that are struggling to acquire credit. Conversely, drawbacks to these kinds of loans include high interest rates or fees and short repayment terms.
Newer and small businesses can often have trouble accessing traditional funding to grow their operations, or they may need financing quickly to take advantage of new opportunities. No-doc loans address these needs with faster financing opportunities.
“By simplifying the process and minimizing documentation, businesses can access the funds they need more swiftly, allowing them to seize opportunities, address urgent financial needs, or invest in growth initiatives without being hindered by lengthy bureaucratic procedures,” says Anna Koval, a business owner and financial expert with more than ten years of experience in the finance industry.
Keep reading to learn more about no-doc loans, including some of the different financing options available and the pros and cons of applying for a no-doc loan.
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What is a no-doc business loan?
A no-documentation business loan is a type of lending that allows businesses faster access to funding without the extensive documentation that is usually required by more traditional lenders. Normally, a business loan lender will need to see documentation such as personal and business financial statements, tax returns, business licenses, and documentation of assets and debts.
The more documentation you need to provide, the longer it can take for a loan to go through the underwriting process. This can be a problem for business owners who need speedy access to funding for any reason, such as to take advantage of opportunities to grow their company. No-doc business loans can accelerate the lending process and provide borrowers with much-needed cash on the fly — sometimes in as little as a day or two.
However, this expedited lending option does come with a few caveats. For instance, no-doc loans typically come with higher interest rates than traditional business loans, and their repayment terms and schedules are usually much shorter. In addition, you may not be able to borrow as much money as you could through more conventional channels.
Clarification on what a no-doc business loan really means
It should be noted that the term “no-doc loan” is a bit of a misnomer: there is no such thing as a loan that requires zero documentation. This is why some lenders more accurately refer to them as “low-doc loans” instead. That said, with some financing companies, you can fill out a loan program application completely online, which technically eliminates most of the paperwork — hence, the closest thing you can find to a “no-doc loan.”
Even online, though, you need to provide some form of documentation — it just won’t be nearly to the extent you would need to provide for traditional lending. For example, some no-doc loan lenders may only require bank statements or proof of sales to approve your loan or line of credit.
Who are no-doc business loans good for?
No-doc business loans are a convenient and flexible option for business owners who need quick access to capital without going through the lengthy and complex process of traditional bank loans,” says Koval. “They are also suitable for businesses that have irregular cash flow, low credit scores, or limited financial history, [as well as] businesses that don’t have all the required documents readily available or have situations that make traditional loan processes a bit tricky.”
Types of no-doc business loans
There is more than one kind of no-doc loan, so it’s recommended to research all your options to determine which one would be best for your business. The following are some of the types of no-doc business loans you can apply for:
Short-term business loans
No-doc short-term business loans usually come with loan terms anywhere from a few months to three years, with the majority being 12 months or less. Borrowers will receive the money in a lump sum and, because of the short loan term, may need to pay it back in weekly installments.
“These are loans that have to be repaid within a few months or a year. They usually have higher interest rates and fees than long-term loans, but they can provide fast funding for urgent needs or opportunities,” says Koval.
To qualify for this type of no-doc business loan, you may need to meet credit and revenue requirements and provide three months of bank statements. Lending requirements can vary by lender, so you’ll need to do your research, but in some cases, you may be able to qualify for a loan and receive the funding in a single business day.
Invoice financing
Invoice financing is another type of no-doc business loan that gives borrowers a lump sum of cash — in this case based on the value of their unpaid invoices. Lenders who deal in invoice financing will typically let you borrow a certain percentage of the invoices’ worth (usually no more than 90%), and the loan amount will vary depending on the lender and your unique situation.
When customers pay their invoices, you then repay the financing company, including interest or fees. These types of no-doc loans are often good for B2B companies. Instead of relying on your credit history or other documentation, lenders who deal in this type of loan will most likely want to verify your customers’ payment histories.
“Invoice financing can provide immediate cash flow relief when you are waiting for customers to pay their invoices, which is especially beneficial for companies that do not have a large cash reserve,” says Martin Seeley, a startup enthusiast, business owner, and investor.
Merchant cash advances
Merchant cash advances (MCAs) offer a way for businesses to get a hold of quick funding by borrowing against their future debit and credit card sales. Similar to invoice financing, a merchant cash advance gives borrowers a lump sum of money, but repayment comes out of the business’s future sales rather than outstanding invoices.
This kind of no-doc business loan is often best for companies that have a high sales volume. This is because payments to the lender are usually made on a daily or weekly basis and are typically deducted directly from the merchant’s bank account.
“The lender deducts a percentage of the daily sales until the advance is repaid. This can provide immediate funding for businesses that have high-volume sales, but it can also have high costs and fees,” explains Koval.
Business lines of credit
Unlike a lump sum loan, a business line of credit is basically a revolving loan that allows borrowers to draw from it as needed for a specified period of time, similar to a business credit card. Basically, this lending option is the business equivalent of a residential home equity line of credit (HELOC) without all the paperwork.
“A business line of credit is well-suited for businesses that need a flexible source of capital, as it provides access to funds up to an established limit,” says Seeley. “I personally have used a business line of credit in the past. It was beneficial for my business because it allowed me to access funds quickly and without having to go through the traditional loan process. The interest rate was higher than what I would have found with a traditional loan, but the convenience was worth it for me.”
This form of lending may be secured or unsecured, depending on the lender and loan amount, although some unsecured lines of credit may come with a variable interest rate, which can complicate your situation. On the other hand, like a credit card, you’re only charged interest on the funds you use.
Pros and cons of no-doc business loans
As with all other types of lending — be they traditional mortgages, bank statement loans, or conventional business loans — it’s important to be aware of the potential benefits and drawbacks of no-doc loans before you apply for one.
Pro Tip
“These types of financing can put your business at risk if not used responsibly. It is important to carefully research all the options before making a decision about which loan or line of credit to pursue.” — Martin Seeley, startup enthusiast, business owner, and investor
What to consider before applying for a no-doc business loan
When researching the best alternative forms of financing for your business, such as no-doc loans, here are some of the factors you should consider:
Interest rate
As mentioned previously, no-doc business loans are riskier than traditional forms of lending, which means you could end up paying much more in interest than you would on a conventional loan.
“Depending on the type of financing you pursue, the interest rate may be higher than a traditional loan product, and it can be difficult to qualify if your business does not have a strong financial position,” says Seeley.
Fees
No-doc business loans may have fees in addition to interest, so it’s important to carefully read the terms of your agreement to know exactly what you’re signing up for.
“One thing I tell people is that if a lender is going to make money, they either have to be reasonably sure you can repay the loan, which requires some time and work, or they are probably counting on onerous terms and hidden fees, which is the case for far too many quick loans,” says Carolyn Katz, who runs the funding group at Score NYC, an SBA-sponsored nonprofit that provides free one-on-one small business mentoring.
Loan terms
Repayment terms for no-doc loans may differ greatly from terms for traditional lending, so you’ll need to make sure you’ll be able to make the payments as the contract dictates, or else you could be putting your business at risk. For example, whereas you might have years to pay off more traditional loans for businesses, you may only have months to repay a no-doc loan.
Speed of funding
How quickly you need to acquire financing will affect the loan term, interest rate, and fees, among other factors. If you’re not in a hurry, you may want to consider other options, such as traditional business loans from banks or credit unions or a loan from the Small Business Administration (SBA).
Reputation of the lender
Not all lenders are on the up and up, warns Katz. For this reason, you’ll want to be sure to do your research by comparing multiple lenders, reading reviews of financial institutions that offer no-doc loans, and scrutinizing the fine print of any financing agreement before you sign on the dotted line.
“Borrowers should be very careful to work with a reputable lender because there are excellent lines of credit and there are truly terrible ones. Also, they should read the documents carefully. Often, for example, the interest rate is a monthly or even weekly rate. They should also check out the fees that can be charged, as these can be horrific.”
FAQ
Are stated income loans a type of no-doc loan?
A stated income loan, also sometimes called a bank statement loan, is typically a type of no-doc mortgage loan for which lenders don’t require income verification. However, the mortgage lender will usually take a look at your bank statements to ensure you have enough money to make your mortgage payments (or loan payments, if it’s for business purposes rather than an investment property). A real estate investor or self-employed individual is a typical candidate for this type of no-doc loan.
What are no-documentation mortgage loans?
A no-doc mortgage loan, also known as a no-income verification mortgage are often used by real estate investors, self-employed individuals, and other borrowers who can’t prove enough income through pay stubs and tax returns to qualify for traditional mortgages. Instead, borrowers use other methods to prove they are capable of covering each monthly mortgage payment even without income from more conventional sources.
Key Takeaways
- No-doc business loans offer a faster and easier way for borrowers to access much-needed financing for a business.
- In exchange for the speed and relative ease of acquiring no-doc loans, borrowers should expect higher interest rates and shorter loan terms than they would get from conventional loans.
- Some examples of no-doc business loans include invoice financing, merchant cash advances, business lines of credit, and short-term business loans.
- Factors to be wary of when pursuing no-doc loans include hidden fees, tight payment schedules, and disreputable no-doc lenders.
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