Technically speaking, you’ll have a difficult time finding “no doc business loans” in the United States. At the very least, you’ll have to submit a digital online document to apply for a loan. And you’ll have to verify your identity with government-issued I.D.
While online lenders can process and approve commercial loans with no “paper documents,” they still need to assess loan risk through digital confirmation. “No paperwork” or “low doc” business loans better describe these commercial lending options. They are also sometimes referred to as “stated income business loans.”
Why Do Lenders Offer Low- and No-Doc Business Loans?
Four Historical Events Create the Perfect Storm in Small Business Lending
- Apple Introduced the Smartphone
Apple’s 2007 launch of the iPhone revolutionized personal computing by providing internet access to anyone with a smartphone.
- 2008 Financial Crisis
According to Harvard Business School Research, small businesses in the United States employ about 120 million workers or half of the private sector workforce. They were impacted especially hard during and after the 2008 Financial Crisis when traditional banks couldn’t take on additional risks and small business lending ground to a halt.
- Widespread Wi-Fi
Wi-Fi integrated chips become standard in 2009 for smartphones, tablets, laptops, and TV while Wi-Fi networks expanded throughout the country.
- Fintech Revolutionizes the Online Business Loan Marketplace
In 2014, Harvard research provided a clear answer to the question: “Is there a credit gap in small business lending?” The answer was an unequivocal, yes. They found that traditional lenders didn’t want to process loans under the $250,000 that 70 percent of small businesses wanted. Many banks also reject commercial financing to businesses they consider high risk business loans. This after spending 25 hours on average filling in paperwork. Fintech business lenders quickly filled the vacuum left by traditional lenders.
Fintech Enters the Commercial Lending Marketplace
Financial Technology had been experiencing a renaissance since the turn-of-the-century in the consumer finance marketplace. Post Financial Crisis, they saw an underserved segment in the small- and medium-business financing sector.
They not only decided to enter the industry, they sought to disrupt the entire commercial lending marketplace. No more 25-hour loan application marathons, less reliance on credit scores, no outright refusal for high-risk industries, and pre-approval in 24 – 48 hours. Low- and no-doc business loans were born.
At this point, it should come as no surprise that the Fintech industry places more emphasis on technology during the approval process. Traditional lenders look at an application, run a credit check and the loan officer makes a judgement call on whether to approve or not. If the applicant doesn’t have the requisite credit score or is in a high-risk industry, then the loan officer will not likely even glance at the business plan and success to date. For the business owner, that’s 25 hours not well spent.
A notable change made by online lenders is a streamlined digital application form. A short-form application takes just minutes and can be completed on a computer in the office or a phone in the field. While some business financing options do not require a credit check, most lenders will run a “soft inquiry” for pre-approval purposes.
They’re mainly looking for recent bankruptcies, liens, and outstanding debt. But they don’t disqualify an applicant based solely on credit scores. If you’re leveraged beyond recovery, you may get some bad news. But many fintech commercial lenders have a adopted a performance-based model in the loan approval process.
What are Performance-Based Business Loans?
As we’ve stated, there are no true no-document business loans. There are paperless business loans that are processed digitally as well as low-document commercial financing options. Financial information like bank statements, company financials, and credit card statements are typically available online and can be downloaded into PDFs to be sent digitally to the lender.
By taking a disruptive approach to commercial lending, the fintech lending industry chose to provide business loans not just to those with excellent credit scores, but to those who have struggled in the past and are on the cusp of success.
This performance-based model places more emphasis on the recent past and the near future rather than historical credit scores. Having strong revenue and timely payments in the past six months to a year carry more weight than late payments that occurred three years ago in the start-up phase. Some commercial lenders have a 90% loan applicant approval rate.
Let’s look at several no- and low-document business financing options:
Stated Income Business Loans
This unsecured financing option is where no-doc business loans got its name. That’s because stated income loans don’t require the submission of financial statements or other documents to verify income. The business owner simply “states” their income to the lender.
Borrowers of stated income business loans are typically required to have a high to excellent personal credit score and to sign a personal guarantee in case of default. A caveat on the personal guarantee is that owners of LLC’s can inhibit limited liability protection by acting as surety for a corporate loan.
Invoice factoring is a short-term no- to low-doc business financing option. It is less a loan and more a cash advance. The borrower simply uses unpaid customer invoices for work already completed as security for a cash advance from a factoring agent. The cash advance can range from 75-90% of the face value of the invoices pledged, so shop around for rates.
A credit score is not as relevant because the invoices act as collateral for the advance. They may, however, require further verification either digitally or paper based. Invoice factoring can be beneficial to project-based companies like construction, professional services, and manufacturing.
Asset-Secured Low-Document Business Loans
Purchasing equipment or posting assets as collateral reduces the documentation required for securing the loan. Most information requested such as financial statements, equipment pricing, and/or appraisals can be submitted digitally. Your credit score doesn’t play a large part in loan approval because it’s considered a secured business loan. A down payment may be necessary on new assets to ensure the equipment is valued higher than the loan in the event of default.
No-Doc Merchant Cash Advances and ACH Business Loans
Two other no- to low-document commercial lending options are Merchant Cash Advances (MCA) and ACH Business Loans. They are sometimes referred to as Business Payday Loans as they are processed based on future earnings. Technically, they are a cash advance rather than a loan.
Merchant Cash Advances are based on the borrower’s future credit card receipts. Primary financial documents for MCAs are six to twelve months history of the company’s merchant accounts which can be transmitted digitally. A soft credit check may be required to ensure that the company isn’t over-leveraged.
Minimum requirements for MCAs are at least one year in business and $10,000 in monthly credit card sales. Cash advances can range from 50% – 250% of credit card sales. For repayment, the lender takes a fixed percentage of daily or weekly credit card revenue. Merchant cash advances are geared to brick-and-mortar retail, hospitality, and professional services companies with high-level credit card sales.
Low-Doc ACH Cash Advances
ACH business loans are nearly identical to MCAs having two subtle differences. Rather than base the borrower’s cash advance on credit card receipts, they use the company’s bank statements. This is done to include all business deposits including credit card, debit card, checks, e-transfers, and online payment services like PayPal.
ACH commercial loans are best suited to businesses that receive payment from a variety of sources such as professional services, healthcare, and e-commerce companies. Repayment is typically deducted from the company’s bank account by a fixed amount daily or weekly through an automated clearing house (ACH).
Advantages of No- and Low-Document Business Lending
Disdvantages of Low- and No-Document Business Loans
Typical Uses of No-Doc Commercial Loans and Cash Advances
Due to the high interest rates, no-document business loans should be used rarely and for profit-making opportunities like funding projects, purchasing inventory, capitalizing on a “can’t miss” opportunity, or increasing market share. They’re also useful for occasional short-term working capital emergencies that provide “bridge financing” while waiting for customer payments.
Wrapping it Up
Since the Financial Crisis that caused the banking industry to become risk-averse, online alternative lenders filled the void in providing small- and medium-sized businesses the funding they need to thrive. They disrupted the industry by adopting a performance- and data-based model rather than the credit score and sometimes biased judgement used by traditional lenders.
Low- and no-doc business loans have opened the door to new possibilities for enterprising entrepreneurs that were out of reach in the past due to lack of funds. But as the cost of low-document commercial loans are higher and easier to get, it puts more responsibility on the borrower to use the proceeds strategically and for profit.