In this post, I’m going to stick to different types of loans such as Lo-doc, No-doc and Full-doc. Later we can explore different facilities such as term loans and commercial bill facilities.
Here are some brief explanations to get you started:
Lo-Doc – this type of loan requires ‘Low Documentation’.
In truth it usually means that you don’t have to provide your financial statements or tax returns. That does not mean you don’t have to prove that you can pay the loan. While some non-banks will allow you to provide them with say, a declaration from your accountant that states you can repay the loan, in most cases you will need to provide a lot of other information to assess your ability to repay.
You might be asked to provide 12 months BAS statements so the banker can assess your stated turnover. Then they might ask you for 12 months Business Account Statements. They will use this to check both your turnover into your account as well as any expenses going out ; what is your wage bill for example, or your lease payments that are coming out of your account.
If on the loan application you are stating a profit of $100,000 but you only turnover $150,000 on your BAS or account statements, you MIGHT get a loan approved, but you will probably have to do some fast talking as to why your business runs at such a high profit. Remember that credit managers see different businesses every day. If every business they see that is providing financial statements and tax returns operate on a 10% net profit margin, and you have stated 30%, then they will be asking why and how?
So, in essence, Lo Doc is not an excuse to start stating profits that don’t exist, nor is it a particularly ‘easy’ way to get finance. In fact, one of the easiest ways to get finance is a Full Doc (Fully Documented) loan.
A Full Doc loan is usually the cheapest type of finance available to buyers.
This is because you will be providing the financier with as much information as possible to help them assess the risk of lending to you. This information usually includes such items as:
- Tenancy Schedules for the commercial property
- Company and Personal Tax Returns
- Details of all existing debts in both business and personal names
Credit managers will use all of this information to determine if they will lend you the money to buy the commercial property. If you can, you should try to achieve your borrowings using this type of finance. Unfortunately many business owners do not have their tax returns and financial statements up to date and as a result they opt for the Lo Doc loan as an alternative. Regrettably they could be paying up to 0.50% more for this type of loan.
Last but not least is the No-Doc or No Documentation loan.
It isn’t really ’no’ documentation, it usually just means ‘less’ documentation. It is as close to an asset lend as you can probably find. In many instances, this type of loan will require a deposit of up to 40%. You will still have to provide details of the rental income for the property and in this rental income will need to cover the repayments on the loan.
Remember though that it is the NET income. The NET income is the Gross REntal less any Rental Management costs from agents and any outgoings such as Rates, Taxes, Repairs and Maintenance. If you cannot provide evidence of this to a financier, they may take around 20% off the Gross Amount to forecast your NET income.
As previously mentioned, the fees and interest rates applicable to each of these loans are very different. In the next post I’ll detail these fees and tell you how banks price your loans.