Low doc business loans: what lenders accept instead of full financials

A low doc business loan is finance for a business that verifies its income with lighter documents than a full set of lodged financial statements and tax returns. Moneysmart, the Australian Securities and Investments Commission's consumer site, defines a low doc loan as one that requires less financial documentation to prove income, assets and liabilities than a standard loan, typically used by self-employed people and small business owners. Moneysmart adds that these loans are usually offered at higher interest rates and may include terms that restrict borrowers.

For loans secured by residential property, APRA's lending guidance says that where standard documents are unavailable, a bank or other authorised deposit-taking institution (ADI) would usually seek bank statements showing cash flow history, business activity statements, recent tax assessment notices or confirmation from an accountant. APRA also says it is not good practice to lend on limited verification of income where full verification is reasonably available. Low doc therefore means different evidence, not no evidence.

This guide groups low doc business finance into four kinds, and the security behind each one shapes what the lender asks for. According to business.gov.au, a secured loan is backed by something of value, such as property or business inventory, and if the loan is not repaid the lender can take that security. An unsecured loan puts no asset at risk, so the lender usually looks harder at the business's financial health instead. The table compares the four kinds in general terms only; terms vary between lenders, and no row is the right answer for every business.

Asset finance often works differently: business.gov.au notes that when a business borrows to buy a vehicle or equipment, it can often use that asset as the loan's security, and a hire purchase instalment can sometimes be reduced by choosing a larger final balloon payment.

The documents a lender asks for on a low doc business loan depend largely on the business structure, because each structure lodges different returns and carries debt differently. business.gov.au says documentation requirements vary between loans but may include proof of identification, a business plan, financial reports including cash flow statements, financial forecasts, lease agreements and personal financial information. The Australian Taxation Office (ATO) describes four common structures, summarised below with documents a lender may ask for in each case.

For any structure, business.gov.au describes a cash flow statement as a snapshot of the money coming in and going out of the business. The guide to how lenders assess self-employed income explains how lenders read these documents.

A low doc business loan generally sits outside the responsible lending rules that protect home loan borrowers. ASIC's Regulatory Guide 209 says that if a loan is wholly or predominantly for a business purpose, the responsible lending obligations do not apply, even if the borrower is an individual and the loan is secured over their home. Under section 5(4) of the National Credit Code, predominant means the purpose for which more than half of the credit is intended to be used, or, for credit used to buy goods or services such as a vehicle, the purpose they are intended to be most used for. ASIC adds that loans to companies, other than strata corporations, are not regulated for any purpose.

A borrower may be asked to sign a business purpose declaration. ASIC says such a declaration is not irrefutable evidence of a loan's purpose and is ineffective if the lender knew, or would have known after reasonable inquiries, that the money was really for personal use. The mortgage broker best interests duty also applies only to regulated consumer credit, according to ASIC's Regulatory Guide 273.

Small business borrowers still have protections. ASIC lists the unfair contract terms protections in the ASIC Act, rights under the Banking Code of Practice where the lender is a bank that subscribes to it, and the right to take a dispute to the Australian Financial Complaints Authority (AFCA) if the lender is an AFCA member. ASIC has also reported on changes the big four banks made to their small business loan contracts to comply with the unfair contract terms law. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) helps small businesses in disputes with other businesses or Commonwealth agencies, including the ATO.

Security shapes how much a low doc business loan can provide, for how long and at what cost, because it decides what the lender can recover if repayments stop. An unsecured loan puts no asset at risk, so business.gov.au says the lender will usually look at the business's financial health to be satisfied it can be repaid, which puts more weight on bank statements and BAS. A loan secured by property gives the lender an asset to fall back on. For alternative documentation home lending, APRA says a prudent bank or other ADI would seek to address the extra risk through appropriate pricing and significantly lower loan to value ratios, which means a smaller loan relative to the property value.

Using the family home to secure a business loan moves business risk onto the household. ASIC's guidance confirms that responsible lending obligations do not apply to a business-purpose loan even when it is secured over the borrower's home. Where a lender asks a director or family member for a personal guarantee, Moneysmart warns that a guarantor may have to repay the whole loan plus interest if the borrower cannot, and the lender may repossess an asset used as security, such as a home. Moneysmart tells anyone asked to guarantee a business loan to read the contract with extra care because business income can change fast, and to get independent accounting and legal advice before signing.

One way to compare low doc business loan offers is the total amount repayable over the term, including every fee, rather than any single advertised figure. Moneysmart describes a comparison rate as a rate that helps work out the true cost of a loan by folding in most fees and charges; the checklist below asks for the figures directly. business.gov.au also notes that non-bank lenders often have more flexible criteria than banks but may charge more in interest and fees, and that selling invoices to a factoring company is quick but can be expensive compared with traditional finance.

• The total amount repayable over the full term, in dollars, with every fee included.
• Establishment, application, valuation, legal and ongoing account fees, and who pays each one.
• Repayment frequency (daily, weekly, fortnightly or monthly) and how it lines up with when customers pay the business.
• Early repayment or payout terms, including any fee or interest still owed if the loan is cleared early.
• Any balloon payment at the end of an asset finance contract, and how it would be paid or refinanced.
• What security and guarantees are required, and what happens to them if a repayment is missed.
• Default, review and covenant clauses, such as terms that let the lender call in the loan.
• How the broker is paid: business.gov.au notes some business loan brokers charge fees while others are paid by lender commission.

The FundUp calculators can show how different repayment amounts and terms change the total. business.gov.au says a call or email about a loan you have not applied for is almost certainly a scam and can be reported to Scamwatch.

Before applying for a low doc business loan, it helps to confirm that BAS lodgements are current, that any ATO debt is under management, and that the business and its owners' credit files are accurate. APRA lists business activity statements among the alternative documents a bank would usually seek, so it helps to have every BAS lodged. Once registered for GST, a business must lodge a BAS, and the ATO says businesses with GST turnover under $20 million lodge quarterly unless told to report monthly. Registration is required once GST turnover reaches $75,000.

1. 1Check the business's ABN record on ABN Lookup, which is free and shows the business type and GST status.
2. 2Confirm every BAS due in the last 12 months has been lodged, and download recent business bank statements.
3. 3Review the business's ATO account for any overdue amounts. The ATO may report a business tax debt to credit reporting bureaus where at least $100,000 is overdue by more than 90 days and the business is not engaging with the ATO to manage it.
4. 4If the ATO has sent an intent to disclose notice, note that the business has 28 days from receiving it to act; effective engagement, such as complying with a payment plan, stops the report, and reported information is removed once the debt is paid or managed.
5. 5Get a free copy of each owner's or director's credit report; Moneysmart says there is a right to one every 3 months, and errors can be fixed free by the credit reporting agency.
6. 6Ask the accountant to prepare a current cash flow statement and, where a lender accepts one, a written confirmation of income.

Moneysmart says low doc loans are typically used by self-employed people and small business owners. An established business whose lodged financials already support the loan may find that full doc applications avoid the higher pricing and restrictive terms Moneysmart associates with low doc loans. Neither path suits every business, and lender policy decides what is possible in each case. The low doc vs full doc guide compares the two in more detail.

FundUp is a Cairns-based mortgage broker that serves clients Australia-wide, and says its lender panel exceeds 40 lenders. Ned McLachlan, Director and Broker, can talk through which kind of low doc business finance fits the documents a business already holds. FundUp states that its home loan service costs the borrower nothing because the lender pays the broker; Moneysmart explains that lenders generally pay brokers an upfront and ongoing commission, which brokers must disclose. On a business loan, ask any broker to confirm in writing how they are paid before proceeding. The commercial finance page sets out the business lending FundUp arranges and how to book a free consult.