An area of potential confusion in business finance exists around bad credit business loans and low docs and no docs commercial finance. The possible misconception is that they are one and the same. In reality, that is not the case. To clarify the issue, we’re providing this explainer around the differentiation of bad credit and low docs loans, their features, and how businesses may still achieve cost-effective commercial loans with a bad credit rating.
Similarities and Differences
First up, let’s look at the actual definition of the terms. Bad credit business loans and low doc business loans are common terms used across the lending sector, including by Business Finance. But ‘bad credit’ and ‘low docs’ are essentially application categories rather than specific loans as such. When a consumer applies for business finance they are defined by the lender as having a bad credit rating or if they don’t have all the financial records as required by most banks, as a low docs applicant.
If the bad credit or low docs application is approved, the business can then utilise that approval for many of the same commercial finance facilities. Those in the same finance products that are also available for fully documented and good credit-rated applications. For asset acquisitions that are secured by the asset being purchased that would include Chattel Mortgage, Leasing, Rental, and Commercial Hire Purchase. With other types of commercial loans such as Unsecured Business Loans and Business Overdrafts, approval would be subject to individual lender guidelines, but not necessarily unachievable.
Low docs loans are typically sought by businesses that are just starting up or have not been trading for a long time. Banks especially require significant documentation and often that a business has been trading for a certain amount of time. Often 12-24 months. If a business has not been trading for that period they won’t have all the financial records.
Businesses applying for low docs loans may have a good credit rating based on the time they have been trading and/or on an assessment of the business owner(s)/director(s). Low Docs applicants do not by definition have bad credit. They may have, but not in all cases.
On the other hand, a business seeking a bad credit loan may have been trading for quite some time and have all the financial records and docs that are required for the application. That business would not be classified as a low docs application, just a bad credit application.
So bad credit applicants may be fully documented and low docs applicants may have a good credit rating. In fact, to approve a low docs business loan at advertised interest rates, many lenders will require a good credit rating.
Bad Credit Business Finance Options
A bad credit rating can befall many operators across many industries at some point in their business life. It can occur for a range of reasons, some outside the control of the business and some due to the actions of the business. One of the most common reasons is the failure to meet scheduled debt obligations on time over a period of time.
Lenders and other parties such as utilities providers and some suppliers are obliged to advise credit reporting bodies of individuals and businesses that fail to meet repayments and other credit matters. These entries in a credit profile remain in place for a period of time. Read more here.
When assessing an application, lenders will refer to the credit history and profile of the business. Businesses with a bad credit rating can address issues in the profile and work towards correcting some issues according to the established guidelines for that process.
Now for the good news. There are lenders that do offer business finance to companies with bad credit. If approved, these loans are offered for a wide range of acquisitions and purposes including the purchase of equipment loans, truck finance, business car loans.
Bad credit business finance for this type of secured purchase can be used across the range of asset acquisition finance including Chattel Mortgage, Leasing, CHP, and Equipment Rental.
When taking out bad credit business finance, the business can still realise the taxation and other benefits associated with the loan type and accelerated asset depreciation measures such as Instant Asset Write-off can be utilised.
Achieving Workable Bad Credit Solutions
For a business seeking bad credit finance, the priority is to access specialist non-bank lenders as banks are not known for offering this type of loan. Using a lending service such as Business Finance to access the most appropriate loan source can be highly beneficial. If the business applies to multiple banks and lenders for the same loan those applications are recorded in their credit history and can reflect poorly on the credit rating. Thus exacerbating an already bad credit situation.
When using a business loan broker, the same situation does not play out. An experienced broker has the capabilities and resources to cover off many lenders to find the one that will offer the best bad credit loan to the applicant and those multiple approaches are not recorded on a credit profile.
A fully licensed broker with the right lender accreditations can open up industry-only lending sources to lenders that are open to offering bad credit finance. Sources that may not be accessible by the business directly. The broker then adds their own negotiating skills and expertise to structure the finance package to best suit the business.
Due to the risk factor, it would be expected that additional loan conditions would be applied to bad credit finance. A higher interest rate than that available for good credit loan applicants would also be expected. But cost-effective solutions are available and Business Finance has the connections to pursue a solution for your bad credit loan requirements.
To discuss your options, contact us on 1300 000 033
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