Many self-employed borrowers think they have fewer loan options than PAYG borrowers because their requirements are more complex. This is completely false.
Are Loan Options for Business Owners Really Limited?
In this post we explain why business owners have much more choice when it comes to borrowing. Business owners have MORE choice in the following ways:
1) Tiers of Lending – relating to the riskiness of your scenario according to your credit history, proof of income and asset quality; and
2) Types of Lending – relating to the purpose of the funds, whether it be asset finance, commercial property, business lending or construction.
We also go through what alt-doc loans are to help you understand whether you qualify for one.
So just because you can’t think of a lender, doesn’t mean a solution doesn’t exist. You simply have to have an open mind and know where to look!
1. Tiers of Lending
Let’s first take a look at TIERS of Lending.
Your lending tier refers to the riskiness of your application in terms of a few areas. This includes your previous credit history, reliability of your income and quality of the asset.
Importantly, for bank lending, the completeness of your paperwork also counts.
Loans from banks are considered “Prime Loans” – they offer the lowest rates, but there are often many business clients that do not qualify. These business clients do not qualify not because they are dodgy. The reality of running a business is that, even if the business is running profitably, the financial statements and supporting docs available may not support a full doc loan application.
The most common reasons why many business clients do not qualify can be because:
- Their financials are not up to date;
- Their scenarios are too complex; and/or
- They have experienced a default in their credit history.
To cater to this market, Non-Bank Financial Institutions exist to offer “Sub Prime” loans, which are commonly marketed as “Specialist”, “Alternative Documentation” or simply “Alt Doc” Loans.
Why are they called “Alt Doc Loans”?
Alt doc loans are called as such because the lender offers alternative methods of verification to prove your income.
While a bank may require 2 years financial statements or tax returns, an Alt Doc Lender may allow you to verify your income using:
- Business Activity Statements;
- Bank Statements; and/or
- Accountants Letters declaring your income.
Alt Doc lenders are also more willing to lend to clients with past defaults, and usually offer a much quicker process for business clients than a mainstream bank.
However, there is a trade off!
When you apply for a Specialist or Alt Doc loan, this lender is offering you an easier process, but they compensate themselves for the risk taken by:
- Charging a higher interest rate – the premium added to the market going rates is usually 1.0% or more higher
- Charging a one-off risk free or establishment fee – how this fee is calculated varies widely by often it is a percentage of the loan amount
- Capping the Loan to Value ratio to 80% or even 70% for Commercial Property. A lower LVR means you require a larger deposit.
Despite these higher costs. Alt Doc loans are not even available to normal bank Pay-As-You-Go customers, completely unique to business owners thereby giving you more choice!
2. Types of Lending
The second way business owners have choice, is in the TYPE OF LENDING.
While PAYG customers have access to home loans, car loans, personal loans and credit cards, a business client has access to these PLUS much more.
The type of loan really depends on the PURPOSE & SOLUTION that a business owner needs.
A business owner may have access to a huge variety of loans depending on their unique requirements.
| Type of Loan | Description |
|---|---|
| General Business Loan | To help grow your existing business or acquire another business |
| Commercial Property Loan | To purchase a retail shopfront, an office suite or industrial warehouse |
| Asset Finance Loan | To purchase an income generating vehicle, such as a van, truck, tractor or trailer. Asset finance loans also cover specialised equipment, as well as new workplace fit-outs. |
| Unsecured Loans, Lines of Credits, Overdrafts | To assist with Working Capital, and supporting periods of lower cash flow |
| Invoice Financing | To release cash earlier on the invoices issued to your customers |
| Property Development Loans | To help construct a new business premises, or improve a piece of real estate to sell or keep as an investment |
Business Owners also have access to Alternative Credit or Private Debt Markets. These are loans from credit funds, High Net Worth individuals, and sophisticated investors to support special situations, bridging scenarios or more risky, but highly lucrative business opportunities.
Risk Reward Curve
So putting these items together – a self-employed business owner definitely has more choice than a normal PAYG client in both tiers of lending and types of lending.
These loan options roughly sit on a risk reward spectrum, which looks something like these – whereby the riskier the type of loan, the higher the interest rate or “reward” paid to a lender.
Going deeper, there are even tiers within tiers and tiers within types of loans – as a business owner, you really are spoiled for choice!