If you’re a strong borrower looking to purchase a Commercial Property, but not quite fitting what a bank wants then it may be worthwhile considering a Commercial Alternative Documentation or “Alt Doc” Loan. These commercial loans are not just for people with credit impairments (bad creditor history), but for strong borrowers – especially self-employed clients – who are finding it tough to satisfy the banks.
What is a Commercial Alt Doc Loan?
A Commercial Alt Doc Loan is a type of Commercial Property loan offered by non-bank lenders when you are not not meeting a bank’s strict approval criteria as a self-employed borrower. Usually this criteria relates to proving income via financial statements and tax returns.
They are also known as “Alt Doc” because they offer alternative methods to business owners to demonstrate their income to a lender. Sometimes the name “Specialist” or “Lo Doc” loans is also used to signal that the lender is happy to consider clients with credit impairments, whether self-employed or PAYG.
Some big banks can also offer Commercial Lo Doc solutions, but usually for smaller loan amounts, and for borrowers with no credit impairments.
When should I use a Commercial Alt Doc Loan?
Commercial Alt Doc Loans have a range of useful applications for self-employed borrowers looking to purchase a Commercial Property, and apply both for Commercial Owner Occupied Properties as well as Commercial Investment Properties.
Reasons include:
Timing: The classic case is that you have found a Commercial Property that you want to quickly buy, but do not yet have your financial statements or tax returns up to date for the current year.
Complexity: You may have a very complex structure that is difficult to work through and present to the bank for approval. For example, the level of work required may be worth it for a $5,000,000 loan but not for the $500,000 loan you need now.
High Growth Businesses: Your business may be growing extremely quickly, and even if your financials are up to date, they do not reflect your current rate of earnings. Waiting for your next set of financial statements will keep you out of the commercial property market for too long.
One-Off Impacts: Alternatively, you may be having an “off” year or going through a difficult patch, despite the fundamentals of your business remaining the same. You are confident you will recover, but would like to borrow now.
Bad Credit History: You previously had run-ins with the bank or other lenders which have impaired your credit file. You have now re-established yourself and want to borrow.
Other Unusual Circumstances: Sometimes business and life is “a little tricky”, and this is when Alt Doc Loans are suitable as well.
What are the documents required?
Commercial Alt Doc loans usually offer three forms of alternative income verification:
- Accountants Letter – this is a fixed template provided by the lender, which declares your income
- Business Activity Statements (BAS) – your income will be calculated looking at total sales, expenses and salaries paid noted in your BAS
- Bank Statements – The debits and credits will be evaluated to see if it in line with your declared income
As the borrower you will also have to self-declare your income to the lender, and test if serviceability passes.
What are the advantages and disadvantages of each type of income verification method?
Choice is offered because not every business owner can verify their income in the same way.
The most common pros and cons are set out below:
| Advantages | Disadvantages | |
|---|---|---|
| Accountants Letter |
|
|
| Business Activity Statements (BAS) |
|
|
| Bank statements |
|
|
So from the above table usually the Accountant Letter or BAS method are preferred when pursuing an Alt Doc Loan.
Note: some lenders will CALL your accountant to verify the income declared. As your broker, we will help you prepare your accountant for that.
Do Commercial Alt Doc Loans cost more?
Commercial Alt Doc loan providers are providing easier forms of income verification, so are conducting less due diligence and are quicker than a typical bank. The trade-off is that they do charge more for their services, which can include:
- A higher interest rate – this is adjusted for LVR and risk presented
- An establishment fee or risk fee – essentially an upfront charge
- Valuation and legal fees – where banks absorb these costs, non-bank lenders pass them on. It is important to note that these fees are usually higher when dealing with a commercial property
- Early termination fees – as Commercial loans are unregulated generally (they do not fall under the National Consumer Credit Protection Act 2009), “exit fees” can apply for making large extra repayments or closing the loan early. Such fees do not apply to residential home loans.
When the LVR is low (i.e. you have a high deposit) and no credit defaults the interest rates can still be very competitive when compared to a bank. However, the higher the LVR and the worse the credit history, the higher the interest rates and upfront fees charged.
What securities can be considered under a Commercial Alt Doc Loan?
Commercial Alt Doc lenders are typically non-bank lenders. While there is a perception that non-bank lenders are happy to do risky deals, this is a myth. Non-bank lenders are happy to take on more calculated risks, and still apply prudent risk assessment frameworks. The risks they can take are also often bound by their warehouse lending facilities, which are provided by major banks and investment banks.
This means Commercial Alt Doc loans will only consider very “safe” and standard Commercial Property securities, such as:
- Office
- Retail Shops
- Industrial Properties (Warehouses and Factories)
Other Commercial Properties can still be considered, but may have a lower LVR applied given they are more specialised, and therefore may be harder to lease or sell if something goes wrong.
Am I stuck in a Commercial Alt Doc loan, or can I refinance?
No, you are not stuck in a Commercial Alt Doc loan. If your income improves and you are able to get your paperwork in order, you are able to refinance back into a bank for your Commercial Property. Alt Doc loans can therefore be thought of as an interim solution to get what you want now while you get back on track and switch to a bank later.
Anything else I should know about Commercial Alt Doc Loans?
Many clients when they go to borrow get fixated on the interest rate, and this prevents them from moving forward with a Commercial opportunity and life generally.
While you should make every endeavour to secure a bank loan for your commercial property, if you are not eligible or simply sick of how the bank is treating you, you should keep an open mind towards Commercial Alt Doc options. In our client base we have all types of self-employed clients who have used Commercial Alt Doc loans, from first time Commercial Property buyers, to the very wealthy with Commercial Portfolios who are seeking an alternative solution to the bank.