Disadvantages of Low Doc Loans for Businesses

Low doc loans might seem to be the answer for businesses that are trying to get financing, despite not having the right documentation. The loans, however, are not without problems. These business loans are available for companies with good and bad credit.

Disadvantages

The largest disadvantages with a low doc loan are the higher interest rates. If you have bad credit or a poor credit history, high interest rates are hard to get away from. In the case of low doc loans, you can bet that the interest rates are going to be higher for two reasons. You likely have a poor credit rating if you are applying for a low doc loan.

You could try getting a bad credit business loan, but the low doc one will be your best bet if you have minimal proof of income. Typically, you would be considered a high credit risk, which means a higher probability to default on your loan. Financial institutions are assuming a large risk when they approve a low doc loan because the loan applicants are usually new to their businesses. This can be risky because of possible downfall of businesses in their first year.

The disadvantages of a low doc loan may outweigh your need for one.  If you have a proven track record and well kept financial records you will likely be approved for a standard small business loan. A standard small business loan has less risk factors and lower interest rates.

Risks for You and Bank

With low doc loans, most businesses think they have an option for capital when traditional loans fail. While there are risks involved for both yourself and the banks, most of the time both the self-employed entrepreneur, or small business owner and the bank end up winning in the end. The bank will also win by making a large profit from the interest and the small business owner.  

The advantages will outweigh the disadvantages if you either have a bad credit history or poor record keeping.  In both of these cases, the benefits will outweigh any risk factors if you plan to keep your business running. Keep in mind that the fees and costs for these will also be higher than the traditional mortgage, so don’t forget to shop around before you commit to one lender.