When you’re working hard to get a new business off the ground—or you need cash flow to pay bills and employees—you might need to borrow money. In a recent survey of small business owners, roughly two-thirds indicated that they had received business financing at some point.
Business owners who need a cash influx have a few different loan options, including no-doc business loans. This type of financing has fewer requirements, less paperwork, and quicker fund distribution than traditional loans. But it can have significant downsides, too. Learn more about no-doc business loans to decide if they’re the right fit for your business needs.
What is a no-doc business loan?
A no-doc business loan is a financing option requiring a minimal amount of paperwork during the application process. Required documentation could involve providing bank statements and credit scores rather than tax returns or full financial statements. These types of loans are typically offered by alternative lenders, including online lending platforms and non-bank financial institutions.
Since no-doc business loans don’t require as much documentation as traditional loans, the application and approval process tends to be faster. Once approved, you could get your money within a few hours or days, depending on how your lender disburses funds. Not all no-doc business loans work the same way. However, interest rates are typically higher than traditional loans, and the repayment window is typically shorter.
Types of no-doc business loans
- Invoice financing
- Merchant cash advances
- Unsecured short-term business loans
- Unsecured business lines of credit
There are a few different types of no-doc business loans. The right fit for your business depends on your own financial needs.
Invoice financing
Invoice financing is a loan or line of credit covering the amount of your unpaid invoices (or accounts receivable). Lenders front you the money—typically between 70% and 90% of the total of your unpaid invoices. Then you repay the advance and the requisite fees once your clients or customers pay you what you’re owed. In this scenario, you retain the risk of nonpayment. If your clients don’t pay, you’re still on the hook for the loan principle and fees.
Invoice financing differs from invoice factoring, which is the process of selling invoices at a discount—typically between 80% and 90% of the invoice value—to a third-party company. The factoring company takes on the risk of nonpayment and collects the invoices. They could potentially send invoices to collections if they become overdue. Once the factoring company gets paid, it will send you the difference, minus the fees for its service.
Merchant cash advances
A merchant cash advance (MCA) is an unsecured working capital loan where an MCA company lends your business a lump-sum cash advance for operational costs. You then pay the lender a percentage of your sales (typically at least 10%) until you’ve returned the principal, plus a fee. Before granting an MCA, a lender reviews the average value of your sales. Shopify Capital, for example, is a type of MCA that offers fast funding to Shopify sellers based on recent sales.
MCA repayment depends on the factor rate agreement your lender sets and your expected earnings. The factor rate, which is a fixed rate multiplied by the advance amount to determine the total cost, typically ranges between 1.1 and 1.5. If you have a factor rate of 1.2, for example, you’ll repay 1.2 times the initial advance.
For example, let’s say you borrow $50,000 with a 1.5 factor rate—meaning you’ll owe $50,000 x 1.5 = $75,000. Your business makes $30,000 in sales every month, and your terms dictate that 20% ($6,000) of your monthly sales go toward paying off your loan. It will take just over a year to pay off the total of $75,000.
Unsecured short-term business loans
A short-term business loan is a small lump-sum financing option with a repayment period within two years. Unsecured short-term loans don’t require collateral. Instead, lenders weigh your personal and business credit scores, plus credit history, to determine approval and estimated interest rate. This means unsecured short-term business loans may require less paperwork, and tend to have a quicker application process. You can apply for short-term loans at various financial institutions, including banks, credit unions, and online lenders.
Unsecured business lines of credit
If you prefer to not take out a lump-sum loan to cover your immediate financial needs, you can apply for a business line of credit. The line of credit works a lot like a credit card. It allows you to draw funds as needed, up to a pre-specified limit. Approval for an unsecured business line depends on the lender’s guidelines. Since it doesn’t require collateral, the online application process can typically be completed in a matter of minutes. As with an unsecured loan, lenders check your personal and business credit scores and credit history. You could also get evaluated on your business income and how long your company has been in business.
Pros and cons of no-doc business loans
If you’re exploring different borrowing options, weigh the advantages and disadvantages of a no-doc business loan before completing an application.
Pros
- Convenience. With less paperwork required, no-doc business loans have an easier application process compared to traditional loans.
- Fast approval. The streamlined documentation also makes it quicker to process your loan. You can provide basic information about your business needs and potentially get approved within minutes or days.
- More accessibility. It’s easier for new and non-traditional businesses to get funding with a no-doc business loan compared to a traditional loan.
- Flexible use of funds. Borrowers can use funds for a variety of different needs, whether it’s buying equipment, covering payroll, or paying necessary bills until invoices get paid.
Cons
- Higher interest rates and fees. You pay for the convenience of a no-doc business loan. This could mean you agree to pay the lender a percentage of your future sales, make larger monthly payments, or have a higher interest rate than traditional lenders.
- Less favorable loan terms. Agreeing to a no-doc business loan could mean you don’t get ideal loan terms. It’s possible to wind up with a shorter repayment period with high monthly payments.
- Difficulty getting out of debt. Higher interest rates and fees mixed with shorter loan terms could keep you from paying back your loan, causing you to continually borrow money and stay in a cycle of debt.
- Potential for predatory lenders. Traditional business loans have interest rates ranging from 6% to 16.5%. Some no-doc business loans charge interest rates above that.
*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.
No-doc business loans FAQ
How do I get a no-doc loan for a small business?
While many banks, credit unions, and online lenders offer small business loans, they may not provide no-doc business loans. You might need to consider financial institutions such as online marketplace lenders and merchant cash advance companies to get a no-doc loan.
Are no-doc loans hard to get?
No-doc business loans may be easier to get than traditional financing options, depending on your business structure, financing needs, and the type of loan you’re looking for. But with fewer financial institutions offering these types of loans, you might have a harder time finding a no-doc business loan you’re eligible for.
How much do you need to put down for a no-doc loan?
Most no-doc business loans don’t require a down payment, although each lender has their own requirements that borrowers need to meet to qualify. Some, however, may require collateral, like a percentage of future sales. Some lenders may require business assets, equipment, or cash.
