No lending agreement in the SBA’s catalog conjures quite as much confusion as the Low-Doc loan. The reason being, it’s a relatively new addition to the lending roster, and it’s not entirely its own thing, rather, an amended variant of the standard 7(a) loan.
The strange name does you no favors in terms of communicating its parameters either, but once you realize what this compound adjective stands for, it all starts to make sense.
Low-Doc simply stands for Low Documentation. It’s designed to offer small business owners fast, easy access to small loans between $25,000 and $150,000.
For loans smaller than $50,000, business owners need only fill out a single SBA form to apply. For loans exceeding $50,000, you must fill out the SBA form and provide individual income tax returns for the last three years, as well as financial statements of anyone involved in the borrower’s side of the agreement, i.e. guarantors and business partners.
The standard 7(a) loan usually takes between 3 and 4 months to process, and being that there are large sums of money involved (up to $5,000,000), a lengthy time frame is understandable. However, a Low-Doc loan can be approved in as little as 45 days, and on certain occasions, even sooner than that.
Where Did the Low-Doc SBA Loan Come From?
The Low-Doc loan format was born out of the discontentment of lenders and borrowers alike. The SBA was consistently receiving complaints from both parties that the process of securing small-sum loan agreements was needlessly arduous and long-winded.
Ultimately, the labyrinthine structure of the SBA’s 7(a) General Business Loan Guarantee Program was deterring business owners from even trying to apply for small loans, and the ones that did were met with decreasing interest from lenders.
As a result, the SBA created the Low-Doc variant of the 7(a), and it’s been helping business owners in a bind ever since.
What Can a Low-Doc SBA Loan Be Used For?
The Low-Doc loan can be used to fund three things: inventory acquisition, equipment purchase, and working capital.
- Inventory Acquisition
This simply means that you can use the Low-Doc loan to purchase goods and materials with the ultimate goal of selling them on for a profit. For example, if you own a small sports outlet, you could use it to stock your shelves with baseballs, basketball, footballs...whatever you think will sell well.
This refers to any small acquisition that’s meant to streamline the business and improve productivity. These items can be sold eventually, but they’re not bought with the sole intention of reselling them. For example, if you own a restaurant, you may buy a walk-in freezer for the kitchen or a new coffee machine for the bar.
- Working Capital
You can think of working capital as the funds you’ll use to pay off short-term expenses such as utility bills, payroll, and rent.
Are You Eligible for a Low-Doc SBA Loan?
First and foremost, for full Low-Doc eligibility, your enterprise must fall under the SBA’s definition of a small business within its field. Beyond that, the Low-Doc format relies heavily on credit scores to assess a prospective borrower’s eligibility for a loan. Without extensive documentation, this is the quickest and most comprehensive way of determining who qualifies for a loan.
It’s not always the case, but typically, a minimum credit score of 690 is required for application. If your credit score exceeds 690, your chances of securing a Low-Doc loan skyrocket.
On top of your credit score, lenders will be assessing your character as a whole in order to determine whether you’re a worthy candidate for investment. To do so, they’ll investigate your business history, experience, educational background, and may even consult references for reassurance.
As a general rule, your application will not be accepted if you’ve declared bankruptcy in the last three years, and even if bankruptcy was declared more than three years prior to your application, it will still harm your chances of securing the Low-Doc loan.
Equity, Collateral, and Franchise Requirements for the Low-Doc SBA Loan
While the SBA doesn’t require any sort of borrower equity, certain lenders may ask for 10% down.
It doesn’t matter if you don’t have enough collateral to cover the entire loan amount. In fact, some lenders won’t ask you to set collateral down at all.
If you own a franchise, there are a few extra fees, but once that’s out of the way, the process proceeds largely as normal.
Low-Doc SBA Loan Response Time
The SBA understands that business owners applying for the Low-Doc loan may be in a time-sensitive situation, so they guarantee a response within 36 business hours.
That way, if you qualify to progress, the SBA can get the ball rolling immediately, and you can start making more definite financial plans.
It’s also beneficial to those who do not qualify for the Low-Doc loan, as they can start looking for alternative financing immediately, rather than waste time hoping to secure the SBA loan.
Summing Up - Is a Low-Doc SBA Loan Right for You?
The Low-Doc loan can be a massive help to small businesses, but it’s not the only low-sum business loan available, so how do you know if it’s right for you?
Well, it depends on what you want to accomplish with the Low-Doc funds. The great thing about this loan is that it has a fairly broad scope, by which I mean that you can allocate funds to various aspects of your business.
Other small business loans are usually more focused. For example, you can take out an inventory loan that’s tailored for acquiring stock exclusively. So, if you only need a loan for one very specific aspect of running your business, it makes little sense to apply for the broad Low-Doc loan.
However, if you need a lump sum in order to invest in multiple business areas, the low interest rates, easy application process, and snappy response time of the Low-Doc format make it the perfect loan for you.