It’s nearly impossible to get approved for a loan without documentation. In fact, most new entrepreneurs still get denied business loans. Banks want to see proof that you’re producing and guarantee return of their funds.
If you’re having trouble providing documents to get the cash you need, you’re not at a complete loss. Stated income business loans have recently resurfaced.
The loans originally became popular as a means for self contractors and workers who receive cash payments to still get mortgage and business loans. It gave more flexible options for proving income and getting approved. With more full and part time entrepreneurs surfacing, income business loans are serving the same need today.
What are Stated Income Business Loans?
Simply put, stated income business loans are funding options that don’t require financial documents. That’s why they also go by the name no doc, or no documentation loans. Lenders normally request bank statements, tax returns, proof of assets and other income verification. Freelancers or self employed individuals may have a hard time furnishing sufficient documents.
Tax returns may not show the true value of the money they make. Entrepreneurs and tax preparers work together to reduce their liability and what they owe. Therefore, the adjusted gross income may not be enough to meet the needs banks and lenders require. Freelancers may also have multiple streams of income or cash payments they may not be able to show.
In the age of PayPal, Cash App, Stripe and other electronic payment systems, income tracking can prove difficult. Traditional lenders may not view this as an acceptable financial document. If you use one of these merchants to take payments from your clients, you won’t meet requirements of most lenders. That’s where stated income business loans come in.
How Does it Work?
With stated income business loans, entrepreneurs give a verbal or written statement for their amount of business revenue. The lender takes their word for it, using that amount to process the loan. If approved, the amount of the loan depends on what amount of revenue the business owner states. Under normal circumstances no proof of income is necessary. It works like a credit card application.
Pros and Cons of Stated Income Business Loans
One of the largest benefits is that securing the loan doesn’t require collateral. This is because it is unsecured funding. It’s an alternative way of getting business cash when you’re not yet established. Another huge plus about stated income business loans the start of building business credit through bureaus like Dun and Bradstreet. Building business credit sets the foundation to protect and separate personal credit.
A disadvantage of stated income business loans is higher interest rates. Taking your word for it on income adds an extra layer of risk. That means the lender will protect their company by tacking on fees and interest in case you default in the loan. These types of loans have also gotten a bad reputation in the past as liars loans. Some clients inflated their income to get loans in larger amounts only to not be able to repay them.
Not having to provide proof of income doesn’t remove the personal guarantee requirement. A stated income loan is still attached you your personal credit. If you sign for the loan, it could cause damage if the business goes under. Make sure you have an understanding of your business revenue and ability to pay back the loan.
How to Get Approved for a Stated Income Business Loan
Not just anyone can walk in and ask for a sum of money. A break on showing proof of income doesn’t mean you’re completely off the hook. You still have to meet criteria to get approved for the loan. For starters, lenders will still request to view your credit score. They may also look at your personal credit file. Your credit profile will show lenders if you’re being honest about the business income you claim to earn.
For instance, credit reports show information about employment. They may not directly report income information. Expenses and credit limit information will still give clues into what you actually bring in. Trade lines of credit with low limits may be a sign that your income is low or your creditworthiness is shaky. It’s not the case in every situation, but that may be enough to prompt lenders to request more proof about the income you stated.
What to Purchase with a Stated Income Business Loan
The most reasonable way to use stated income business loans is for short term business investments. Using the funds to generate income in a short period of time makes the most sense. Paying for low cost supplies, travel, meals, entertainment, business fees, or extra projects give a better advantage than higher priced business expenses or investments.
You could use the loan proceeds to lease or buy business equipment, but an equipment finance loan has more benefits. That way you can take advantage of a lower interest rate and built in collateral from the equipment. It’s almost just as easy for a small business to get equipment financing. The amount of equipment you can purchase may still depend on your personal credit.
Stated Income Business Lines of Credit
Instead of using stated income business loans, stated income business lines of credit are also an option. With them, entrepreneurs get the same benefit of unsecured loans but with unlimited access. A term loan terminates once you make the last payment. Stated income business lines of credit replenish the available funds you can borrow as you make payments. That’s helpful in solving the cash flow problem new entrepreneurs often face.
Let’s face it. Today’s market doesn’t make traditional loans available to non-traditional businesses. Startup entrepreneurs, freelancers, and self employed need as many flexible options as possible to meet business funding needs. Educating yourself on business financing is critical to sustain your business. That way you’re prepared for whatever criteria your solution requires.
Work with a business financing expert to find out if stated income business loans are suitable for your goals.