When Is A No-Doc Business Loan Right for You?

Evaluate when a No-Doc Business Loan is right for your business. Understand the benefits and drawbacks of this quick financing option

20 Jul,2023 13:08 IST 1296 Views
When Is A No-Doc Business Loan Right for You?

A No-Doc Business Loan or a No Documentation Business Loan is a loan offered to businesses with minimal documentation and quick processing times. The name is misleading though. The loan does require documentation though this may not be as cumbersome or demanding as traditional business loans. Sometimes, one can avail such a loan within short time of raising a request.

The No-Doc Business Loan provides an alternative financing route vis-à-vis traditional business loans. While it is a great way to raise quick cash, the processing speed comes at a price. The interest rates are higher and repayment windows and loan amounts are smaller than traditional business loans.

Usually, traditional business loans require applicants to submit their personal or business financial statements, business certificates and licenses like incorporation deeds and trade licenses, tax returns of the past two or three years, company PAN cards and other more detailed documentation. The alternative financing route, i.e. the No-Doc Business Loan is thus often taken by self-employed individuals, small business owners and those just starting off a business who may not have access to all the documentation required for traditional business loans. Sometimes it is used by business owners who meet the eligibility criteria but do not have the time required for processing of traditional business loans.

No doc Business Loans are of several kinds, such as Merchant Cash Advance, Short-term Business Loans, Invoice Financing and Business Line of Credit. They are mostly offered without collateral and are issued on the basis of assets, invoice payment history and business credit card volumes.

Merchant Cash Advance (MCA):

An MCA is as the name suggests, is a cash advance based on projections of future business sales and not a loan in the traditional sense. It is a variety of asset-based lending, otherwise known as asset-based borrowing. The business’s capacity to repay is assessed based on credit card sales, bank statements and other financial records such as sales volumes and daily receipts. A lump sum amount is provided to the borrower. Repayments are structured as a percentage of expected future sales. They may be weekly or even daily.
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Short-Term Business Loans:

This is similar to a traditional business loan in some ways. The lending institution transfers the agreed loan amount to the borrower. The repayment installment and tenure are fixed. This tenure could be just a few months to two or three years. However, the interest rates are higher than traditional loans and usually lesser than that of MCAs. The documentation process, though less than that of traditional loans, is more than that of MCAs.

Invoice Financing:

This is a kind of asset-based borrowing or asset-based lending. Here the loan amount is issued with unpaid invoices serving as a collateral. This is usually offered to B2B type companies, with credit-worthy customers, when they face a cash crunch due to delayed payment cycles. Loan amounts range from 70% to 90% of the unpaid invoices’ value. In most cases, the customers of the lenders will be expected to make payments directly to the lending institution till the loan amount, interest and charges are cleared. Interest rates may vary from 1% to 5% per month.

Business Line Of Credit:

This is much like an overdraft facility, allowing borrowers access to revolving funds subject to agreed limits. Like a credit card, the borrower can use as much as he needs with interest being charged only on the amount used. Repayments are made as per the agreement with the Business Line of Credit Service Provider – these are usually monthly. The business has the facility to use the credit line up to the specified limit as often as needed during the tenure of the agreement if repayments are regular. Interest rates are usually lower than that of Business Credit Cards.

No Doc Business Loans are useful for enterprises that require quick finance but do not have the time or are unable to meet the eligibility requirements demanded by traditional business loans. You might find our series of blogs on Business loans useful to help you understand more about business loans. If you find this is still the best option for you, i.e. the No Doc Business Loan, apply after evaluating the interest rates, eligibility criteria, and terms and conditions attached to each type of No Doc Business Loan. Determine which one is best suited to your business circumstance. However, the interest rates being comparatively higher, you need to be assured of being able to repay the loan quickly. If not, the cost of the loan will severely affect the profitability of your business. If time is not a factor, you could also try the option of government mudra loans or other financing schemes for small and medium scale industries. 

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Disclaimer: The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.

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