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When in need of flexible, working capital and having not yet established substantial profits, new entrepreneurs may be best off seeking no document business credit lines. These are classified in the mortgage industry as “Alt-A,” meaning that they are not prime loans (although not subprime either). No doc lines of credit have some special advantages: they increase the availability of lending options to entrepreneurs who have very little to show by way of profit margins (or have very irregular profit margins), and allow flexible spending with little pressure or restrictions on what they need to buy. Lines of credit are considered “revolving credit, in that interest in a business line of credit is based only on the balance, and is charged at a market-determined rate with no amortization. In this respect, they are very similar to credit cards.
The application process will require a very extensive credit check. Since the lender is not putting any weight on income documentation, they will require a strong personal credit score (generally over 680). Experian is usually the preferred credit bureau, although Dun & Bradstreet is sometimes used as well. Assets and years of experience may also be used in the application process. If approved, the lender will issue the borrower a checkbook, from which he can access the line of credit for any purpose. The amounts can vary widely depending on the client.
No document business credit lines are less popular today than they were several years ago. As a result of the recent financial crisis, lenders are much more cautious about non-prime lending. Interest rates on no docs tend to be much higher as a result, and the credit lines tend to be lower. However, they are still around and are very often the only choice available to certain people such as the self-employed or unemployed, or those whose borrowing needs extend beyond the limits of conventional loans. Sometimes, they are simply the only kind of loan you can apply for.
