Traditional loans have a variety of requirements for applicants, especially related to business income, credit score, and cash flow. The purpose of these guidelines is to make sure companies can afford to make loan payments every month, which makes sense. Unfortunately, many lenders take the application process to the extreme, expecting companies to have nearly perfect scores across the board. This is unfair for small businesses and entrepreneurs that have gone through credit issues in the past.
Stated income loans are a comfortable alternative. They can take care of many of the same needs as traditional financing, but with fewer restrictions. Understanding how this type of loan works can help business owners choose the right terms for their company.
What Stated Income Means
On conventional loan applications, it’s not enough to fill in how much a business makes every year. Owners have to demonstrate revenue with countless documents, including profit and loss forms, annual revenue records, tax returns and other information. Needless to say, this is very time-consuming and tedious. Any perceived problems with income can result in the application getting rejected.
Stated income loans avoid this area almost completely. The business only needs to estimate, or state, how much income it makes on average. There are no document requirements related to revenue or cash flow to worry about.
Who Uses Stated Income Financing
This type of loan is compatible with self-employed business owners as well as contract employees. It doesn’t matter whether your income comes from a single source or many different employers. Qualifying simply doesn’t depend on revenue.
Why Stated Income Loans Are Easier To Qualify For
The main factor used for approval of stated income financing is collateral. These loans are backed by some type of valuable asset. Sometimes, a business can use its real estate or equipment to get a loan, getting access to working capital for a variety of needs. This is helpful for sales businesses looking for money to purchase bulk inventory.
Most of the time, a stated income loan uses the item being purchased as collateral. For example, in real estate deals involving stated income financing, the new property acts as security for the loan. The applicant can obtain significant financing toward the purchase price and remodeling costs.
The LTV of stated income loans determines what percentage of the property’s value is extended as capital. With a 70% LTV, the buyer would only need to cover 30% of the purchase price.