High-risk business loans are loans that are extended to a business with poor credit, low annual revenue, and little to know business history. Depending on the situation, the lender will assume more risk with working with that person or entity.
When you apply for a traditional business loans, lenders will analyze how credit worthy a business in based on the five C’s of credit (character, capacity, capital, collateral, and conditions). If any business falls short on any of those they are considered to be “high-risk”.
There are several factors that lenders consider before they make their approval decision. If you fall under the following, you are likely to be considered high-risk.
Startups and New Businesses
Startups and new businesses are very risky because they do not have a track history yet. When your business is established, lenders can look at your bank statements, income taxes, and more to show that your business is profitable. Startups and new businesses do not have the paperwork needed to verify how successful they are yet. The best type of loan to apply for this situation is an SBA loan or other forms of lending.
Businesses with Bad Credit
If you have a poor credit history, you are considered high-risk. Both your personal credit score and business credit score can impact your credit history. If a lender finds that you do not have a good track record for repaying, the lender will not invest in you.
Limited Business History
If your business has been in operation for under 2 years, lenders will consider your business as too risky since you do not have the track record to prove that your business is profitable.
Some industries are riskier than others. What is considered as a high-risk industry depends on the lender. Some examples of risky industries are gambling and marijuana.
Benefits of High-Risk Loans
There are a few benefits of high-risk loans that can make it worthwhile for businesses and lenders.
Sometimes a high-risk loan is the only option for some business owners, so it is important to project future earnings correctly and use the funds wisely.
Although high-risk businesses may seem risky for lenders, they an protect themselves by requiring that borrowers make large or frequent payments and charging high interest rates.
Types of High-Risk Business Loans
Here are the business loans that are referred to as high-risk.
Merchant Cash Advances
A merchant cash advance is not a loan, but an advance. When you choose an MCA, you are receiving cash in exchange for a percentage of your sales in the future. Since it is being based on your business’s overall sales, your credit score, history, and time in business are less important.
Short-term loans are paid in about one year or less, some even can be paid off in a few months or weeks. It is easy to qualify for a short-term loan as they have less strict requirements than other traditional loans. The downside is that rates can be very high, so be sure to shop around for the best terms if you decide to apply for a short-term loan.
Businesses who use invoices may not always get paid on time, but the good news is that there is invoice financing available. Invoice financing will convert your outstanding invoices into cash immediately. In this financing option, the creditworthiness of your customers is essential instead of the creditworthiness of your business.
You can also get a personal loan for business reasons. This is a great option if you have a new business and have no history and little to no revenue yet. However, you do need a strong personal credit score.
The Bottom Line
Not only are high-risk business loan risky for the lenders, but they are risky for the borrowers too. They can be difficult to repay and can lead you to be in debt. It is advised to get a high-risk business loan only if it is absolutely necessary.