What Are High-Risk Business Loans & Where Do I Get One?
Qualifying for a loan can be frustrating for a business owner. With so much paperwork and so many requirements, the process is confusing, long, and — all too often — ultimately futile. Maybe your credit score is too low. Maybe your business hasn’t been in operations long enough to prove it can be profitable. Whatever the case, finding the right loan can be a challenge.
Don’t despair, though. Before throwing in the towel on finding a loan, you can explore the options available to what lenders consider “high risk” borrowers. With alternative loan options, business owners can get the financing they need while also building a positive credit history for the future.
Read on to learn more about high-risk business loans and where to get them.
Table of Contents
What Businesses Are Considered High Risk?
When considering whether to approve a loan application, lenders will always focus on the risk posed by the borrower. After all, lenders are out to make a profit on the money they loan. They want to work with businesses and individuals that make payments on time every month. They lean toward approving businesses and individuals that have documentation proving that they can afford to pay the loan with interest. On the flip side, lenders are wary of working with businesses that are seen as risky.
But what makes a business risky? There isn’t just one factor. In fact, there are several things lenders consider before making their approval decision. If your business is defined by any one of the following four characteristics, it may fall in the high-risk category, often making it more difficult to obtain financing:
Startups & New Businesses
One entrepreneur may have the next great idea that she knows will change the world. Another entrepreneur needs money to start a business that’s been his lifelong dream. Both are ready to put in the work to make their endeavors successful. Both have confidence in their businesses — all they need is the money to get their ideas off the ground. Unfortunately, lenders don’t have the same level of confidence.
Startups and new businesses are considered riskier borrowers because they don’t yet have a proven track record. An established business can approach a lender with bank statements, profit and loss statements, and years of income tax returns proving that it is profitable. On the other hand, startups and new businesses haven’t yet built a reputation and don’t have the paperwork to verify their success.
This doesn’t mean that startups and new businesses are out of the running entirely when it comes to getting a business loan. What it does mean is that these businesses will have to prove themselves to lenders in other ways, like coming up with a detailed business plan and future profit projections. These borrowers should look into SBA (Small Business Administration) loans for startups and may also need to consider other forms of lending outside of traditional methods like banks and credit unions.
Businesses With Low Revenue
Lenders want to see that a business is making enough money to cover all of its debts in addition to a new loan payment. For businesses with high revenue, this is no problem. There’s plenty of money flowing in; all they need is a financial boost, perhaps for a larger purchase like real estate or equipment.
On the other hand, businesses with low revenues will encounter problems when applying for a loan. Maybe a seasonal lull has contributed to recent low revenue, or the business has many unpaid customer invoices that affect incoming cash flow. Unfortunately, the reason for your low revenue doesn’t typically matter to a traditional lender. Regardless of why current revenue is poor, lenders will call into question whether or not your future revenue will be enough to pay back a loan as agreed.
While seeking traditional loans may be challenging — or even impossible in some cases — there are financing options available for businesses with low revenue.
Businesses With Bad Personal Credit
Every business owner has a credit score. For most lenders, this score is one of the most important factors taken into account when deciding whether to approve a loan. The higher the credit score, the higher the odds for approval. Not only is a business owner with a great score more likely to get approved, but they’ll also receive the best rates and terms.
However, sometimes credit scores aren’t exactly where they need to be. Old medical bills, late payments to creditors, and high credit card utilization can all contribute to a lower credit score. Even having too many inquiries when shopping for a loan can make a credit score drop by several points. In some cases, a business owner may not even have started building a solid credit history, and the lack of credit is viewed similarly to bad credit by lenders.
Having bad personal credit certainly makes it more difficult to qualify for a loan, but it’s not impossible. There are bad credit loan options available for business owners. While some of these loans may have higher interest rates or terms that aren’t as favorable, these loans can give business owners the cash they need while also helping them to build a solid credit history.
Businesses In A High-Risk, Unstable Industry
In some cases, businesses that are in high-risk, unstable industries may also be seen as high-risk borrowers. Whether the industry itself is dangerous and unsafe or the business itself is at risk of becoming obsolete, lenders consider industry factors when approving loans.
Remember, lenders want to work with businesses that are going to be able to pay off the loan. If the future of the business could be in question, this throws up a red flag for lenders.
However, like the other high-risk businesses previously mentioned, there are alternative lending options available. Small business owners just need to know where to look and how to obtain these loans.
What Are My Options For High-Risk Business Loans?
High-risk businesses aren’t going to be able to just walk into a bank and walk out with a loan. But even though traditional loan options may not be available, that doesn’t mean there aren’t any lending options out there. In fact, there are several available to high-risk businesses. However, every business owner should have an understanding of how each loan works to ensure that the financing decision is a wise one that benefits the business.
Short-term loans are loans that are paid off in a short period of time – usually one year or less. In some cases, short-term loans may be paid off in just a few months or weeks.
Qualifying for a short-term loan is easier than qualifying for other loans (like long-term installment loans). Credit requirements are not as stringent for short-term loans, so business owners with low personal or business credit scores may qualify.
Revenue and time in business requirements are also less strict for short-term loans, opening this type of funding up for startups, new businesses, and businesses with low revenues. Often, the application process is straightforward and easy and funds are available quickly.
Not only will receiving a short-term loan provide business owners with the capital they need, but making timely payments on a short-term loan can boost credit and open up other financing options for the future.
With short-term loans, however, rates can be very high, so it’s necessary to shop around for the best terms. Some banks offer short-term loans, while alternative lenders also provide this type of financing. Learn everything there is to know about short-term loans before moving ahead with the application process.
Merchant Cash Advances
A merchant cash advance is a type of financing that is based on credit card sales. With a merchant cash advance, a lender advances a sum of money to a business. Instead of taking monthly payments and using collateral to back up the loan, the cash advance is paid back through a percentage of future credit card sales. This is typically an option chosen by businesses that may have slower sales periods. With this model, the business would pay less toward the cash advance when sales are down and more when sales pick up. Usually, the percentage paid is between 10% to 20%, but this varies by lender.
Other times, a lender advances money to a business, then takes a fixed payment through weekly or daily ACH withdrawals. Regardless of the number and amount of sales, the payment remains the same.
Because this method of financing is based on sales, credit score and time in business is typically not as important of a factor as it is with installment loans or other types of financing. A lender will evaluate the cash flow of the business to determine how much money the business is eligible to receive, as well as work out the payment schedule.
While these cash advances could help businesses that are in a bind, it should be noted that interest rates can be high, with some annual interest rates soaring into the triple digits. Merchant cash advances are available through some banks and many alternative lenders. Before accepting an offer, all businesses should evaluate other loan options and weigh out the benefits of taking the loan versus the overall costs to avoid getting trapped in a cycle of debt. Learn more about the merchant cash advance process.
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Few things are more frustrating to a business owner than having money they can’t access. This is what happens when a business has unpaid invoices. Whether the invoices aren’t yet due and an emergency situation has popped up or a customer is late in making their payment, unpaid invoices can pose a challenge for any business.
The good news is that there are options. Businesses that just can’t wait to get paid from their customers can take advantage of invoice financing. With invoice financing, there are two different options to consider.
|Invoice Financing||Invoice Factoring|
Uses invoices as collateral for a line of credit
Sell invoices for immediate cash
You are granted a credit facility based on the value of your unpaid invoices, and can draw from your available funds at any time
Factor gives you an advance when the invoice is sent and sends you the rest once the customer pays (minus a factoring fee)
You are responsible for collecting invoice payments
Factor is responsible for collecting invoice payments
The first option is known as invoice factoring. With invoice factoring, the lender will pay the business a percentage of the invoice total. The lender will then collect the payment from the customer. Once the invoice has been paid, the remaining invoice total will be given to the business, less any fees and interest charged by the lender.
The second option is invoice discounting. The lender will loan the business an amount of money based on a percentage of the invoice (for example, 90% or 95% of the invoice total). Once the business collects payment from the customer, the loan is paid back, along with interest and fees.
Invoice financing is an easy way for businesses to resolve cash flow issues due to unpaid invoices. This option can be used by businesses with a low credit score, lack of collateral, or a limited time in operations. Thinking of applying for invoice financing? Learn more before getting started.
Up to $100,000
Starts at 4.66%
0.25%-1% per week
Possible $15 wire transfer fee (no ACH transfer fee)
12 or 24 weeks
13 weeks (91 days)
Recourse Or Non-Recourse
Notification Or Non-Notification
Personal Loans For Business
Traditional business loans can be difficult to obtain. Business and personal credit scores are taken into consideration, while documentation to prove the success of the business through incoming cash flow is required. The process can be even more difficult for new businesses and startups with a lack of business credit or a limited time in business.
Instead of getting a business loan, some business owners may opt to use their own personal credit score and income to qualify for a personal loan to use toward business expenses. Since it is a personal loan, the revenue of the business or its credit score will not be a factor in approving the loan.
|Business Loan||Personal Loan|
6 months - 25 years
1 - 7 years
4% - 99%+
5% - 36%
Possible origination fee, assessment fee, packaging fee, referral fee, guarantee fee, or others
Possible origination/closing fee, application fee, referral fee, or others
Possible personal guarantee, UCC-1 blanket lien, and/or specific collateral such as accounts receivable, real estate, or equipment
Personal loans for business use are available through banks and alternative lenders. An applicant will need to prove that they are able to pay the loan by submitting documentation such as pay stubs and bank statements.
Creditworthiness is also a factor. While there are options available for applicants with low credit scores, the best interest rates and terms are given to those with higher credit scores. Learn more about applying for a personal loan for business.
In some cases, collateral may be required in the form assets and property (including real estate or vehicles). Whether collateral is required and how much collateral is needed is based upon the amount of the loan, the borrower’s creditworthiness, and the lender’s policies.
Asset-Backed Business Loans
As we’ve established, lenders want to make sure they get paid before loaning money to borrowers. When revenue or income isn’t where it needs to be or a credit score is low or non-existent, the borrower seems like a big risk. However, sometimes lenders are willing to take a risk on these borrowers provided they have adequate collateral.
Asset-backed business loans are business loans that are backed by collateral. This simply means that the borrower pledges to put up assets in the event that the loan goes into default. If the borrower fails to pay, the lender has the right to seize the assets, which can then be sold to pay off the loan.
Assets and property, including real estate, equipment, and accounts receivables, can be used as collateral. Typically, business assets are used as collateral, but in some cases, personal real estate and assets may be used.
These loans are available through banks and alternative lenders. The amount of collateral needed to secure the loan is dependent upon the amount borrowed and creditworthiness. The full amount of the loan will generally need to be collateralized.
Business Credit Cards
Many businesses have business credit cards, and it’s easy to see why. Business credit cards allow a business owner to have access to funds on-demand, the application process is typically quite easy, and even borrowers with lower credit scores can get approved. Some credit cards even come with rewards, such as cash back bonuses or airline miles.
Chase Ink Business Preferred
18.24% - 23.24%, Variable
Business credit cards are available through many banks and financial institutions and can be used just like personal credit cards. Multiple draws can be taken up to the amount of the maximum credit limit. Borrowers pay back the balance plus interest that is applied to the used funds.
With so many credit card options, it’s easy for a business to qualify for one, even when the business has lower revenues or credit scores. Some borrowers may have lower credit limits and higher interest rates, while others may need to pay a security deposit.
Businesses that opt to use credit cards should always keep their balances as low as possible, as a high credit utilization can have a negative impact on credit. In order to avoid paying interest month after month, business credit cards should be paid down or the balance completely paid off as quickly as possible.
Do you have excellent personal credit, even though your business is considered high-risk? Check out these 0% interest rate business credit cards.
|Credit Card||0% Introductory Period||Next Steps|
|American Express Blue Business Plus||0% APR on purchases and balance transfers for the first 12 months||Compare|
|Chase Ink Business Unlimited||0% APR on purchases for the first 12 months||Compare|
|American Express Blue Business Cash||0% APR on purchases and balance transfers for the first 12 months||Compare|
|Capital One Spark Cash Select For Business||0% APR on purchases for the first 9 months||Compare|
|Bank of America Business Advantage Cash Rewards Mastercard||0% APR on purchases for the first 9 billing cycles||Compare|
Every business faces financial challenges which are made even more difficult when the business is seen as high-risk by lenders. However, there are financing options open to these high-risk businesses, whether they’re in an unstable industry or are just building up their credit and reputation.
Before accepting any offer, don’t forget to evaluate the full cost of the loan. A loan should only be used to help the business, not drag it into debt. Shopping around for offers and weighing out the pros and cons for each type of financing is a critical step before signing on the dotted line. Responsible borrowing — and making payments as scheduled each month — is the best way for businesses to receive more favorable loan options in the future.