What Are High-Risk Business Loans & Where Do I Get One?

Startups and new businesses are considered riskier borrowers because they don’t yet have a proven track record. These businesses haven’t yet proven that they are profitable and don’t have the paperwork to verify their success.

Startups and new businesses will have to prove themselves to lenders in other ways, like coming up with a detailed business plan and future profit projections.

Lenders want to see that a business is making enough money to cover all of its debts in addition to a new loan payment. Because of this, businesses with low revenues will encounter problems when applying for a loan.

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 your future revenue will be enough to pay back a loan as agreed.

For most lenders, personal credit 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 — and more favorable rates and terms.

Old medical bills, late payments, high credit card utilization, and multiple credit inquiries contribute to lower credit scores. A lack of credit history may also be viewed similarly to bad credit by lenders.

Whether the industry itself is dangerous or the business itself is at risk of becoming obsolete, lenders consider industry factors when approving loans.

If the future of the business could be in question, this throws up a red flag for lenders.

Short-term loans are loans that are paid off in a short period of time – usually one year or less. Interest rates are often higher than other loans (such as long-term installment loans).

The trade-off is that short-term loans have less stringent requirements, including lower credit score, revenue, and time in business requirements. The application process is generally quick and easy and funds are available quickly — typically hitting your account in just a few days or less.

Instead of taking monthly payments and using collateral to back up the loan, a merchant cash advance is paid back through a percentage of future credit card sales. With some MCAs, a fixed payment is made through weekly or daily ACH withdrawals.

Because this method of financing is based on sales, credit score and time in business are typically not as important as they are with other loans. While this opens up funding opportunities for new businesses and bad-credit borrowers, interest rates can be high, with some annual interest rates soaring into the triple digits.

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.

There are two invoice financing options to consider. With invoice factoring, the lender pays the business a percentage of the invoice total. After collecting payment from the customer, the remaining invoice total is given to the business, less any fees and interest charged by the lender.

The second option is invoice discounting. The lender gives the business a loan based on a percentage of the invoice. Once the business collects payment from the customer, the loan is paid back, along with interest and fees.

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 for business.

Since it is a personal loan, the revenue of the business or its credit score will not be a factor in approving the loan. This is ideal for new businesses or borrowers that haven’t established a business credit score.

Asset-backed business loans are business loans that are backed by collateral. 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.

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.

High-risk business loans are loans that are provided to businesses that are seen as risky by the lender. This could be because the business is in a specific industry, the borrower has low credit, or the business is brand new. High-risk business loans often have shorter repayment terms and higher interest rates and fees than loans that are given to low-risk borrowers.

It is possible to get a business loan with bad credit. However, you should be aware that these loans are more difficult to find and often come with higher interest rates, shorter term lengths, and more frequent repayments (i.e., weekly or daily).

Banks typically do not offer high-risk business loans. Credit unions may be more willing to work with high-risk businesses (such as those with lower personal credit scores) if you want to go a more traditional route. In most cases, using an online alternative lender will give the best odds of approval.

The best high-risk business loan is one that provides you with the amount of capital you need with terms and repayments that work for your business. Depending on your situation, this may mean an installment loan, line of credit, invoice financing, or business credit card.