When a business owner is labeled “high risk” by lenders, many financing avenues are closed to them. But there are lenders out there who will work with high-risk borrowers. Alternative loan options, like merchant cash advances and short-term loans, are accessible to small business owners with less than stellar financial qualifications.

Through these financing options, small business owners can gain access to the capital they need to sustain and grow their businesses, while simultaneously improving their credit for a brighter future.  

In the content that follows, we’ll cover what makes a borrower “high risk,” and what lending options are available to this type of small business owner.

What Makes an Applicant a High-Risk Borrower?

A high-risk borrower is an applicant who falls outside the parameters of most lender qualification requirements. This could mean they have a bad credit score, little-to-no business credit history or low revenue. Businesses that have been in operation for less than two years are also considered high risk since they have yet to prove they can consistently generate and sustain sales.

Can I Get a High-Risk Loan With…

Bad Credit?

One of the more common reasons a borrower is considered high risk is a low credit score. Unpaid medical bills, late payments to creditors and high-credit utilization can all contribute to a lower score. Even having too many inquiries into your credit history can drop a score by several points. In some cases, a lack of credit history can stand out as a negative to lenders.

Low Revenue?

Businesses with low revenues will encounter problems when applying for a loan. Lenders want to see that a company is bringing in enough money to cover all of its debts, and a low annual revenue calls the viability of this into question.

Minimal Business History?

Businesses less than two years old are often deemed riskier by lenders, as they don’t have the track record to prove their profitability. A seasoned business owner can present years of income tax returns and profit and loss statements to show its stability. But a startup or green business can’t prove their creditworthiness beyond a solid business plan or profit projections. For many lenders, this is not enough of an assurance to extend credit.  

In an Unstable Industry?

Lenders may label a small business owner “high risk” if the industry they conduct business in is unstable. Retailers, restaurateurs and manufacturers are just a few examples. In short, if a company stands a risk of defaulting as a result of external factors that are outside of their control, it poses a legitimate threat to lenders.

What Types of Loans are Accessible to High-Risk Lenders?

The harsh reality for high-risk businesses is that a traditional loan from a bank or credit union is likely not in the cards. But that doesn’t mean there aren’t lending options out there. Alternative lenders—also referred to as high-risk lenders—extend financing to a broader range of small business owners, including high-risk applicants.

Before agreeing to a high-risk loan, it’s important to understand how this classification affects rates and terms to ensure that the financing decision is a wise one that benefits your business.

Higher Rates, Shorter Terms

As a lender is taking on more risk working with a “high-risk” business, you are generally going to see higher APRs, smaller loan amounts and shorter repayments terms on any high-risk business loan you qualify for. It’s critical to evaluate the full cost of borrowing to ensure your operating cash flow can withstand the daily, weekly or monthly loan payments. After all, a loan should be used to help your business, not drag it deeper into debt.  

Here are the business loan types often referred to as “high risk.”

Merchant Cash Advance (MCA)

A merchant cash advance is a type of financing that is based on your business’s projected sales. A lender will advance a sum of money to your business, and the advance and fees are paid back through daily or weekly ACH withdrawals.

Because this method of financing is based on sales, credit score and time in business are less of deciding factors when it comes to approval. A lender will evaluate the cash flow of a business to determine how much money the company is eligible to receive, as well as the rate and terms.

Merchant cash advance fees are calculated using a “factor rate.” Factor rates are expressed as a decimal figure rather than a percentage, and typically range from 1.10 to 1.30. The factor rate is used to calculate the MCA fee, which is a percentage of the original advance amount, not a fee based on depreciating principal. For this reason, the cost of MCA financing remains the same, whether you pay off an advance in 3 months or six.

Short-term Business Loan

Similar in structure to a term loan, short-term loans provide a condensed, often more expensive alternative to the low APR, 5-year-plus loans we’re all familiar with. You receive a lump sum up front and the lender adds their fees and interest. Then, you repay the new amount over an agreed-upon term (18 months or less).

Generally speaking, the minimum qualifications for short-term loans are at least 1 year of business history, a  540+ credit score and a minimum annual revenue of $75,000. These qualification minimums are less lenient than those of the merchant cash advance. Nonetheless, they’re still achievable for a large segment of small businesses.

When Is a High-Risk Business Loan Right for My Business?

Now that we’ve covered what makes a borrower high risk and what loan types are accessible to this classification of business owner, it’s time to decide if this type of loan is right for you.

Just because your business has a better chance of being approved by a high-risk lender doesn’t mean you should jump right into a contract. These types of loans aren’t a fit for every business. So if you’re considering applying for one, there are a few questions you should ask yourself before doing so:

  • Do you qualify for a funding alternative?
  • Do you need funding as fast as possible?
  • Do you have time to build your business’s qualifications

High-risk business loans offer less-qualified applicants the funds they need to continue operating their business and pursue growth opportunities—but they are expensive. If your business has other options with lenders who don’t view your company as a high risk, you may find better rates with them.

Similarly, if you don’t have a pressing need for funding, it’s best to be patient. There are ways to build your qualifications and shed the “high risk” label. Working to improve your eligibility can increase your chances of being approved for better rates.

On the other hand, these types of loans are a tool that business owners can use when they’re guaranteed to receive a sum of money, but would benefit from having it in advance. An excellent example of this would be your business receiving a large order request that requires additional capital. A high-risk business loan can get you the funds you need to fill their order until you receive their full payment.

Applying for High-Risk Business Loans

Alternative funding is easy to apply for and can get your business the funds it needs to grow, quickly. High-risk business lenders offer online applications that are straightforward and only take a few moments of your time to complete.

When applying, you will need to provide basic business information and documentation. Some of the items you’ll need are:

As we mentioned earlier, alternative lenders offer a much faster approval process than banks. Applicants typically receive approval in as little as 60 minutes. Once a business is approved for funding, funds can be wired to your account as soon as the following business day.

If you’re considering applying for high-risk business funding, but have questions about which options are available, Fast Capital 360 can help. Before making a decision, give us a call today at (800) 735-6107, and one of our Business Advisors will be happy to guide your business in the right direction.

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