While financing offerings differ among high risk loan lenders, there are a few go-to options suitable for business owners working to improve their credit or build a history.
Here are 4 types of high risk business loans and financing.
|High Risk Merchant Cash Advances
||Lenders advance funding in exchange for a percentage of future sales
|Short-Term High Risk Business Loans
||Borrowers receive funding to be repaid over an 18-month maximum term
|Accounts Receivable Financing
||Lenders advance businesses a percentage of their outstanding invoices. Client’s creditworthiness is key for this financing
|High Risk Equipment Financing
||Lenders can finance a portion or all of an equipment purchase; the equipment serves as collateral and reduces lender risk.
1. High Risk Merchant Cash Advances
A popular option for high risk borrowers is a merchant cash advance (MCA), which isn’t a loan but an advance. With an MCA, high risk lenders advance you a sum of cash in exchange for a percentage of your future sales.
The advance is then repaid through daily or weekly debits from your business’s bank account. These remittances are fixed over a set term, usually ranging from 3 to 24 months.
High risk cash advance fees are calculated using a factor rate. Factor rates are expressed as decimal figures rather than percentages and typically range from 1.10 to 1.50. The factor rate is used to calculate the MCA fee, 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 6.
Before approving a high risk cash advance, a lender will review your small business’s deposit and cash-flow statements to determine how much money you’re eligible to receive. Because your credit score, history and time in business are less of deciding factors, MCAs are a good fit for many high risk business owners.
Related: Is a Merchant Cash Advance Right for Your Business?
Do you qualify? Fast Capital 360’s minimum MCA requirements:
- Time in Business: 4+ months
- Annual Revenue: $100,000+
- Credit Score: 500+
2. Short-Term High Risk Business Loans
Short-term high risk business loans function as a condensed version of a term loan. Your business will receive a lump sum of cash that it will pay off, plus interest, over a set term. And herein lies the difference: you pay off short-term loans more quickly than term loans.
In general, short-term high risk business loans reach maturity in 18 months or fewer. This shortened payoff structure reduces the risk of default and thus results in lower lender requirements.
Do you qualify? Fast Capital 360’s minimum short-term loan requirements:
- Time in Business: 1 year or more
- Annual Revenue: $75,000+
- Credit Score: 540+
3. Accounts Receivable Financing
Accounts receivable financing—also known as invoice factoring or financing —converts outstanding invoices into immediate cash for your small business. High risk commercial lenders’ terms vary, but an invoice financing company will generally advance businesses up to 80%-90% of the invoices’ value, deducting an overall processing fee and a weekly factor from the reserved portion until the invoice is paid in full. The remaining balance is then remitted to the borrower in the form of a rebate.
While the creditworthiness of your business is less of an approval factor, your customers’ creditworthiness is. For this reason, accounts receivable financing might be a good option for your high risk business, as long as you operate in the business-to-business space and have outstanding receivables on the books.
Do you qualify? Fast Capital 360’s minimum invoice financing requirements:
- Time in Business: 1 year or more
- Annual Revenue: $150,000+
- Credit Score: 600+
4. High Risk Equipment Financing
If you need to purchase a vehicle or key piece of machinery for your business and some lenders have deemed you a high risk borrower, equipment financing is a solid alternative to achieve your goals. With equipment financing, a lender will finance up to 100% of the equipment you’re buying, and the equipment itself serves as collateral to secure your funding. This reduces the risk for the lender because they can recoup the equipment in case of loan default.
Do you qualify? Fast Capital 360’s minimum equipment financing requirements:
- 2 years or more in business
- $160,000 or more in annual revenue
- 620 or higher credit score
Other Loans and Financing for High Risk Clients
You can investigate the following alternatives in addition to the primary 4 high risk loan options.
Personal Loan: If your personal credit score is higher than your business credit score, a personal loan could be preferable to applying for high risk business loans for poor credit. If you’re just starting your business venture, a personal loan could also be an alternative to high risk small business startup loans. However, these funding amounts are usually lower than business financing; 6-figure loans are usually approved for people with excellent personal credit scores and high income.
Co-signer: Lenders are more likely to approve your application if someone with a higher credit score and stronger credit history can co-sign with you. This removes some of the default risk. Note that your repayments impact your co-signer’s credit score, so ensure you can meet the terms of your agreement and won’t strain any professional or personal relationships.