Table of Contents
- What Are High Risk Business Loans?
- How Do High Risk Commercial Lenders Offset Risk?
- High Risk Small Business Loans: Your Top 3 Options
- Applying for High Risk Small Business Loans Through Fast Capital 360
In today’s marketplace, small business owners have more funding options than ever, thanks to alternative lenders. By considering a broader set of data points, alternative high risk commercial lenders have redefined what “fundable” looks like.
There are many reasons why business lenders classify candidates applying for financing as “high risk.” The most obvious of which is a bad credit score, but there are other considerations too.
Whatever the reason, a “high risk” label can prove problematic when trying to obtain a business loan. But that doesn’t mean you’re unfundable.
Let’s explore what qualifies as a high risk business loan as well as the best financing options available for high risk borrowers.
What Are High Risk Business Loans?
High risk business loans are loans that lenders extend to applicants with subpar qualifications, such as poor credit, no collateral and low revenue. In these cases, the lender assumes more risk working with this individual or entity.
For example, an applicant with the following qualities might have difficulty securing a loan for a small business through conventional means:
Low Personal Credit Score
When assessing applications, lenders will review the business owners’ personal finances, including their credit scores. If you have an insufficient credit history or bad credit (a FICO score of 580 or less), your business loan application will likely be flagged as “high risk” by lenders.
Low Annual Revenue
A business’s annual revenue is a reliable indicator of creditworthiness. Simply put, if your business is generating consistent income, you’re more likely to meet debt obligations. As such, many lenders set strict minimum annual revenue requirements. If your business falls below these thresholds, you’ll likely be considered a high risk applicant.
Limited Business History
If your business has been in operation for less than 2 years, many lenders will consider your business too risky to invest in, as you lack the track record to prove profitability.
Lenders might label a small business owner “high risk” if the industry they conduct business in is unpredictable. Retailers, restaurants and manufacturers are a few examples. If a company stands a risk of defaulting as a result of factors that are outside of its control, it poses a liability to lenders.
How Do High Risk Commercial Lenders Offset Risk?
Alternative high risk commercial lenders offset risk by using additional data points and advanced algorithms to further evaluate a company’s creditworthiness. (Conventional financial institutions, on the other hand, rely heavily on the criteria previously mentioned.)
For loans that are high risk, lenders take into account additional factors such as bank account activity, earnings, deposits and payment histories, among other criteria.
Armed with this information, alternative lenders make data-driven decisions as to who they will and won’t lend to. As such, many high risk business owners now have viable capital options that weren’t available in previous years. However, this access to financing comes at a cost.
Generally, recipients of high risk business loans incur higher interest rates, smaller loan amounts and shorter—and more frequent—repayment terms. These measures are taken to reduce the chance of default and protect high risk commercial lender investments.
High Risk Small Business Loans: Your Top 3 Options
While business loans and types of financing differ from high risk commercial lender to lender, there are a few go-to offerings suitable for business owners working to improve their credit or build a history. What’s more, high risk commercial lenders have looser funding requirements, which can help a borrower who’s been rejected by a conventional lender.
What types of business loans fall under the high risk classification?
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. When you enter into an agreement with an MCA lender, you receive a sum of cash in exchange for a percentage of your future sales. A lender will review your small business’s deposit and cash-flow statements to determine how much money your company is eligible to receive.
The advance is then repaid through daily or weekly debits from your business’s bank account. These remittances are fixed and take place over a set term, usually ranging from 3 to 18 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 1.30. 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 6.
Because high risk merchant cash advances are based on your business’s overall sales, your credit score, history and time in business are less of deciding factors. For this reason, they are a good fit for many high risk business owners.
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
As its name suggests, a short-term high risk business loan functions 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 less. 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. Invoice Financing
Invoice financing converts outstanding invoices into immediate cash for your small business. Terms vary by lender, but in general, an invoice financing company will advance businesses up to 80%-90% of the accounts receivable 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.
Unlike other financing options, the creditworthiness of your business is less of an approval factor; however, your customers’ creditworthiness is essential. For this reason, invoice 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+
Applying for High Risk Small Business Loans Through Fast Capital 360
Few business owners hit the ground running. Companies often go through some trials and tribulations before they find the right formula for success. In the process, it isn’t uncommon for your credit score to take a hit.
But if other financial indicators point to a brighter future, there are funding options out there—and we’re here to help you uncover them. You can apply for high risk small business funding in 3 simple steps:
Step 1: Apply in Minutes
Our online application is quick, easy and only asks for basic business information. Most users complete an application in a few minutes.
Step 2: Qualify in Hours
After you submit your application, one of our experienced business advisors will reach out to you in as little as 1 hour to discuss the financing options your business qualifies for.
Step 3: Next-Day Funding
Once you select your funding program, your funds could be wired to your company bank account the next business day.
If conventional lenders are giving your company a hard time with high risk small business loans, it isn’t the end of the road. Apply now for unsecured business funding with Fast Capital 360 and you could have the capital your business needs to grow in as little as 24 hours.