Table of Contents
- What Is a High Risk Business Loan?
- How Do High Risk Lenders Off-Set Risk?
- What Loan Options Are Open to You as a High Risk Borrower?
- Applying for a Business Loan as a High Risk Borrower Through Fast Capital 360
- Small Business Funding in 3 Simple Steps
There are many reasons why business lenders classify candidates applying for financing as “high risk.” The most obvious of which is a low credit score. But other considerations come into play, too.
It could be that you operate in what lenders perceive as a “risky” industry. Or perhaps your business is subject to seasonal peaks and lulls.
Whatever the reason, a “high risk” label can prove problematic when trying to obtain a loan to run your business and grow. But that doesn’t mean you’re unfundable.
In today’s marketplace, small business owners have more options than ever before thanks to alternative lenders. By taking into consideration a broader set of data points, alternative lenders have redefined what “fundable” looks like.
To learn what options are open to you as a high risk borrower, read on.
What Is a High Risk Business Loan?
What makes a business loan high risk? A loan is considered “high risk” when it’s extended to an applicant with sub-par qualifications. As the lender is assuming more risk working with this individual or entity, the loan dons the “high risk” label.
For example, an applicant with the following attributes might have trouble securing a loan for their small business through traditional means:
Low Personal Credit Score
When assessing an application, lenders will review the business owner’s personal finances, including their credit score. If you have insufficient credit history or bad credit (FICO® score of 580 or less), you 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 bringing in consistent income, you’re more likely to meet debt obligations. As such, many lenders set strict minimum annual revenue requirements. Should your business fall 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 two years, many lenders will consider your business too risky to invest in, as you lack the track record to prove profitability.
Lenders may label a small business owner “high risk” if the industry they conduct business in is unpredictable. 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 liability to lenders.
How Do High Risk Lenders Off-Set Risk?
While traditional financial institutions rely heavily on the criteria mentioned above, alternative lenders use additional data points and advanced algorithms to evaluate a business’s creditworthiness. Factors such as bank account activity, earnings deposits and payment histories are taken into consideration, among other criteria.
Armed with this insight, alternative lenders make data-driven decisions as to who they will and will not lend to. As such, many high risk business owners now have viable capital options when in previous years, they did not—though they will have to pay for this access.
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 lender investments.
What Loan Options Are Open to You as a High Risk Borrower?
What types of business loans fall under the high risk classification? While the answer differs from lender to lender, there are a few go-to offerings suitable for business owners working to improve their credit or build a history.
Merchant Cash Advances (MCAs)
An MCA is not 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. To assess funding worthiness, 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 occur over a set term, usually ranging from 3 to 18 months.
Merchant 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 six.
Because 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 Merchant Cash Advance requirements:
- Time in Business: 6+ months
- Annual Revenue: $75,000+
- Credit Score: 500+
Short-Term Business Loans
As its name suggests, a short-term loan functions as a condensed version of a traditional 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 much quicker than traditional term loans.
Generally, short-term 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+ Years
- Annual Revenue: $75,000+
- Credit Score: 540+
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 percent 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. What’s essential in invoice financing is the creditworthiness of your customers. For this reason, invoice financing may be a good option for your high risk business, as long as you operate in the B2B space and have outstanding receivables on the books.
Do you qualify? Fast Capital 360’s minimum Invoice Financing requirements:
- Time in Business: 1+ Year(s)
- Annual Revenue: $150,000+
- Credit Score: 600+
Applying for a Business Loan as a High Risk Borrower Through Fast Capital 360
Few business owners hit the ground running. Companies often go through various trials and tribulations before they find the right formula for success. In the process, it’s not 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.
Apply for 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 their application in just a few minutes.
Step 2: Qualify in Hours
Following the submission of your application, one of our experienced business advisors will reach out to you in as little as 60 minutes to go over the options your business qualifies for.
Step 3: Next-Day Funding
Once you pick your funding program, your funds could be wired to your company bank account the following business day.
If traditional lenders are giving your company a hard time with high-risk small business loans, it’s not 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.