Business lenders often categorize financing applications as high risk for several reasons. One primary factor is a poor credit score, though there are additional considerations to account for.
Being labeled “high risk” can complicate securing a business loan, but it doesn’t mean funding is impossible. In today’s market, alternative commercial lenders assessing high risk loans look beyond traditional metrics to redefine fundability.
This article delves into the criteria for high risk business loans and identifies optimal loans and financing choices accessible to high risk clients.
What Are High Risk Loans?
High risk business loans are extended to applicants with inadequate qualifications, such as poor credit, lack of collateral, and low revenue. In such instances, lenders take on greater risk when engaging with these individuals or entities.
Let’s examine each factor that contributes to the classification of a business loan as high risk.
Low Personal Credit Score
When evaluating applications, lenders scrutinize the personal finances of business owners, particularly their credit scores. If your credit history is inadequate or if you have a poor credit score—typically defined as a FICO score of 580 or lower—lenders may classify your business loan application as “high risk.”
Low Annual Revenue
The annual revenue of a business serves as a dependable gauge of its creditworthiness. Consistent income generation enhances the likelihood of fulfilling debt obligations. Consequently, numerous lenders establish rigorous minimum annual revenue criteria. Falling short of these benchmarks may lead to your classification as a high-risk applicant.
Limited Business History
If your business has been operating for fewer than 2 years, you’ll lack the track record to prove profitability; thus, many lenders could consider it too risky to invest in your business.
Unstable Industry
If your industry, such as retail or restaurants, is known for unpredictability, your business might fall into the category of “high risk business loans.” Industries where companies face potential default risks due to external factors can present liabilities to lenders.
How Do High Risk Commercial Lenders Offset Risk?
Alternative high risk commercial lenders mitigate risk by leveraging additional data points and advanced algorithms to deepen their assessment of a company’s creditworthiness.
For high risk loans, lenders analyze supplementary factors such as bank account activity, earnings, deposits, and payment histories, among other criteria.
Armed with this detailed information, alternative lenders can make informed, data-driven decisions about applicants. Consequently, many high risk business owners now have access to capital options that were previously unavailable.
However, it’s important to note that high risk business loans often come with higher interest rates, smaller loan amounts, and shorter—and more frequent—repayment terms. These measures are implemented by lenders to minimize the risk of default and safeguard their investments.
High Risk Business Loans: Your Top 4 Options
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.
| Financing Type | Details |
| 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 choice among high risk borrowers is a merchant cash advance (MCA), which differs from a traditional loan as it involves an advance rather than a loan. With an MCA, high risk lenders provide a lump sum of cash in exchange for a percentage of your future sales.
Repayment occurs through daily or weekly debits from your business’s bank account, fixed over a specified term typically ranging from 3 to 24 months.
Fees for high risk cash advances are determined using a factor rate, expressed as a decimal rather than a percentage, typically ranging from 1.10 to 1.50. This factor rate calculates the MCA fee, a fixed percentage of the original advance amount, regardless of the repayment term. Consequently, the cost of MCA financing remains constant, whether the advance is paid off in 3 months or 6.
When considering approval for a high risk cash advance, lenders evaluate your small business’s deposit and cash-flow statements to determine the eligible funding amount. Due to less emphasis on factors like credit score, credit history, and time in business, MCAs are often suitable for many high risk business owners.
Do you qualify? iBusinessLender’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 operate similarly to abbreviated term loans. Your business receives a lump sum of cash that must be repaid, along with interest, over a predetermined period. The key distinction lies in the quicker repayment schedule of short-term loans compared to traditional term loans.
Typically, short-term high risk business loans mature within 18 months or less. This accelerated repayment timeline minimizes the risk of default, leading to less stringent lender criteria.
Do you qualify? iBusinessLender’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, transforms outstanding invoices into immediate cash for your small business. High risk commercial lenders have varying terms, but generally, an invoice financing company will advance businesses up to 80%-90% of the invoices’ total value. They deduct an overall processing fee and a weekly factor from the reserved amount until the invoice is fully paid. The remaining balance is then released to the borrower as a rebate.
Approval for accounts receivable financing depends less on your business’s creditworthiness and more on the creditworthiness of your customers. This makes it a viable option for high risk businesses operating in the business-to-business sector with outstanding receivables on hand.
Do you qualify? iBusinessLender’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’re looking to acquire a vehicle or essential machinery for your business but face challenges securing traditional loans due to being classified as high risk, equipment financing offers a reliable solution. With equipment financing, a lender can finance up to 100% of the equipment’s cost, using the equipment as collateral to secure the funding. This arrangement lowers the lender’s risk since they can reclaim the equipment in the event of a loan default.
Do you qualify? iBusinessLender’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
Consider exploring the following alternatives in addition to the primary four options for high risk loans:
Personal Loan: If your personal credit score surpasses your business credit score, opting for a personal loan might be more advantageous than applying for high risk business loans. For new business ventures, a personal loan could also serve as an alternative to high risk small business startup loans. However, personal loan amounts tend to be lower than business financing; six-figure loans are typically approved for individuals with outstanding personal credit scores and substantial income.
Co-signer: You may increase your chances of loan approval by having someone with a higher credit score and stronger credit history co-sign with you. This reduces the lender’s risk of default. Keep in mind that your repayment performance directly affects your co-signer’s credit score, so ensure you can fulfill the terms of your agreement to avoid straining any professional or personal relationships.
Applying for High Risk Small Business Loans Through iBusinessLender
Many business owners face challenges before achieving success. It’s not unusual for credit scores to suffer during this journey.
However, if other financial indicators show promise, funding options are available. We, along with other reputable high risk lenders, are here to assist you in discovering them. Applying for high risk small business funding is straightforward, typically involving three 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 an hour to discuss the financing options your business qualifies for.
Step 3: Next-Day Funding
Once you choose your funding program, your funds could be deposited into your company’s bank account as soon as the next business day.
If traditional lenders are making it difficult to secure high risk small business loans, don’t despair. Apply now for unsecured business funding with iBusinessLender and access the capital your business needs to thrive.
