High-risk loans are just that, high risk, meaning that the profile of the business presents issues that make it more difficult to provide a business loan for the business by the credit provider. Remember, the lender wants to lend you money to your business and has to make an informed calculated risk to do so.
What Defines a High-Risk Business Loan?
When defining a high-risk business loan, you have to look at the factors that are reviewed by business lenders to make an informed credit decision in business lending.
Let’s take a deep dive into those factors and breakdown their importance in the business credit decision.
What Are the Considerations for a High-Risk Business Loan?
Personal & Business Credit
Personal credit of the business owner plays a vital role in the credit decision process. The track record of the business owner to manage their personal credit has a direct correlation to how they will manage finances with their business. Business credit is also evaluated for liens, judgments, and State or Federal obligations that may interfere with the business lenders’ ability to collect.
The amount of revenue, as well as the frequency of deposits, helps business loan underwriters determine risk as well. If you are a business that deposits only four times per month may pose a greater risk than a business that deposit’s every day as a restaurant. The minimum amount of revenue required to keep a business open also can present a risk if the business deposits a low amount overall on a monthly basis, depending on the industry, which may be viewed as
Just because a business has a lot of revenue coming in. It does not tell the full story. If the expenses are greater than the deposits it’s going to be hard for a small business to survive, no matter if it’s a million dollars or $15,000 in deposits in revenue, the expenses out the way that, there’s going to be problems, that’s just common sense.
Time in Business
The longer a business is open, the more of a track record can be evaluated. It doesn’t matter if you owned a prior business when it comes to business lending. What matters is how long you have been operating your current business under current conditions.
Not all Industries are created equal, and they have their unique ways of operating. Some industries are inherently more risky than others. Through data collection and analysis of delinquency and defaults, business credit underwriters can determine what those high-risk business industries are and set programs and terms that mitigate risk. For example, restaurants will not be viewed the same as a manufacturer as they operate completely differently and have different risks.
Business Bank Statement Health
Cash flow is king in business lending. The first place business lenders look at the most recent business bank statements to gauge cash flow and any stresses in the business. Areas that business underwriters look at include consistency of deposits from sales, number of deposits, average daily balances, available cash reserves compared to monthly expenses (debits). These recent bank statement ques tell a lot about the current health of the business and the risk associated with business lending.
The health of a business is evaluated by looking at financial trends as well as current profit & loss and balance sheet. Multiple year business tax returns, profit & loss, balance sheet, accounts receivable, and payable reports can tell a full picture that allows business lending underwriters to evaluate risk.
How Do Lenders Offset the Risk of Offering High-Risk Business Loans?
To mitigate the risks, business lenders use a variety of options to still be able to lend but control and identify risks. Clearly, it is a delicate balance that business lenders continually monitor against current economic conditions. Obviously, business lenders are in the business to make loans, but if they take too much risk, they could fail, and if they don’t take enough risk, then they can’t fund businesses either. The best business lenders are able to take those identified risks and still provide a product that has less chance of default with saying no.
Top 4 Options for High-Risk Small Business Loans
Short Term Business Loans for High Risk
Short term business loans reduce risk by shortening the length of time to repay and also limiting the amount of loan that a business can acquire creating payments that are affordable but protected against risk through a time of repayment and frequency of payments. Short term business loans are loans with a fixed amount “lump sum” provided upfront, with a fixed payback amount over a fixed term of time typically 6 to 18 months.
Short term business loans, unlike traditional business loans, don’t typically require tax returns or other financial statements, just bank statements and a one-page application. Rates are based on factor costs and not principal & interest and cost more than traditional business loans. The good news is these products require very little paperwork and credit requirements are much more forgiving than traditional business loans.
Rates: 1.10 to 1.45 Factor Rates
Terms: 6 months to 18 months
Fees: Origination Fees 1%-5%
Payments: Monthly, Bi-Weekly, Weekly, and in some cases daily Monday-Friday to reduce risk
Credit Standards: All credit accepted from Poor to Excellent
Special Features: Fast Process. Approval to funding can be same day to 24 hours
Documentation: Reduced or low Doc. 1- page application and 3 months bank statements
Mitigating Risk: Reduces length of time to repay to mitigate risk
Benefits and Best Uses of Short Term Business Loans
Short term business financing has higher rates, shorter terms, and fees but can come into the rescue the business that is in need of the money now and can’t get approved for more traditional business loan products does to financial statements documentation. There are no restrictions for the use of money with most short term business loans.
Merchant Cash Advance for High Risk
Merchant Cash Advances, also known as a Purchase of Future Sales Agreements, advance a “lump sum” of money upfront to a business owner with a discounted purchase price (also known as specified amount) to payback. The advance is repaid by taking a fixed percentage of future credit card sales batches until the payback amount is paid back in full, there is no term limit with advances as the fixed back percentage never changes. The time frame to pay back depends on the volumes of future credit card sales. It’s estimated that merchant cash advances are set up with expectations of being repaid in 6 to 18 months, but again it may be longer or shorter depending on future credit card sales.
Merchant cash advance reduces the risk in a different way than business loans through payment collection. Unlike business loans, merchant cash advance takes a percentage of current credit card sales at the point of sale, so merchant cash advance funders don’t need to rely on business owners making payments or bank statements that don’t have a balance to clear ACH payments.
The only documentation required for business funding is a one-page application, three months bank statements, and three months of merchant processing statements. No other financial statements required.
Rates: 1.15% up to 1.45% Factor Rates
Terms: No term limits estimated payback periods are 6 to 18 months
Fees: Typically 1% to 3% Origination Fees
Payments: Fixed percentage Splits from future credit card batches
Credit Standards: All credit types considered from Poor to Excellent
Documentation: Reduced, low Doc. 1-page application, 3 months bank statements, and 3 months merchant processing statements.
Mitigating Risk: Fixed percentage Splits from future credit card batches at point of sale reduces risk of missed payments.
Benefits and Best Uses of Merchant Cash Advance (MCAs)
Merchant cash advances do cost more than traditional bank financing with higher rates and fees but the flexibility of repayment, which is attached to the fixed percentage of future sales. This process really helps businesses that fluctuate in sales or are a seasonal business. You couple that with the limited documentation you provide, MCA’s really helps businesses that fluctuate in sales or are a seasonal business. Not all businesses are equal, and sometimes traditional business loan products are not an option for some. There are no limitations for the use of money and can be used for a variety of different purposes, but a majority of money is cash flow needs.
Business Cash Advance for High Risk
Business cash advances, also known as a Purchase of Future Sales Agreements, advance a fixed “lump sum” of money with a discounted purchase price, also known as a specified amount, to payback. The advance is repaid by taking a fixed percentage of future overall sales, which is different than a merchant cash advance, which takes a percentage of future credit card sales. Payments are collected by a fixed daily or weekly payment deducted from a business bank account, which is based on the fixed percentage of future sales.
After every month, if the fixed payments taken are more than the set future percentage of sales, than a refund back to the merchant can occur. This repayment continues until the payback amount is paid back in full. Therefore, there is no term limit with advances as the fixed payback percentage ever changes. The time frame to pay back depends on the volumes of future overall sales. This process mitigates risk by allowing the monthly collection of payments to be adjusted, unlike a short term business loan.
It’s estimated that business cash advances are set up with expectations of being repaid in 6 to 18 months, but again it may be longer or shorter depending on future credit card sales as the time period is not set in stone like a short term business loan. Documentation is limited to 1-page application and three months bank statements. No tax return is required.
Rates: 1.10% up to 1.45% Factor Rates
Terms: No term limits estimated payback periods are 6 to 18 months
Fees: Typically 1% to 3% Origination Fees
Payments: Fixed ACH payments are weekly or daily Monday-Friday
Credit Standards: All credit types from Poor to Excellent is considered
Documentation: Reduced or Low Documentation. 1-page Application, 3 months bank statements
Mitigating Risk: Recalculation of payments. The option of recalculating collected ACH payments against the set percentage of future sales deposits to be collected.
Benefits and Best Uses of Business Cash Advance
Business Cash Advances costs are higher than those of traditional financing, but when credit and documentation are an issue. A business cash advance can be a real lifesaver. There are no limitations for the use of money and can be used for a variety of different purposes, but a majority of the reasons are cash flow to help the business.
Invoice Financing for High Risk
Invoice financing, also known as “Invoice Factoring” or “Accounts Receivable Financing,” is a type of financing that allows business owners to get cash quickly from invoices that they would otherwise be waiting up to 90 days or more, depending on invoice terms, to receive payment from the customer.
This type of business financing allows you to get an advance of up to 95% percent of purchase orders or outstanding invoices from your customers. A finance company will advance a set amount of the unpaid invoice to the business owner and then collect directly from the client or customer for the unpaid portion. The credit approval is directed to the customer/client and not the business owner, so there is little documentation required other than an application, Accounts receivable report, and contact information of the companies you invoice on a regular basis.
Invoice financing mitigates risk by collecting unpaid invoices directly from the client/customers instead of allowing the business owner to payback. Invoice factors also look at the client/customer risk factors in making approval for invoice advances and will not extend an invoice advance beyond typical invoice terms of 30, 60, or 90 days, limiting exposure to clients not paying invoices and causing a financial loss for the invoice financing company. Invoice financing companies are monitoring daily invoice payments and work closely with customers and clients to detect any potential risk problems.
Rates: Factor Rates 1.50% to 2.75% of invoice amount advanced
Fees: Typically a monthly service fees of based on amount of invoices
Credit Standards: Credit of Business owner not needed. Companies that are invoiced will be credit vetted.
Documentation: Reduced or Low Doc. 1-page application, accounts receivable aging report, and clients contact information.
Mitigating Risk: Collection of invoice by finance company directly from clients. Time to payback the same as term on invoice of 30, 60 or 90 days. Monitors invoice payments daily.
Benefits and Best Uses of Invoice Financing
When traditional financing is not an option for a business, invoice factoring can provide money in a pinch and allow a business to continue to operate smoothly. The costs are low and require no credit check of the business owner and limited documentation. Invoice factoring is cash flow a lifesaver. There are no limitations as to the use of, but a majority of the reasons are cash flow to help the business.
What Are the Pros and Cons of a High-Risk Business Loan?
- Access to capital instead of being declined but traditional business loan options
- Speed-Processing times. Business funding’s are usually 1 day
- Reduced documentation compared to traditional business loans
- Rates may be higher than that of traditional loans
- Fees may cost more than traditional loans
- Terms may be shorter in duration
- May not offer some flexibility traditional business loans do
- Loan Amounts may be limited
Frequently Asked Questions
What are the Benefits of High-Risk Business Loans?
When you are turned down because of risk factors like credit, financial statements, time in business, industry, or any other risk factor, it’s great to know there are high-risk business funding available to help small business owners access capital.
Are High-Risk Business Loans difficult to obtain?
It is not difficult to find a high-risk business funding option, but keep in mind that banks don’t offer these high-risk products, so you have to go online to find companies that offer these products. Don’t worry, though; there are plenty of options for help accessing at AdvancePoint Capital.
Can I qualify for a High-Risk Business Loan if I have bad credit?
Yes, you can get approved for business funding with high-risk factors. Keep in mind the rates, costs, and terms may be affected by your risks and what can be offered to you.
Can I get a High-Risk Business Loan if I am a start-up business?
The short answer is no; you cannot get a start-up business loan if you are high risk. There is no way to mitigate the high risk of start-up business lending.
The Bottom Line: Advice, Tips, Warning’s about High-Risk Business Loans
All of the products mentioned provide funding to businesses with some type of risk mitigation to the business funder. These unique product structures provide small business owners to access the capital they may not otherwise get approved for.
In recommending high-risk products, you must realize that if business lenders deem you high risk, it’s for a reason. Just because these products exist doesn’t mean you should take one. Even more so than less risky businesses, the high-risk business owner must ask yourself the key questions you always must ask when getting a business loan for your business. What is my cost vs benefit analysis look like? Can I make more than it’s going to cost me for this money? What are the long term benefits of accessing this capital for my business?
If you ask the tough questions of yourself as the business owner and you are comfortable with your answers, then these products can be an excellent source to help your business grow!
How to Apply for High-Risk Business Loans?
AdvancePoint Capital offers an easy business loan experience. Our customers love the fast, streamlined process and high approval rates that come from working with us. All credit scores are considered.
Applying for a loan with AdvancePoint Capital is as simple as a 1, 2, 3, 4 process. Start with this online form, then fill out the short application page, wait a few hours for your approval, and then get your money!
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