Our goal at Lending Valley is to provide all small business owners access to the best loans possible for their business. You can rest assured we will get you the best rates in the market!
High risk business loans are a variety of loan products that help business owners with bad credit or low revenue get a loan.
Getting qualified for a business loan can be a long, tedious and frustrating process for both established business owners and entrepreneurs.
Applications involve a ton of paperwork and there are a lot of strict requirements that you are expected to meet. Finding the right loan is always going to be a challenge, but if you have poor credit or your business is still in the start-up stages it can be a particularly difficult ordeal.
Fret not, however. Lenders are very aware of the fact that new business owners and those with poor credit are the ones who might need additional funding the most.
That is why many lenders now offer options for ‘high-risk borrowers’. With these high risk business loan options, business owners can acquire the much needed helping hand, while also building their credit profile and history which will put them in better steed for financing in the future.
The only reason why lenders offer financing to high risk businesses and individuals is profit. For every penny that they lend, they want to early a little bit extra back. For this reason, lenders only want to work with individuals or businesses that can prove that they will be able to pay the funds back, and pay them on time.
Your honesty and word means nothing in the world of money lending. What banks and investors need is solid written documentation that proves that you have a good track record of paying back money and that you have enough money coming in to do so again.
The less documentation that you have, the more risky you appear in the eyes of lenders.
There are many factors that can put businesses in the risky pile, and there are several considerations lender will look into before even thinking about filling an approval.
Below are 4 business characteristics; if your business fits the bill of one or more, you will most likely be deemed high risk and will find it more challenging to acquire business financing.
You might be the next best thing in business, but all you need is a premises in order to conduct your work. Perhaps you have a new invention set to change the world and all you need is the funding to get things moving to bring your creation to life.
Confidence could be sky-high, your planning perfect and your business plan bulletproof – but in the eyes of a lender, you are just another entrepreneur with no credit history and a risky candidate you lend money too.
Any start-up or new business without a proven track record is going to be considered riskier by lenders.
New businesses don’t have a reputation, their books are thin, and their business trading projections will rarely have any paperwork backing.
On the other hand, established business and entrepreneurs with a proven track record will have folders full of bank statements, spreadsheets explaining their profit and loss statements, and many years of tax returns proving their profitability, which makes it far easier to verify success and secure funding
New businesses are not completely out of the question when it comes to securing funding, it does mean, however, that they will have to prove and demonstrate to lenders their merits in other ways.
When lenders offer financing to a business, they will always want to see that they are clearing enough money to repay all of its current debts in addition to new ones.
This is normally not a problem for established businesses with high turn over, as they will usually have plenty of money coming in, they might just need an extra financial boost to pay for things like new equipment or expansion.
Businesses with low revenue will often face problems during the application process of a loan.
To traditional lenders, the cause of low revenue is not relevant. It could be because of seasonal implications, even cash flow problems caused by a non-paying customer. Regardless of the reasoning, lenders will be skeptical to lend as they put into question your future profitability. Current revenue is more important than any previous.
If your business is not a completely separate entity to your personal finances, then your application for funding could result in an investigation into your personal credit history.
When deciding whether or not to approve a loan, lenders will regard a business owner’s personal credit score as one of the most important factors to consider.
The chances of approval will greatly improve, the higher the score. Business owners with the highest scores will be the most likely to be approved and will also be offered the best interest rates and loan terms.
Credit scores are determined by a number of different factors. Hospital bills, late payments, poor credit car utilization, will all contribute to negatively impacting a credit score.
Even applying for credit and getting tuned down can put a dent in a credit score.
A lack of credit history is often seen in the same light as bad credit history. So if a business owner has not managed to build up enough of a personal credit profile, they too will find it difficult to secure financing.
Little credit history and poor credit history will most certainly make it more difficult to secure a loan, but it isn’t an impossible task. For those in a less than ideal situation, there are ‘bad credit’ lending options available.
High-interest rates and unfavorable terms are typical of these kinds of loans, however, they might be the only option. They can also offer business owners a much-needed boost in funds and also help them to build a credit history which will help them to secure a ‘better’ loan in the future.
Even if a business is demonstrating good books and a decent credit history, if the industry that they are situated is at risk of crashing, or is seen as unstable by lenders, they too may find it difficult to secure business financing.
Lenders only want to work with people and businesses that show complete transparency in being able to repay all of the money (with interest) in the predetermined period of time.
If the future of a business’s profitability is in question due to what is being observed in similar business models or businesses in the same area, a big red flag will be thrown up in the eyes of lenders.
Like other high-risk businesses, there are still other lending options available, business owners just need to learn where and how to secure these types of loans.
Whilst traditional loans with lower interest rates and favorable terms, might not be on the cards for businesses regarded as high risk, there are still multiple lending options available to them.
For the best chance of being granted business funding, it is important for business owners to learn how individual kinds of loans work. Doing this will also put business owners in the best position to choosing the right loan for their business and individual situation.
Although not suitable for all business, short term loans can be a good option for many new business owners, and businesses in need of immediate funding.
Short term loans are a relatively new offering from lenders, very similar to an installment loan, but with the main difference being the way in which the fees is calculated.
Although the premise of a short term business loan is the same as any loan; money is borrowed and repaid with a fee. Short term loan repayments are not subject to an interest rate, but instead something that is called a factor rate.
The repayment fee of a short term loan is calculated using the factor rate. this is called a fixed fee repayment term. Similarly to interest repayment terms, the fee is calculated using a percentage of the borrowed amount.
However, unlike interest, the fee for a short term loan is not variable, but instead only calculated once at the start of the loan agreement.
This is good for borrowers, as they will know exactly what fees will have to payed back before accepting the loan.
For a visual example, if you were borrowing $20,000 and your specific factor rate is 1.35, the fixed fee that you will be required to pay back will amount to $7,000. The fee in adition to the initial loan will amount to a total repayment amount of $27,000.
Usually, a factor rate of anywhere between 1.08 and 1.7 is seen as typical, but in some cases this might be higher or lower. As well as the fixed fee all loans might be subject to further fees such as opening, closing, and administration payments.
As the name suggests, short term loans are repaid over a shorter period of time, then say a traditional or ‘long term’ loan.
Business owners would have previously found it incredibly difficult to find loan terms that spanned less than 2 – 3 years. it is now very common to find loans with repayment plans of less than 18 months
Unlike most loans, it is important to mention the short term loans are usually paid daily or weekly, as opposed to monthly. This practice is to the advantage of the lender, because it means that they are able to spot problems sooner and intervene quicker then if they had to wait a full calendar month.
Merchant cash advances have a similar fee structure to that of short term loans, however, in the case of short term loans, repayments are always fixed.
What this means is that the same amount is required to be repaid each day, regardless of takings or fluctuations in profit. Very few lenders will offer adjustable payment terms, and if they do you will often be tagged with an additional fee for the privilege.
Short term loans are often regarded as cash flow loans. This is because lenders of short term loans usually put less focus on the credit score or profitability of a business, but instead the consistency of daily cash flow.
This being said, short term loans are best suited for business that can demonstrate a good track record of having excellent daily cash flow. Businesses such as restaurants, cafe’s and retail-based stores, usually lend themself to short term loans the best.
If your business has poor consistency or troubles with cash flow, then a short-term loan is probably not the best option, and you are far less likely to be accepted by a lender.
Other than the point made above, lenders of short term loans have easier requirements to meet in order to be seen as eligible. It is possible that you will be accepted for a short term loan, even if you have been declined recently for other loan formats.
Having a business or personal credit score of 450+, consistent cash flow with records spanning at least 3 months, then you are likely to be eligible for a short term loan.
As with any loan, the better your cash flow and the more profitable, the more eligible you will be for better fees and more favorable terms.
Short term loans can be tempting due to the ease of acceptance, however, it is important to remember that they are not best suited to all businesses. As you may have guessed, short term loans are best suited for business that have short term financial requirements, such as:
Most lenders of short term loans dont have particularly strict rules regarding where or what the money goes towards. However, the fund should always be used for business-related purposes, and not for things like entertaining potential clients or planning incentive trips.
There are a lot of advantages and perks of short term loans, however, there are some cons that you will want to review before deciding to commit to an agreement.
there is a practice that some lenders employ commonly known as ‘double-dipping’. This can be problematic for a business when they decide to renew or refinance a loan with a fixed fee.
businesses that renew or refinance with a lender that double dips will essentially end up paying interest on interest. This is because the total amount of the fee has to be repaid, regardless of whether or not the amount is paid early.
If you end up borrowing from a lender that implements the double-dip practice, then you could end up being far more out of pocket then if you were to go with a provider that didn’t.
If there is even the slightest chance that you might be forced to refinance or renew, it is best to search for a lender that does not double-dip.
Merchant cash advances are a type of lending option that is repaid through future credit card sales. In an MCA, the lender will provide a business with a sum of money, and instead of repaying the money back daily, weekly, or monthly, the business will instead be automatically be paying the advance back through future sales done through credit card.
MCA’s are usually a common choice for businesses that tend to have seasons or times of the year that are slower (less profitable) than others.
With this kind of lending option, repayments will be paid at a rate that is in line with current trading. So pay less when sales are down, and more when sales are up.
Of course, the amount ranges from lender to lender, but a typical percentage paid back on credit card transactions is usually between 10% – 20%.
MCA’s can also be repaid through daily or weekly ACH draw outs, but this option sees fixed repayments, regardless of the amount of sales.
This finance method is also heavily based on sales performance, instead of credit score and credit history. Lenders will pay close attention to cash flow to determine the amount of funds they are willing to let a business borrow.
Cash advances are great for business that are not bound, however high interest rates can make repayments unmanageable and seriously diminish the growth of a business long term.
Most banks do offer merchant cash advances, however, other loan options will usually be more beneficial for any business, regardless of the situation.
High-interest rates associated with MCA’s can often result in pitful downward cycles of debt.
Having money that you can not access is one of the more frustrating aspects of being a business owner. Unpaid invoices can cause more than just headaches; they can also result in some serious implications on cash flow.
If a customer is late with their payments, or a situation pops up that demands money, but invoices are not due to be paid yet, invoice financing might be a good option.
If a business is unable to wait for owed funds to be paid, invoice financing can bridge the gap and keep a business trading.
The first is invoice factoring. Invoice factoring, is when the lending party will pay a percentage of the outstanding money to the borrower. The money will then be collected by the lender, who will subtract their fees, and pay the remainder back to the borrowing business.
The second way is called invoice discounting. This is where the lender loans and amount of money to the business based on a percentage of the invoice. Collection is then done by the business, who then repays the loan with added interest/fees
When cash flow is at risk as a result of unpaid invoices, invoice financing is one of the best options for businesses. Invoice financing is also an accessible financing option for businesses with poor credit, little collateral or little trading history.
Most business loans can be difficult to obtain if the business has not got a business credit score, or at a minimum a proven track record of being profitable.
A personal loan for business purposes might be a good option for those in that situation, although there is the requirement to have a particularly good personal credit score to qualify.
A personal loan will not prompt lenders to look into the revenue of the business, as the only relevant documentation will be the earnings and credit score of the individual.
Nearly all banks and private lenders will offer personal loans for business purposes. qualifying for such a loan is usually easy if a good personal credit can be demonstrated, along with a record of consistent income.
Those with low credit scores may still be eligible for personal loans, however, the loan terms and interest rates will be far less desirable.
In some cases, personal loans must be taken against assets or property (collateral). This acts as a safety net for lenders, should the borrower be unable to meet the demands of payment.
How much collateral is always at the discretion of the lender, but usually the more an individual can offer, the better the terms they will receive.
Applying for a high risk business is done in the same way as any loan. Although there are some specifics that a business owner might have to get together, in order to increase their chances of getting accepted.
A low-risk borrower will have an easier time securing a loan, as it will be easier for them to convince a lender of their trustability and their ability to pay back any money borrowed.
A high-risk borrower may have to go through more processes and ‘hoops’ in order to convince a lender that they will be able to maintain payments and stay within any agreed terms.
Usually, applications will involve expressing the reason for the loan, the amount, and how long they wish to have to repay.
Being accepted will see the lender doing rigorous checks, and potentially personal interviews/consolations.
In most cases, credit score trumps all in terms of being granted eligible for funding, but if a personal or business score is not up to scratch, the borrower will have to get together all the information they can in order to convince the lender.
Bank statements, profit and loss accounts, assets, etc. Can all help in the approval process, so it is important for business owners to have these pieces of information at the ready should they be asked to provide them.
It is important to remember that business loans of the high-risk nature will differ in terms of features than that of regular loans.
This is because of the added risk that is presented to lenders when potentially lending money to a business or individual who has less of a comprehensive credit record.
The typical product features of high-risk business loans include high-interest rates and less than ideal terms.
This means that the amount a borrower will have to repay will be more in relation to the initial sum, and the repayment will usually have to be returned in a shorter period of time, under far stricter guidelines.
This does not mean that high-risk business loans can not be utilized effectively, however, extra caution must be taken to ensure the loan will serve its purpose.
Whether or not a high risk business loan is a good idea, or if you should work with a high-risk business loan lender at all, is completely dependent on the situation and needs of the business that requires the funds.
Some people believe that lenders of high-risk loans are exploiting and taking advantage of struggling businesses, but this is not the case.
If a lender is going to put up the funds and offer business financing, they are going to want the risk to be as little as possible. As the risk rises, it is understandable that the cost on the borrower’s side will rise as well.
Some high-risk business loans are subject to incredibly high fees, but that is why it is important to shop around and find the best deal.
‘Haggling’ is also an option when looking to secure financing, not in the way that you might try get a few hundred $ off a car, but by reiterating what you can offer, and why you are trustworthy.
If you are able to offer more documentation and reasons as to why you are worthy of better rates or terms, then, by all means, present them to the potential lender. In most cases, they will be more than willing to make adjustments to interest rates.
For businesses that are struggling with their credit score, or are having difficulty proving revenue/cash flow, then a high-risk loan might be the best and only option.
There are a number of different types of high risk business loans, each with their own pros and cons.
The most important thing to consider when applying for a high-risk business loan is if financing is the only option, whether the business will benefit from the extra funds and will the business be able to pay back the initial sum with the addition of fees/ interest.
