High-Risk Business Loans: What are Your Options?
If you have applied for a business loan with a traditional lender and been denied on the grounds that you are “high risk,” you probably want to know what that means. And if you have any other options for obtaining capital.
The good news is that there are high risk business loans available, but you will need to know the factors that will outweigh the risks you present to lenders. Shield Funding has been helping small business owners secure high risk business loans for more than a decade. The process is fast and easy and you can apply online. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What are High-Risk Business Loans?
In lending terms, high risk means that the lender has concerns about your ability to repay the loan. They are high risk from the lenders’ perspective, not yours. Facts that place you in the high-risk category are;
- Your personal credit score
- Defaulting on past loans
- Consistent history of late or missing payments
- Past bankruptcies
- Short time in business
- Annual revenues
- High-risk Industry
Often, past mistakes can haunt you for years on a credit report. A past loan default may have been due to an illness in the family, or a bad business partner. When first starting up, many businesses deal with cash flow and budgeting issues that can hurt their credit. Any derogatory information that surfaces on your credit report can make a borrower a high risk applicant, but it is not only past credit mistakes that make borrowers high risk.
Some industries are considered high risk due to their failure rate, such as restaurants, and only certain lenders will work with you. You might have to network within your industry to find lenders who are familiar with your business needs, as traditional lenders will automatically deny you.
If you have only been in business a short time, you have no proven track record of revenue generation or repayment ability. Even if you have an excellent credit score, banks want every aspect of your application to be strong or the loan is considered high risk.
Not everyone will turn you away because you fall into one or more high risk categories, but knowing what makes you a high-risk borrower will help you determine where to look for capital.
Are Traditional Bank Loans an Option?
Traditional lenders and banks have the most stringent lending requirements. They will not lend to individuals with credit scores below 620, and those borrowers must be borrowing through an SBA program. You must have been in business for a minimum of two years, and have strong annual cash flows.
Banks also do not move quickly through the application process. It can take months to receive an approval for business funding from a bank, months during which your business could struggle, and your financial condition could continue to deteriorate.
Chances are if you know that you are a high-risk borrower, you found out when a bank denied your loan application. You already know that traditional loans are not an option, so here is where you can find funding.
Types of High Risk Business Loans
When you are a high risk borrower, you will have to get creative when meeting your capital needs. The loan may not take the form of a traditional, fixed-rate, term loan, but an alternative form of capital.
Bad Credit Business Loans
Bad credit business loans have been designed for high risk borrowers. Lenders who offer them know that applicants will have bad credit, so they look at other factors when deciding whether or not to lend.
If you have been in business a long time, that will count heavily in your favor. It indicates that you know how to manage and keep a business running, even if you made financial mistakes in the past that hurt your credit score.
High monthly revenues will also be a plus on your bad credit business loan application. Alternative lenders look to cash flows to determine repayment ability, rather than a credit score. Because they’re taking high risks in lending to you, they will likely want to set up daily or weekly repayments through automatic bank account deductions.
Merchant Cash Advances.
Merchant cash advances are perfect for borrowers who have strong business revenues but know that they have a poor credit score. Often, the lender makes a decision without even pulling your credit, because they look at several months to years of transactions run through your company paid by credit and debit cards to make a lending decision. It is ideal funding for businesses that have a high volume of credit card sales, such as restaurants, grocery stores, salons, and more.
A merchant cash advance is not repaid by a set monthly payment. Instead, the lender gets repaid by deducting a percentage of each sale that you swipe. Essentially, you sell the lender your upcoming sales based on past cash flow, and they take a percentage of those sales to repay the principal plus their profit. You can get access to immediate funding up to $500k. It is not a good option if your customers pay in cash or by check.
Invoice Financing and Factoring
If you have a large balance of past due receivables, look into invoice financing. The lag between invoicing and getting paid could be when your bills are due, and part of why you are seeking funding. Accounts receivable (“A/R”) financing lenders, or invoice factoring lenders, lend on these past due receivables to help you smooth over the bumps in cash flow.
With these loans, you are pledging the value of your past due receivables as collateral. Your personal credit and other high-risk indicators will not prevent you from being approved. The lender may want information about your customers’ credit, however. Invoice factoring is when you sell the invoices directly to the lender, and they collect on the past due balances; invoice financing is when you pledge those balances.
The lender either takes a percentage or flat fee of the invoices to repay the loan’s capital plus their margin. If you pledged a $200 receivable, for example, and the factor rate you were charged is 10%, once collected the lender would only send you $180. They would keep twenty dollars as their fee, or much more. Invoice financing can be quite expensive, and rates go up the longer the lender waits to be repaid.
An invoice financing lender also holds an amount in reserve. The reserve protects them from customers who never pay. When they advance you a percentage invoices’ remaining value, it could be 80-85% of its total or much less. If your customers have poor credit, the A/R financing lender might advance less or charge a higher factor rate.
An invoice factoring lender buys your invoices outright. They will collect on them, so from the moment they are sold you have no control of the customer interaction. If the invoice factoring company is rude to your customers, it could harm your long-term relationship with them.
Short Term Business Loans from Alternative Lenders
Alternative lenders work with high risk borrowers all the time. Their business loans are short term, with repayment periods ranging from two months to one and a half years. Loans are approved on the basis of your business’s strength, so someone who is high-risk has excellent odds of being approved for a bad credit business loan.
When you contact an alternative lender for a bad credit business loan, they will request information on your cash flows and revenue for the past few months or longer depending on your business type. Unlike a traditional lender, alternative lenders do not require that you have been operating for years. They lend to businesses with strong cash flows that have been in operation as few as two months.
Payments on a short term business loan will be higher than those on a long term loan. That is because the loan’s capital plus fees is spread over a shorter period. For example, if you take out a $6,000 loan, including fees, for five years, your monthly payment would be $100. The same loan, repaid over two years, would require $250 as a monthly payment.
Another plus of working with an alternative lender is their extremely flexible repayment plans. Payments can be made monthly, bi-weekly, weekly, or even daily. If you need your loan repayment schedule to work with an unusual cash flow pattern, look into a bad credit business loan from an alternative lender.
How to Find the Best High Risk Business Loan
You might not always have a lot of time to investigate your options when you are looking for a high risk business loan. There are still a few steps you should take when looking into potential lenders.
A quick google search will give you many options. But before you apply, quickly compare the different rates, fees, and terms. Not all high-risk lenders will make the same offer, and comparison shopping could save you a lot of money.
Lean on word of mouth, ask similar businesses in your network, or other local businesses, where they have been able to obtain capital. They might have experience working with lenders on your list, and opinions about how the process went.
Evaluate Your High Risk Lender
Look at how long the lender has been in business, too. You want to borrow from an established lender who has experience in lending, not someone who opened shop a year ago. Shield Funding, for example, has been in business for over ten years and offers a wide variety of high risk private business loans.
A longer time in business indicates that they have satisfied customers and know how to meet their needs. This also decreases the odds that your lender will run out of funding and demand immediate repayment.
Improving Odds for a High Risk Business Loan
If you are still worried about getting approved for a high risk business loan, you can improve your odds of getting approved. The more prepared you are before you apply the higher the likelihood you will be approved. Here are some basic tips to get you started.
Wait to Apply for a High Risk Business Loan
Unless you have an immediate need for funding, put your expansion plans or the reason you need the funding on hold for a while. In the meantime, build your revenues and time in business. The longer you have been in operation, the less you will pay in fees.
Fees and interest rates reflect risk. A lender charges more if they do not think you can repay the loan. Thus, if you can demonstrate revenue growth and successful operations for more than a few months, you will pay less to access capital.
Work on Your Credit Score
It is possible to improve your credit score once you understand the components that are used to calculate it. Late and missed payments deduct points; therefore it is a good idea to set up auto-pay for your bills. If it is the first time you have paid late or missed a payment, call the creditor and request that they not report it to the credit bureaus. Your debt service ratio also negatively impacts your credit score. Simply paying down balances on revolving lines of credit, like credit cards, can lead to an immediate improvement.
Check out our bad credit repair guide for more information.
Offer the Lender Collateral
Collateral, in the form of equipment, capital assets, or investment accounts, lowers the lender’s risk. It secures the loan, so if you default the lender can seize the collateral and resell it in an attempt to cover their losses.
Knowing that the loan has security does make a lender more likely to lend, and at better terms, than if it has none. But they may require that you have the collateral appraised before accepting it as security, which can take time and money.
Increase your Marketing Efforts
When applying for a high risk business loan, the lender looks at your monthly revenues. To improve your odds of being approved, increase your revenue. Put more effort into marketing to get the word out there about your business. Utilize free marketing methods like social media if cash flow is tight, or ask existing customers to write reviews.
The Final Word on High Risk Business Loans
A high risk business loan is not necessarily a bad business loan. It can be the right decision for your business, and can even help you build credit. While you will likely pay more in interest and fees, and over a shorter term, the loan will help your business reach its goals.
Alternative lenders have entered the lending space to fill the gaps left by traditional lenders, who have been drastically cutting back on small business lending. By working with the right alternative lender, you can obtain the high risk business loan that your business needs.