Learn how high-risk businesses can qualify for a business loan.
Many businesses may be labeled as high-risk for one reason or another. For some, it may be due to the industry while others may carry a higher risk because of past performance or other issues limited to the company. A business with this label may find it difficult to obtain financing, but high-risk business loans do exist.
Defining High Risk
Lenders, investors and others use their own definition of high-risk to define a business. Here are some factors that may influence your business to receive that label.
- Rate of failure – some industries are more difficult for businesses to succeed. For instance, many restaurants fail within the first year of opening.
- Niche industry – if a business operates in a new or trending niche or one without a lot of competition or little room for growth, it may be considered a higher risk.
- Large investments – a business that requires a large investment in the beginning is considered higher risk. For example, a franchise owner may want to open a second location, but they often must pay a heavy franchise fee to get started.
- Lack of business experience – if everyone involved in the company is new to entrepreneurship, it may cause lenders and investors to hesitate to get involved.
- Payment issues – whether your business has a history or you have customers who fail to pay on time, payment problems can make your company high-risk. For instance, businesses in some industries take longer to receive payment for services rendered, which increases the likelihood that customers will default.
With all these risk factors, you can see how difficult it could be to get a loan.
Finding a High-Risk Lender
If you qualify as high-risk for one of these or other factors, many lenders will reject your application for a loan. However, do not assume you can not get financing if you fall into this category. First, it will depend on why you have more risk and what you can do to compensate.
For instance, you may have collateral to use for a loan. If you can use equipment, land or other assets as collateral, it reduces the amount of risk a lender must carry. They will be more likely to approve your loan application even if you have other risk factors. The lender knows they can sell the asset to recover the loss.
Even if you know your business is in this category, you may find a traditional lender, such as a bank, willing to provide financing. You could approach investors for funding as well. You would need to show evidence of your business’ success and future potential for investors to look at your company as investment potential.
Alternative lenders often specialize in high-risk business loans. They understand that not all businesses will qualify for traditional financing, so they strive to fill in the gap.
Alternative lenders often specialize in high-risk business loans. They understand that not all businesses will qualify for traditional financing, so they strive to fill in the gap. These lenders require specific criteria to approve a loan, and they often have higher interest rates. However, they will provide loans to businesses that cannot get financing in any other way.
When looking at alternative high-risk business loans, you will want to look closely at the terms. Make sure the interest rate is affordable and payment terms fit your budget. Consider flexibility to alter terms if you need something other than what is offered. Check that there is no pre-payment penalty and find out the fees for the loan.
In some cases, you can work to get your company away from the high-risk label. In other instances, it is just the nature of the industry you are in. In these situations, you must find the best loan options available even if they are not ideal. Many times, you can work with the same lender and they will offer better terms with subsequent loans because of your track record.
If your business is in a high-risk industry or has this label for another reason, talk to Fast Track Lenders to find out how we can provide financing for you. Easily apply online or contact us today to get the loan you need.
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