High Risk Business Funding
Not every company has the greatest credit or an abundance of commercial or personal assets. For whatever reason a business or owner’s credit may have taken a hit in recent times. Maybe it was due to the slowdown in the economy during the financial crisis and recovery. Maybe a changing economy caused your company to do some costly repositioning to make the business more competitive. Maybe you’re a seasonal business which sees major fluctuation in cash-flow during certain months or seasons of the year. For all these reasons and more, you may be considered “risky” by many business and commercial lenders. But that doesn’t change the fact that you may need access to fast business financing at some point in time.
What is Considered a Risky Business?
The definition of risky business is something that each lender and lending industry determines individually. Each lender decides which businesses or industries present the most risk, and either price in the risk (higher rates) or outright forbid lending to such industries.
- Bad Credit: For some lenders, a risky business may be a business or business owner with bad or poor credit histories. Generally, if a company or its owners have bad credit, that just about guarantees they won’t have access to traditional bank financing. But that doesn’t mean that other lenders aren’t willing to look beyond a company’s bad credit and, instead, look at the company’s cash-flow.
- Poor Cash Flow: Other lenders consider companies with poor or sporadic cash-flow to be risky. If a lender perceives the limited cash-flow to be something that will affect their ability to repay, the lender may feel its too much of a risk to lend to. Under those circumstances, the borrower may seek out a loan that uses the business or owner’s personal property as collateral for a high risk loan.
- Payment History: Other reasons a lender may feel a small business is high risk is if it has judgments against the company, has liens (especially tax liens) or if the business or business owner has previously filed for bankruptcy protection. For many lenders this would be an automatic decline, but for high-risk lenders none of these items automatically disqualifies a merchant for funding.
- New Businesses: If a company is less than a 3 years old its very difficult to obtain traditional financing. If a business is less than a year old (even as low as 6 months) the financing options — both traditional and alternative — are few. But that doesn’t mean there aren’t lenders willing to provide funding to newer companies. In fact, if their cash-flow is sufficient, obtaining financing can be quite easy with certain high-risk lenders.
What is a High Risk Industry?
Industries that are considered high-risk are also determined by each type of lender. A business and its owner may have fantastic credit and excellent cash-flow, but still may find it difficult to obtain financing because some lenders consider entire industries to be high-risk. Such industries include:
- Oil and Gas industry
- Bail bonds
- Rental or sales agencies
- Computer hardware sales
- Internet businesses
- Moving companies
- Web advertising
- Travel agencies
- Adult entertainment
- Gas stations
- Real estate brokers
- Insurance companies
- Vape shops
- Home based businesses
- Sole proprietorships
What are the High Risk Business Lending Options?
Years ago, there weren’t many options for businesses that pose a high-risk to lenders. In fact, if you didn’t quality for a traditional loan, your lending options were nonexistant. Now, there are a number of traditional and alternative lending products including asset based lending, alternative lending, factoring, equipment financing, credit card processing loans and business cash advances (among others). Below we will discuss each one along with its rates and terms.
1. SBA Lending
SBA loans aren’t really high-risk loans in the sense many may think, but they are a reduced risk loan. An SBA loan is financing provided by traditional lenders to borrowers that are unable to obtain traditional bank-rate financing. If a small business can prove they were unable to get a traditional loan, they can apply for a loan with a SBA enhancement. This enhancement is an agreement by the government to cover a large percentage of the lender’s losses should the borrower fail to repay their SBA loan.
- Rates: 5-8%
- Terms: 5-25 years
2. High-Risk Asset Based Lending
Asset based business loans are a good high-risk lending option for small businesses that own their commercial real estate, or for business owners who own their own personal real estate. An asset based lender will offer up to 50% of the real estate’s equity values on 1st, 2nd or 3rd positions.
- Rates: 8-30%
- Terms: 1-5 years
3. Invoice Financing and Factoring
A great funding option for businesses that have poor credit or are high risk is to use its invoices as a basis for financing. Invoice financing is a type of business-to-business transaction where a company agrees to sell its 30-90 day unpaid invoices to a factoring company in return for immediate financing. The factoring company will forward up to 95% of the invoice’s value and charge a fee to the borrowing company. After the invoice is fully-paid, the factoring company will then release the remaining amount to the merchant.
- Rates: 1-3%
4. Equipment Financing
Equipment leasing is a type of financing where a leasing company purchases equipment for a small business, and then leases that equipment to the business for a period of time. At the end of the leasing period the small business is given an option to purchase the equipment, return the equipment, or extend the leasing period. Since this equipment is actual collateral, there is a reduced risk to the lender.
- Rates: 5-15%
- Terms: 1-10 years
5. Alternative High Risk Lending
Alternative lenders offer easy business funding to companies that don’t have the credit, cash flow or business documentation needed to get a traditional bank loan or SBA financing. Preapproval for alternative financing can be achieved in minutes, with funding within 5-7 business days.
- Rates: 8-25%
- Terms: 1-5 years
6. High Risk Cash Advances
High risk merchant or business cash advance aren’t actually high-risk small business loans, but are instead the sale of the merchant’s future credit card processing transaction deposits and/or business bank account deposits in return for immediate funding. Unlike traditional financing where a borrower will send a check to the lender each month, cash advances are repaid through daily repayments via credit card processing or daily ACH payment.
- Factor rates: 1.16-1.55
- Terms: 4-24 months