There could be several reasons that a company falls into the high-risk category when applying for a business loan. The main reason is generally a low credit score. Beyond that, there are factors which include the nature of your industry, the amount of time you've been in operation, as well as the amount of revenue you yearly bring in that could be hindering you from qualifying for a commercial loan.
Being considered high risk however does not mean that all avenues are subsequently closed to you. Because of the rise of alternative lending in the current economy, more and more business owners who might otherwise be deemed high risk are finding that they do have options.
Online and alternative lenders tend to look at the bigger picture, take into consideration more data, and try and get to understand exactly what a company's value is—even if they are considered among the high-risk group.
Understanding a High-Risk Business Loan
In simplest terms, a loan would be thought of as high risk when the borrower doesn't necessarily meet the standard criteria and falls below a benchmark in several fields. What attributes might such a borrower possess…
Low Credit Score - Credit score for traditional lenders especially is a big one. This tells them how much of a risk you pose. If your score falls below 580, then generally this would indeed get you lumped in with the high-risk group.
Not Enough Annual Revenue - How much revenue the company brings in per year is important when applying for a loan. If you bring in an adequate revenue, then this means you're able to meet your obligations in terms of payments and debts. Not enough revenue and you may be lagging and this would then make you more of a risk in the lender's eyes.
Short Business History - Generally speaking, lenders like to see at least 2+ years in operation. Less than this and you're a risk.
Precarious Industry - Certain industries are viewed as unstable; among them: restaurants, retail, and manufacturing to name a few. Lenders tend to shy away from loaning to these industries because the guarantee of longevity is simply not there.
What Can You Do to Off-Set Risk?
If you are in the high-risk group, there are steps you can take to help mitigate your circumstances and thus increase your chances of qualifying for a business loan. Traditional lending, however, may not be the path that you take—in fact, it probably won't be, as odds of you getting are approved are very slim.
Talking to an alternative lender and seeing what programs might be available to you is a great first step. Their decisions are not based solely on one or two numbers but data collected and analyzed carefully regarding your company's past, present and future prospects.
Keep in mind, there will probably be higher rates attached to your loan and potentially a shorter repayment term. This is to help reduce the chances of nonpayment or default.
Loan Options High-Risk Borrowers Can Consider
Merchant Cash Advances (MCAs/)
This is not a loan per se but rather an advance on your future sales. The lender remits to you a sum of money and in return, a percentage of your sale moving forward is paid toward the loan. They will review your business deposits and cash flow to determine the amount for which you qualify.
In repaying the loan, the lender will opt to either take funds daily or weekly from your bank account. The term on an MCA is generally anywhere from 3 to 18 months.
Given that this type of funding is based upon sales, the credit score and length of time in business, for instance, countless. So even if your score falls below that 580 marks, you still have a chance of getting an MCA.
Short-Term Business Loans
Versus a more traditional loan program, with a short term loan, the payback duration is significantly less. And rates do tend to be higher. However, keep in mind that you're paying interest over a much shorter period.
The maturation dates on short term loans are usually less than 18 months. This reduces the odds of default and so the lender, in turn, is not as stringent regarding the other more standard qualification factors that you might not meet.
Invoice Financing
With invoice financing, your invoices are converted to cash that is then loaned to you via a lender. Usually, the lender will advance you up to 85% of the value of your accounts receivable. There is a fee involved and they will also keep a weekly percentage. Creditworthiness isn't necessarily a huge component here as the lending institution is being repaid from clients who owe you money. So if you do have outstanding invoices generally less than 90 days old, invoice financing could be a good route for your business to get some much-needed cash.
Applying for a Business Loan as a High-Risk Borrower
There are going to be bumps in the road, times when money is tight, and you have to find a way to raise some cash quickly. If you do happen to have subpar credit, this could seem a daunting task. Being a high-risk borrower though does not have to prohibit you from finding adequate funding.
After identifying a suitable online lender, you will then fill out the application which generally asks for some basic business info. Following this, an advisor will be in touch to review application details and discuss the various options available. And there's not much more to it. Alternative lenders have dramatically streamlined the process. Some companies find the money in their accounts in as little as 48 hours. High risk doesn't mean you're unfundable; it simply means you need to explore other channels and talk to experienced professionals who are interested in more than just a score.
First Union is the lender you can trust. we offer many loan products that will help almost any problem your business is facing. We will help you get the loan that is the most suitable. Give us a call today to speak to one of our agents.