Running a business costs money, and sometimes you might not have enough cash readily available to cover some big costs that may come your way. In these circumstances, a business loan can help.
The thing is, it can be a bit tricky to get approved for a business loan, depending on the type of business you’re operating. Certain types of businesses might be considered higher risk than others according to lenders, in which case it could be difficult to get approved for a loan. That said, it’s not impossible to secure the loan you need.
Let’s go into a little more detail about business loans for high-risk industries to help you navigate this realm.
Which Businesses Are Considered High-Risk?
Lenders will assess your particular business to determine whether or not it’s considered high-risk before approving your loan application. Businesses that fall under the umbrella of certain industries may be more likely to fail or may involve more dangerous activities that may be viewed as risky in the eyes of a lender.
The type of risk will depend on the industry. For instance, a restaurant business may be more likely to fail, while a construction business may be risky in terms of the dangerous nature of the jobs involved. Other industries, such as gambling and alcohol, are also considered high-risk because of all the stringent regulations that must be followed.
Types of High-Risk Industries
Some industries that are considered high-risk include:
- Auto sales
- Financial services
- Gun shops
- Legal services
- Oil and gas
- Pawn shops
- Real estate
- Travel agencies
Factors That Make Businesses Look High-Risk
Lenders look at a handful of factors to help them determine whether or not a business is considered risky, such as the following:
Personal Credit Scores
Your credit score plays a key role in your ability to secure a financial product, including a business loan. A low score is usually indicative of a habit of missed payments or high debts relative to income.
A lower credit score is considered risky to lenders, as it paints the picture of someone who will be more likely to miss a loan payment in the future.
A business with outgoing expenses that overshadow incoming cash flow is at risk of failing. If your business is spending more than what it’s making, you might find it more difficult to get approved for a business loan.
Lenders will look at a number of factors of a business, including its cash flow. A positive, consistent, and predictable cash flow is what lenders like to see before extending a business loan.
Another factor that your lender will look at is the amount that your business makes every month or year. Ideally, your business will already be generating healthy revenue, or at least promise to do so based on your business plan, before a lender will agree to extend a loan.
If your business is already holding other debts, adding another debt to the pile may be deemed too risky. Lenders will look to see if you will be able to handle another debt, and if they believe you can’t, then your chances of getting approved for a business loan are slim. Instead, you may need to pay off a debt or two before applying for a new business loan to increase your chances of approval.
Age Of The Business
An older, more established business is considered less of a risk to lenders, whereas a new business that’s just starting out and doesn’t have a history of success is considered high-risk. Newer businesses may have better luck getting approved for a business loan with online and alternative lenders.
Types Of Business Loans For High-Risk Businesses
Just because you run a business that your lender considers high-risk doesn’t mean you can’t get the financing you need to continue operating your business. The following business loans may be better suited for high-risk businesses.
What it is. Invoice factoring isn’t exactly a loan. Instead, it’s an advance on invoices that have yet to be paid by clients.
How it works. With this strategy, you would sell your business’s unpaid invoices to a factoring firm, which then pays you a percentage of the invoices’ value in advance. Once the invoices are paid, the factoring company will collect the payments and reimburse you the rest of the funds, minus a fee.
What it’s best for. Invoice factoring is best used if you are experiencing cash flow issues as a result of unpaid invoices.
What it is. Short-term loans are exactly what they sound like — loans that must be repaid in full within a short time frame. Usually, these types of loans are made for no more than one year, though the term may be slightly longer than that depending on the situation.
How it works. A short-term loan works similar to a long-term loan, except the borrowing amounts are lower and the borrowing time frame is much shorter. Interest rates also tend to be higher with short-term loans.
What it’s best for. Short-term loans are best suited for those who need a smaller amount of money to cover pressing expenses. They’re also great for those who may not have a great credit score or who don’t have much collateral to back the loan.
Merchant Cash Advances
What it is. A merchant cash advance involves getting an advance in funds in exchange for a percentage of your future credit card payments or revenues.
How it works. The lender will advance you a set amount of money, which you pay back with a share of your daily credit card payments or bank deposits, plus a fee.
What it’s best for. If your business receives payments predominantly through credit cards and you find it difficult to get approved for other loan types, then a merchant cash advance might be a viable option for you.
Canada Small Business Financing Program (CSBFP) Loan
What it is. The CSBFP provides government-sponsored loans as much as $1 million. At least 75% of these loans are backed by the Government of Canada.
How it works. In order to qualify, your business cannot make any more than $10 million in revenue a year. The money given must be used for a specific reason, such as buying property or equipment.
What it’s best for. The CSBFP is best for larger projects that require a very large amount of money to cover.
Vehicle And Equipment Loans
What it is. These loans are somewhat like traditional loans in that your lender will loan you a certain amount of money required to purchase expensive equipment or vehicles.
How it works. These types of loans use the vehicles or equipment being purchased as collateral. As such, they’re secured loans and come with less risk for the lender because they’re collateralized.
What it’s best for. This loan type is best suited for businesses that spend a lot of money buying very expensive equipment.
How To Qualify For A High-Risk Business Loan
Since a high-risk business loan is more difficult to get approved for due to the nature of the business, it’s important to take certain steps to maximize your chances of loan approval. Here are some things you can do to help secure a business loan.
- Collateralize the loan. If you have an asset of value, consider using it to back the loan. A secured loan is less risky for lenders and can even come with a lower interest rate as a result of this lowered risk. Just keep in mind that if you default on your loan, you could lose possession of the asset you used to collateralize it.
- Keep your debts low. The less debt you have, the more money you’ll have to dedicate to whatever it is that you need to cover for your business. In addition, less debt can improve your chances of getting loan approval, so your best bet is to pay down as much debt as you can before you apply for a new loan.
- Come up with a business plan. Lenders like to see a business plan in place, which shows that you have considered all the expenses that need to be covered and how they are required to successfully run your business. The plan should also include a breakdown of the funds needed to cover these expenses.
Can I get a business loan with bad credit if my business is considered high-risk?
What’s a personal guarantee and do I need one for a business loan?
Who can I get a business loan from?
If you’re having trouble getting approved for a business loan from a traditional lender, there are alternative options to consider. Regardless, it’s always best to go in with your best foot forward, which means doing what you can to ensure a higher credit score and a lower pile of debt.
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