Business Loans for High-Risk industries
Business Loans for High-Risk industries
For nearly every business owner, the thought of applying for a loan can seem burdensome, from the endless pages of paperwork with various requirements to the mind-boggling process of obtaining the loan, which does not even guarantee obtaining the loan. This process is a hassle for even the most stable industries, so just imagine the heartache endured by business owners in high-risk industries.
Are You Considered a High-risk?
Business lenders evaluate many aspects of a business when deciding if a loan approval is possible. They assess the case and decide whether a client is likely to pay back their loan based on a list of factors they deem necessary. These lenders are highly reluctant to divvying up loans to businesses and industries that are unstable for whatever reason(s). Lenders are in the business of gaining a profit based on the money that they lend, so if your company defaults on a loan, then the lender loses money.
A few examples of High-Risk industries:
- Adult Entertainment
- Auto sales
- Gun shops
- Real-estate sales
- Travel agencies
- Law firms
- Financial services
These industries are less profitable or viewed as more likely to fail, making lenders less likely to offer funding. Therefore, several other factors could cause a business to be deemed risky.
Factors That Gain You a Risky Rating
A Business Owner with Bad Credit Scores
Firstly, not all lenders check your credit score, but it’s better to show a high score when they do. A credit score to a lender shows the spending habits of the ship’s captain. If the owner’s credit score is good, then lenders feel more at ease loaning out money because the payee has a history of paying back their debts on time. A higher credit score generates a higher approval rate. Typically, a few unpaid medical bills, late credit card payments, or bankruptcy hurts your chances of approval and forces you to pay higher rates for whatever loan you receive. The more risk the lender takes, the more you pay.
Congratulations, you have a new ground-breaking idea which you are excited to share with the world. Now all you need is a loan to get your business venture off the ground. Unfortunately, lenders cannot match your enthusiasm towards your start-up because lenders understand the industry’s disheartening truth. Around 20% of businesses close their doors within the first year, which rises to 45% within the first five years. These statistics cause lenders to prefer businesses at least one year of operation, that businesses in their infancy. It’s paradoxical: your new business venture needs start-up capital, but it does not have the track record; whereby, once you gain a track record, you do not need start-up capital. As a start-up, your best option is crowdsourcing and personal investments.
Business with Low Revenue
The primary concern of a lender is whether they are going to be reimbursed or not. If your company is struggling with gaining revenue, what would give lenders the impression that you can pay off your debt? If you own a novelty Christmas decoration store, you are not only a niche seller but a seasonal commodity. These are the types of low revenue endeavors that lenders stay away from because the opportunity for growth is small, and the possibility of failure is massive.
Types of Business Loans for High-Risk industries
Even if you fall into one of the categories above, do not feel discouraged. You still have options to keep your dreams alive, such as:
Merchant Cash Advances (MCA)
Merchant Cash Advances are optimal for companies that rely on credit card sales and face-to-face transactions such as restaurants and retail. Lenders act as future customers paying you for the product up front, which you pay back gradually with interest. MCA loans are relatively easy to receive, but they can often hinder a company’s growth, especially in industries where profit margins aren’t substantial after paying expenses.
Invoice factoring is most beneficial for companies dealing with invoices. Like MCA, these firms prepay a company’s unpaid invoices, allowing them to have working capital. There are three types of factoring:
Whole turnover- Companies sell all their invoices to a lending firm, but typically they must agree to sell all their invoices for an extended period. While turnovers have the lowest rate.
Selective invoice factoring- Companies can decide what invoices to factor in, but this option is more expensive than whole turnovers.
Spot factoring- Companies sell individual invoices in a one-time deal, but this option is costly.
Vehicle & Equipment Loans (V&E)
Generally, Vehicle & Equipment loans are the most likely to be approved loans because the item acquired with the loan is collateral. For reference, a construction company receives a V&E loan for a bulldozer and defaults on the loan; thereby, the lender owns the bulldozer. V&E loans generally require a down payment of 10-20%.
Small Business Administration (SBA)
Small Business Administration loans are beneficial for large projects. The rate of interest is relatively low because SBA’s are backed by the government. SBA’s have a loan cap of 5 million USD, which the government covers up to 85%. The downside of SBA’s is that they are hard to obtain because lenders consider many more factors such as criminal records. Applying for an SBA is labor-intensive, but the loan is worth the effort. However, because the business owner is dealing with the government, legal ramifications could result in federal prison incarceration if the loans are misappropriated or found to be fraudulently gained. That said, this loan is generally offered to low-risk businesses generating profitability, that have an owner with a strong credit history. High-risk industries will generally not be eligible for this program since it is insured by the US Federal Government and disbursed by banks.
Short Term Loans
A short-term loan is meant for rainy days and emergencies. Lenders usually only payout $1,000 or less, and they expect reimbursement within 7 to 30 days. Lenders know that the company is already in a risky situation, so companies are looking to pay very high fixed prices to balance the risk. Fixed fees can range from 10-30% of the initial loan value.
How to Qualify?
After reviewing the best loan based on your business model and comfort level, start putting things in place to improve your chances of being qualified. Here are a few tips you can use to increase your chances of receiving a loan:
- Pay off all your previous expenses before trying to acquire more debt.
- Offer collateral as a way to settle the lender’s potential anxiety.
- Have a business plan to show your company’s projections and potential growth.
- Find a lender that is favorable to your situation; not all lenders are the same.
If you would like to talk to a loan consultant feel free to call us at 1-866-257-2973.