No two small business loans are the same. The type of loan you’ll receive from a lender depends on a wide range of factors—some of which vary by lender, and some of which depend on your business’s credentials.
If you’re new to the business loan market, one type of loan you’ll likely encounter is a high-risk business loan. Just from the name, you can probably tell it’s not an ideal product. But what makes a high-risk business loan a less-than-ideal product, and how is it different from other loan products?
With this guide, we’ll explore all the details of high-risk business loans. Plus, we’ll explore some alternatives and steps you can take to help you access lower-risk business loans in the future.
What makes a loan high risk? Well, the term “high risk” is framed from the perspective of the lender. That is, high-risk business loans are high risk for lenders. This is because the loans they are extending are to less-qualified borrowers. A lender’s goal is to make their money back plus interest, and lending to a business with a poor financial track record makes it less likely that they will be able to do that. Hence the term “high risk.”
To determine your business’s qualifications, lenders will look at your personal credit, your business history, and your annual revenues—among many other supplemental considerations.
Often, lenders will have pre-set minimum qualifications for each of these three criteria. If you meet the minimum qualifications, you may be able to qualify for a high-risk business loan. If you exceed them, you may qualify for a lower-risk business loan.
If a lender is taking on more of a risk by lending to your business, then you’re unfortunately going to have to pay for this risk.
High-risk business loans will almost always come with expensive, inconvenient terms because of the risk they involve. As such, if your personal credit is low, your business is young, your business’s annual revenue is low, or all three, then you’ll see higher APRs, smaller loan amounts, and short repayment terms on any high-risk business loan you qualify for.
What types of business loans tend to fall under the umbrella category of high-risk business loans?
Although the answer to this question might vary from lender to lender, there are a few rule-of-thumb business loans that lenders provide to higher-risk businesses.
Here are the business loan types that are often referred to as “high risk.”
Merchant cash advances are available to less-qualified businesses and, as a result, are often considered high-risk business loans.
That said, merchant cash advances (MCAs) aren’t technically loans—they’re advances. With MCAs, a lender considers your business’s future credit card revenues as an asset. They’ll advance cash to your business, and then they’ll deduct automatic repayments from your business’s daily credit and debit card transactions.
Since a merchant cash advance is high-risk business funding, it’s going to be expensive. Exactly how expensive it will be depends on the advance’s factor rate. The factor rate will be expressed as a decimal that you’ll multiply your principal loan amount by to calculate the total cost.
So, for instance, if you secure a merchant cash advance for $100,000 with a factor rate of 1.18, then you’ll end up repaying $118,000. Ultimately, the merchant cash advance will end up costing your business $18,000, which is a lot more than lower-risk business loans.
In order to qualify for a merchant cash advance, you’ll need to fulfill some accessible minimum requirements. You, the business owner, will need to have a personal credit score above 400, your business will need to have at least five months of business history, and your business will need to make at least $75,000 in annual revenue.
Another form of high-risk business loan is a short-term loan.
Short-term loans mirror the structure of traditional term loan but provide a condensed, often more expensive, alternative to a longer-term loan’s lengthy repayment terms and relatively low APRs.
Generally, short-term loans are usually the more affordable, slightly less accessible option when it comes to high-risk business loans. However, that’s not to say they’re cheap or hard to qualify for.
For starters, the minimum qualifications for short-term loans are, generally speaking, a 550+ personal credit score, at least one year of business history, and at least $50,000 in annual revenue. To be sure, these qualification minimums are less lenient than those of the MCA. Nonetheless, they’re still relatively lenient and, as a result, make short-term loans a form of high-risk business loans.
Additionally, short-term loans will come with less desirable terms than other, lower-risk business loan options. Their costs can either be indicated in APRs or factor rates, and the lowest they’ll ever dip is a 10% APR for the most qualified customer.
Our last recommendation is a personal loan for business purposes. A personal loan is a loan you use for personal reasons. But you can use personal loans for business purposes as long as you’re spending the money in accordance with the terms of the loan.
Personal loans for business purposes are a good option if you’re a new business with no history and little-to-no annual revenue. However, to qualify for a personal loan for business purposes, you still need a strong credit score. So you may need to be a little less risky than you would be to access short-term loans or MCAs.
Just be sure that if you take out a personal loan for business purposes, you are vigilant about separating personal and business finances.
Now that we know the types of business loans that high-risk borrowers can qualify for, let’s go over the best lenders who offer these products.
If you have to get a high-risk business loan, then you’ll need to be very careful about which lender you decide to work with. While some are reputable lenders, others may try to take advantage of desperate business owners and gouge you with exorbitant rates and hidden fees.
If you choose to work with a shorter-term, easily accessible loan, you should work with a trustworthy lender. Here are the most trustworthy lenders who provide these types of business loans.
Rapid Finance (formerly Rapid Advance) is an alternative lender that offers three types of short-term loans: Standard, Select, and Preferred loans.
Their Standard loan can range from $5,000 to $1 million with a 1.16 to 1.30 factor rate and terms ranging between four months and one year.
On the other hand, their Select loan can range from $15,000 to $1 million with a factor rate anywhere from 1.12 to 1.31 and terms ranging from six to 15 months.
Finally, their Preferred loan ranges in amount from $15,000 to $500,000 and comes with factor rates from 1.11 to 1.25 and terms from nine to 18 months.
For their most accessible options, Rapid Finance requires a 580+ personal credit score, at least two years of business history, and at least $120,000 in annual revenue.
Another top lender of high-risk business loans, OnDeck Capital offers a short-term loan product to small businesses that are less qualified by traditional lending standards.
If you have a 625+ personal credit score, at least one year in business, and at least $100,000 in annual revenue, then you fulfill OnDeck’s minimum qualifications.
Their short-term loan product ranges in size anywhere from $5,000 to $250,000 with APRs as low as 29.9% and as high as 97.3% (rates based on loans originated in the half-year ending March 31, 2022) and terms up to 24 months.
We haven’t mentioned lines of credit too much yet because they are typically harder to qualify for than merchant cash advances and short-term loans. However, certain lenders provide lines of credit to lower-qualified businesses as long as they have strong cash flow.
One such lender is Bluevine, which offers short-term lines of credit ranging between $5,000 and $250,000 with interest rates as low as 4.8% and as high as 51%. To qualify, you’ll need a minimum credit score of 625, at least 24 months of business history, and monthly revenue of at least $40,000.
A line of credit gives business owners access to a specific amount of financing set by a credit limit, which they can draw from whenever they need. The benefit is that you only pay interest on the amount that you use.
Another short-term line of credit provider with low qualification standards is Fundbox. Through Fundbox, you can secure a line of credit between $1,000 and $100,000 with interest rates as low as 4.66% on a 12- to 24-month term.
To qualify, you need a minimum 500 credit score, $25,000 in annual business revenues, and three months in business.
You’ve probably noticed that most of the high-risk business loan options we’ve laid out for you are pretty costly. And you’re right.
Even more, those are the best terms you’ll likely be able to find for high-risk business loans. That’s why we suggested you should only take on this type of debt if it’s your only option and if it’s urgent.
However, there are often other funding options for small business owners to consider beyond high-risk business loans. Whether they’ll be accessible will depend on your various qualifications, but if you have collateral to offer up, fair credit, or you’re a young business, then you’ve probably got some other options.
Let’s take a look.
If you and your business’s three main qualifications don’t offer the total package, then consider offering up some collateral for an asset-based loan instead of immediately opting for a high-risk loan.
For instance, with equipment financing, you’ll be able to get a loan for up to 100% of the value of a piece of equipment your business needs, and the equipment itself will serve as the loan’s collateral. You’ll just need a 600+ personal credit score, 11+ months in business, and $100,000+ in annual revenue to qualify for this type of financing.
On the other hand, invoice financing uses an outstanding invoice as collateral and, as a result, qualifies as lower-risk. With invoice financing, you’ll be able to get an advance of up to 90% of an outstanding invoice’s worth. Plus, the general minimum qualifications for this funding type are only six months in business and $50,000+ in annual revenue.
Additionally, if you’re looking for short-term credit that won’t break the bank, consider looking into your credit card options. We know—when you think “affordable financing,” you likely don’t think of credit cards. However, high-risk business loans can be so expensive that a business credit card might be your more affordable option.
If your business is on the younger side, but you yourself have good-to-excellent personal credit, then a business credit card like the Blue Business Plus from Amex might be your best bet. The Blue Business Plus offers a 12-month intro period of 0% APR. That means, as long you pay your monthly minimum payments, you’ll be able to carry a balance from month to month without accruing a single cent of interest. Of course, once these 12 months are up, a variable APR will set in.
Even if your personal credit score leaves something to be desired, you could access a monthly revolving line of credit through a credit card like the Capital One Spark Classic. This card is available to business owners who have a personal credit score of just 580 or above. Not to mention, this credit card also offers unlimited cash back rewards to the tune of 1% cash back for every dollar you spend on your business.
With all the information on high-risk business loans laid out, what’s the takeaway?
All in all, high-risk business loans aren’t only high risk for lenders—they’re also pretty risky for the borrowers who take them on.
High-risk loans can be exorbitant and extremely difficult to pay off. As such, you should only take on debt in the form of a high-risk business loan if it’s absolutely necessary. And if you do, you should be extremely careful about which high-risk business lender you choose to work with.
Failing that, you should either wait it out until you can secure a lower-risk business loan or seek another funding option.