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. As a small business owner, the long-term success of your business shouldn’t be dependent on taking unnecessary risks.
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.
Now, let’s dive into everything you need to know about high-risk business loans.
Let’s start by saying that a high-risk business loan is subjective. That is to say, what one borrower considers to be a high-risk loan may appear less risky to another borrower. It all depends on that business’s specific situation.
But in the most general terms possible, a high-risk business loan is a loan extended to a business with poor credit, little or no business history, and low annual revenues.
So what makes these types of business loans 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.
Oftentimes, 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.
Let’s take a closer look at the criteria that businesses need to meet in order to qualify for a high-risk business loan.
The first main qualification that business lenders will look to is the business owner’s personal credit score.
If you’ve has a rocky personal credit history—or no history—then business lenders will be taking on more risk by lending to your business. It may seem counterintuitive—what does someone’s personal credit indicate about their business’s finances? However, lenders will look to the business owner’s personal finances to indicate how they’ll handle their business’s finances.
As such, if you take on a business loan with less-than-stellar personal credit, that’s considered a high-risk business loan.
Note that if you’ve been in business for a while and have built up a strong business credit score, this may help you qualify for a lower-risk business loan, even if your personal credit score is low.
Business lenders will also consider how long your business has been in business. Put simply, a long business history indicates more likelihood that your business will last and, by extension, will be able to repay any debt it takes on.
Because startups and new businesses have less business history than more longstanding small businesses, they indicate more risk for business lenders. Lenders will consider lending to your new business more high-risk, and, because of this, any business loan you secure for a new or startup business will be a high-risk business loan.
The third factor that lenders will consider in the underwriting process is your business’s annual revenue.
Your business’s annual revenue is yet another way for a lender to tell how likely it is that your business will be able to repay a loan.
High-risk loans are lent to businesses with lower annual revenues, and low-risk lenders often come with minimum annual revenue requirements that restrict low-revenue businesses from even applying in the first place.
Another thing a lender will take into account is the type of industry your business operates in. Some lenders have hard and fast rules about not lending to businesses that operate in high-risk, unstable industries. Others will only extend these types of businesses high-risk loans.
Now, what is considered a high-risk industry is subjective and varies by lender. Some examples of industries in which it is hard to acquire a loan include gambling, firearms, and marijuana/CBD.
So, even if your business has good credit, a long track record, and good annual revenues, some lenders will only extend you high-risk business loans depending on the industry you operate in.
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?
While 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. Its 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 you know what high-risk business loans are, and how they work, let’s look at the pros and cons of going with this type of business financing. While the cons may seem obvious, there are legitimate reasons for pursuing a high-risk business loan.
So, when should you consider a high-risk business loan?
The short answer: When you’re a high-risk borrower. Sometimes high-risk business loans are your only options, and they can be the right move.
But the long answer will probably be more helpful—let’s get into the details.
You should only take on debt in the form of a high-risk business loan if it’s your only option and you need the funds immediately. That second part is important. Maybe you’ve identified a great business opportunity, but you need the funds within 24 hours in order to capitalize on it. In that situation, taking out a high-risk business loan could be worth it—as long as you’re sure this opportunity will lead to a significant revenue boost that will allow you to pay off the loan on time.
As a reminder, high-risk business loans rarely come with attractive terms. As such, they shouldn’t be the first place you look for business funding, as they will be very costly and can seriously impact your cash flow.
We’ve already alluded to why you wouldn’t want to take out a high-risk business loan. The reasons not to pursue this type of business financing are a lot longer than the reasons you should.
Let’s take a look.
If you have a funding option that’s not high-risk, then you should avoid taking on debt with a high-risk business loan.
As we said before, what’s considered “high-risk” is subjective. Lenders’ definitions of high-risk borrowers can vary. While one lender can consider your business high-risk, another lender might decide otherwise. It doesn’t happen often, but it’s possible.
If you have one funding option that’s a high-risk business loan and one funding option that’s a lower-risk business loan, the terms should speak for themselves.
Additionally, if you can bide your time to improve your business’s qualifications before securing funding, then you shouldn’t opt to fund with an immediate, high-risk business loan.
You’ll have to put in the effort to get there, but improving your business’s qualifications over time will eventually open up low-risk business loans with better, more affordable terms.
If you don’t need the funding immediately, then you should put in the work to improve your personal credit score and your business’s annual revenue. Plus, your business’s age will improve just by nature of your waiting to fund.
Now that we know the types of business loans that high-risk borrowers can qualify for, let’s take some time to go over some of 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 600+ 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 $500,000 with APRs as low as 8.5% and as high as 99% on terms between three and 36 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 530, at least six months of business history, and annual revenue over $100,000.
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.
So, you’ve explored all your current options, and you’ve decided to wait it out in order to access more affordable, lower-risk funding in the future.
What are your next steps?
Well, that will depend on what made you a high-risk borrower in the first place. Let’s take a look.
So, if you’ve been deemed a high-risk borrower because of your personal credit score, your next step is to build your personal credit.
But how do you do that, exactly?
Well, the most foolproof way to build your personal credit is through responsible spending on a credit card for building credit.
The two best credit cards for building credit are the Spark Classic, which we mentioned above, and the Capital One Secured Mastercard. Each will give business owners the opportunity to spend wisely, improve their personal credit in the process, and eventually become lower-risk borrowers as a result.
But what if your business simply doesn’t have enough business history under its belt?
Well, unfortunately, even the savviest of business owners can’t speed up time. As such, the main solution for having a young or startup business is just patience.
However, to bide your time, you can access one of the top business credit cards for new businesses for a revolving line of credit and perks like rewards, 0% APR intro periods, and signing bonuses. You could also consider a personal loan if you have a strong personal credit score.
Another problem that has no one definitive solution is a low annual revenue.
In order to become a lower-risk borrower, your business will need to earn a certain threshold of annual revenue.
Invest some effort in growing your business by making the most of your marketing budget or perhaps even upping your spend and getting the word out about your business.
The more exposure your business has, the more revenue it’s likely to generate.
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.