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Lenders view high-risk businesses as more financially unstable. Common high-risk factors for lenders include low credit scores, a short time in business, irregular income, or industries where there are lots of chargebacks.
The good news is you're not locked out of financing if you operate a high-risk business. But as a high-risk borrower, you might pay a higher interest rate and receive less favorable repayment terms for financing.
I've spent my career helping small and midsize business owners who were turned down for funding by other lenders get access to capital. Below, I'll cover what you need to know when applying for a high-risk business loan.
| Financing type | Typical cost for a higher-risk borrower | What the lender secures against | How fast you can get funded |
|---|---|---|---|
| Short-term business loan | Starts at 6% APR, priced higher for higher-risk files | Nothing (based on revenue) | As fast as same day |
| Business line of credit | Starts at 6% APR, priced higher for higher-risk files | Nothing (based on revenue) | As fast as same day |
| Invoice factoring | 0.5% to 5% of each invoice per month | Your unpaid invoices | One to two weeks |
| Merchant cash advance (MCA) | Factor rate of 1.08 to 1.45 | A share of future sales | As fast as same day |
| Equipment financing | Starts at 6% APR, priced higher for higher-risk files | The equipment you buy | One to five business days |
What Puts a Business in the High-Risk Category
Some of the factors that make you a high-risk borrower are in your control. Others aren't.
Here's what lenders are paying attention to:
Business credit score and personal credit score
Lenders care about both, and they typically look for a score above 620.
Time in business
More financing options are available when you've been open for six months or more.
Consistent revenue
Lenders prefer steady monthly deposits over uneven revenue, even if your annual revenue looks good overall.
Debt load
Having too many open loans makes your business appear riskier to lenders. Pay down existing debt as much as possible before applying for a new loan.
Messy paperwork
Missing tax returns, messy bank statements, or incomplete financial records slow down approval and may land you with a pricier option.
Your industry
Lenders view some fields as riskier. These include restaurants, construction, trucking, and any seasonal business.
Chargeback and refund rates
A lot of disputed charges are a red flag to lenders that review card activity.
Seasonality
If your monthly revenue drops during specific times of the year, lenders factor this into your quote.
Your credit history
A past tax lien, bankruptcy, or default stays on your credit report for several years.
What Industries Are Considered High Risk?
This isn't an exhaustive list of businesses, but here are a few that have come across my desk after struggling with traditional bank loans. I've also included some details on the type of financing Clarify Capital was able to connect them with:
Trucking and transportation
Financing for trucks, parts and repairs, fuel, and cash flow between shipments.
Food service and restaurants
Financing for equipment and staff during the slow season or off-peak times.
Construction
Financing for materials and payroll until you receive invoice payments.
Retail and e-commerce
Inventory financing and working capital to support both peak and low-volume periods.
Medical and dental practices
Financing for medical equipment, buildout, and day-to-day operations.
Auto shops
Service and repair shops that have variable monthly revenue.
There are millions of small businesses across the U.S. that operate in these spaces. If you're operating a business in a space traditional lenders consider risky, don't be discouraged. There are plenty of alternative lenders that offer more flexible financing options for these and other high-risk businesses.
Types of High-Risk Business Loans
Here's what each one does and where it tends to fit.
Equipment financing
Finance up to 100% of the equipment's value with repayment terms from 12 to 72 months.
Business line of credit
Draw against a pre-set credit limit at any time for inventory, payroll, or other expenses. Only pay interest on the amount you draw.
Short-term business loan
A single lump sum paid back over a fixed repayment term. Use it to cover large expenses. Loans range from $10,000 to $5 million.
Invoice factoring
You sell unpaid invoices at a discount and get cash now. The fee accrues monthly.
Merchant cash advance (MCA)
Get an advanced percentage of your future sales repaid at a factor rate from 1.08 to 1.45. Money can move quickly, but the cost is higher than other options here.
