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Blog Types of Loans
May 30, 2024
5 min read
Last update: May 30, 2024

Empower Your Business: Navigating High-Risk Loans

So you need quick capital to meet operating expenses, but a traditional small business loan will take months, and you’re not quite sure if you qualify. Sound familiar? If so, you’re in the right place because you could be a perfect candidate for a high-risk business loan.  

While the sight of “high-risk” could scare many business owners away, you’re not afraid of a few flashy words. Instead, the term is more a moniker lenders use to justify lending to high-risk borrowers. 

Perhaps you are operating in a volatile industry, or maybe you don’t have years of experience under your belt. Regardless, funding options are available to you, and we’ll break down what it means to obtain a high-risk loan and why it could be the best thing for your business. 

What Are High-Risk Loans?

Lenders consider loans high-risk when providing funds to businesses with the extra potential for defaulting, going out of business, or going bankrupt. As a result, financial institutions offset that risk by creating less favorable terms for borrowers. 

These less favorable terms can range from higher interest rates and fees to shorter borrowing terms and lower principal amounts. Likewise, high-risk lenders may also deploy various collection methods, from weekly bank withdrawals and monthly payments to direct point-of-sale payment collection. 

Businesses may only qualify for high-risk loans because of various factors, including owners with a bad credit report or businesses with short operating tenures. Businesses in volatile industries, like tech, healthcare, or energy, may also bear a higher risk than many traditional borrowers. 

Despite these shortcomings, there are still financing options available to these businesses. A high-risk loan may be the ideal funding solution for your business should you face challenges with traditional loan options. 

Types of High-Risk Loans Available

Bad credit loans are less about the specific type and more about the terms of the loan. For instance, a bank or credit union may approve a traditional term loan to a riskier borrower but with higher interest rates or lower principal amounts. Lenders may also offer loans through lines of credit or borrowers with a cosigner. 

However, there are a few types of loans that alternative lenders tailor more toward the high-risk business. These loans include short-term loans, cash advances, and invoice financing, and many come with fewer requirements so that you can get funding quickly and without extra paperwork. 

Short-Term Unsecured Business Loans

A short-term unsecured business loan is similar to a traditional loan without collateral, such as real estate. The main difference is the length of the term. A short-term business loan has repayment terms between six and 18 months. 

These short-term installment loans also have lower principal amounts, which help manage the lender’s risk and keep borrowers’ payments reasonable. Although you can often avoid a personal or business credit check with a short-term loan, many lenders require bank statements and online applications. 

Furthermore, lenders use factor costs when calculating rates on short-term unsecured loans. Those factor costs lead to higher rates, making unsecured loans a more costly solution than secured loans for many lending needs. 

Merchant Cash Advance

A merchant cash advance, also sometimes called a Purchase of Future Sales Agreement, is another short-term lump-sum loan option. In this case, a lender provides you funds upfront in exchange for a fixed percentage of future credit card and debit sales. 

The agreement continues until the initial principal amount plus any fees and interest gets paid back in full. These arrangements often last between six and 18 months, and lenders receive money based on a percentage of credit and debit card sales directly from the point of sale. 

Business Cash Advance

A business cash advance is similar to a merchant cash advance agreement between a lender and a borrower but with a few notable differences. For example, a business cash advance is an exchange of lump-sum funds for a percentage of total sales, not just card transactions. 

Lenders manage risk by collecting a fixed percentage of all sales daily or weekly and withdrawing those funds directly from a bank account. Borrowers will also receive refunds on overpayments, and repayment can last much longer than the 18 months stipulated in a merchant cash advance. 

Invoice Financing

Invoice financing carries several names, including invoice factoring and accounts receivable financing. When using invoice financing, business owners get cash from invoices that take longer than 30 days to collect. 

In exchange for funds upfront, a lender collects payment from clients or customers directly, along with interest, to satisfy repayment. This arrangement reduces risk on behalf of the lender and allows you to avoid any bank withdrawals. 

At SBG Funding, we can advance up to 90% of receivables, allowing you quick access to working capital. Our invoice financing solution helps you manage your cash flow without waiting for your customers to pay you. Apply today and get funded as soon as the next business day!

Benefits and Drawbacks of High-Risk Loans

In many cases, borrowing funds to cover operating expenses, purchasing startup inventory, or making critical business investments is unavoidable. For business owners weighing their options, a quick look at the pros and cons of a high-risk business loan can be the perfect way to make a decision:

Pros of a high-risk business loan:

  • Quick access to needed capital
  • Flexible repayment options 
  • Available to businesses with low credit scores
  • Shorter loan application processes
  • Reduced lending requirements 

Cons of a high-risk business loan:

  • High interest rates
  • Lower loan amounts
  • Added handling, processing, and origination fees
  • Potential sacrifice of future sales
  • Risk of becoming dependent 

Despite the drawbacks, a high-risk loan could give you the money you need to properly manage your business. With proper planning and guidance from financial professionals, you can leverage one of these loans to great benefit. 

How to Qualify for High-Risk Loans

Each lender and loan type comes with specific eligibility requirements businesses and business owners must meet before obtaining loan approval. Brick-and-mortar financial institutions, like banks and credit unions, usually have stricter demands, whereas online lenders, like SBG Funding, make it easier to qualify. 

For example, a business can qualify for an SBG Funding high-risk option by meeting the following:

  • At least six months in business
  • A FICO score of 600 or higher
  • At least one invoice (for invoice financing)
  • Supporting documentation for approval
  • Operate in an approved industry

If you meet those requirements, you can land funding in three easy steps:

  1. Apply online 
  2. Get approved (with supporting documents)
  3. Receive funds

SBG Funding provides financing options for businesses operating in a wide range of industries, including construction, retail, restaurants, trucking, HVAC, healthcare, and more. Connect with us today or explore our funding calculator for small businesses to see your options! 

Best Practices for Managing High-Risk Loans

Of course, the best way to qualify for needed financing is to boost your financial situation. Following these few best practices can put you in a better position for high-risk loans while setting you up for more favorable conditions when you borrow in the future:

  • Only borrow what you need
  • Avoid becoming dependent on loan funds
  • Make on-time payments and communicate before experiencing late payments
  • Use high sales volume to pay off loans
  • Partner with financial professionals to create accurate budgets
  • Prioritize must-haves over nice-to-haves

Whenever borrowing funds, financing options must align with business goals. Taking out a high-risk loan is, well, risky, and only using those options when most needed can prevent falling into common borrowing pitfalls, like becoming overly reliant on credit. 

At SBG Funding, our goal is to support businesses with successful loan management. We ensure rates and payments are clear upfront so companies can make budgets that keep them out of the red. 

Fuel Your Business Growth with SBG Funding

High-risk loans can be just what the doctor ordered to supply your business with the needed capital to meet operational demands. Although terms, rates, and amounts may be less than ideal, the shortened application process, quicker access to funds, and less demanding requirements make these loans practical options. 
From merchant cash advances and invoice financing to business cash advances and short-term loans, you can get capital for your crucial expenses in several ways. To streamline the lending process, apply with SBG Funding. Our flexible requirements and online application process make us the ideal partner for your funding needs. Apply today and get cash in 24 hours!

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