What Are High-Risk Loans?

Loans in which the risk of default is high. This can be for any number of reasons. The most common reasons a private entity or business can be considered high-risk are; a previous default on a loan, start-up businesses in which the business model hasn’t yet proven itself, and clients with very little or no disposable income.

What Businesses Are Considered High Risk?

• Businesses with bad credit
• Businesses with no credit
• Startups
• Businesses with unsteady revenue streams
• Businesses in volatile or risky industries

Here are some of the types of high-risk business loans:

• Merchant cash advance
• Invoice financing
• Short-term loan
• Personal loan
• Credit cards

What Is a High-Risk Business Loan?

High-risk business loans are last-chance financing options for businesses that are too risky by traditional lending metrics. 

When deciding to approve a business loan or not, traditional lenders look at a business’s creditworthiness according to the five-Cs; character, capacity, capital, collateral, and conditions. Lenders consider companies having problems in any of these categories as “high risk,” and it will be challenging to get a traditional business loan. Instead, they’ll have to look for alternative financing. 

High-risk business loans have high-interest rates, large payments, or frequent payment requirements. They are short-term and are secured with important assets or are personally guaranteed.  

The terms for financing a high-risk business may be almost the same; however, there are a few different high-risk business loan choices. Each has its own set of plusses, minuses, and contingencies.

Businesses can look for merchant cash advances, subprime equipment financing, subprime business loans, or hard money loans against real estate. Business credit cards, loans on assets, and personal business loans are other financing alternatives. 

While they can be useful in some situations, any business owner must seriously consider the long-term ramifications of taking out a high-risk business loan.

Here Are Some High-Risk Business Loans You Should Look Into

Merchant Cash Advance

A merchant cash advance isn’t traditional; it’s a cash advance that a lender gives according to your past and current sales. You promise the lender a percentage of your future profits, usually credit card sales, until the loan and have paid interest. A small business owner needs a personal credit score of 500 or more to qualify usually, and the business must be in operation for at least five months and have estimated annual revenue of $75,000 or more.

Invoice Financing

Lenders designed these for a business with outstanding unpaid invoices, like those with longer terms (30 days or more). The financier buys your accounts receivables and advances you part of their value. Your clients’ credit scores are usually scrutinized instead of yours – to be sure that your customers have a good history of paying their bills.

Short-Term Loan

Short-term loans are the most traditional high-risk loan and mature in 18 months or less.

The shorter-term loan provides money lenders with an assurance of a smaller risk of default than conventional loans. 

You may be able to get a short-term loan from a bank, credit union, or alternative lender. Business owners typically need a personal credit score of 550 or more. Your business must be in operation for at least one year and have at least $50,000 in yearly sales revenue. 

Personal loan

A personal loan can be a good option for a startup with no credit history and little annual revenue as long as you follow the loan terms. You will need a good credit score to get a personal loan.

Credit Cards

It’s often easy for a business with a low credit score and sales revenue to get approved for a business credit card, but interest rates can be high. A credit card can be a less expensive option because some have cash-back features or an introductory 0% APR.

The Bottom Line

High-risk business loans are risky for the lenders, but they are risky for the borrowers too. They can be hard to repay and can put you in debt. Search for a high-risk business loan only if it is indispensable.

Now, Let’s Talk About Non-Business, High-Risk Loans.

If your credit score is subprime, any unsecured loan you receive is a high-risk loan. “High-risk loans” are loans that present more risk to a lender that gives credit to someone with a low credit score. Often a borrower’s low credit score is because of a history of making late payments or defaults, keeping credit card balances at their limits, applying for a lot of credit, or having a limited credit history.

A high-risk loan is a subprime loan that lenders give to someone with a troubled credit history. According to their credit report, high-risk loans can have double- or even triple-digit interest rates.

High-interest rates are how lenders mitigate the risk of loaning to people with bad credit. If you don’t repay the loan, the interest paid on that loan is at least something and reduces the loss.

Many high-risk unsecured personal loans are available online and are easy to get, but if you have poor credit and pursue a loan, read the terms and paperwork closely, so you know what you’re getting into.

Unsecured Loans Are High-Risk Loans Are Unsecured Loans

Unsecured loans are high-risk loans. An unsecured loan doesn’t involve a guarantee or any collateral to assure the lender if the borrower defaults on the loan, such as a valuable possession, asset, property, car, or home. Since you don’t have to put up collateral, the loan is unsecured. On the other hand, secured loans—like a mortgage—require a guarantee.

To mitigate the risk, lenders charge a high-interest rate to unsecured loans. If the borrower pays the loan as agreed upon, his/her credit score should go up. But if the borrower doesn’t make payments on time or defaults on loan, the borrower gets into debt and damages their credit score.

Are You a High-Risk Borrower?

You’re a high-risk borrower if your credit score is high-risk. Your credit score is a three-digit number that tells if you are likely to pay a loan back and make timely payments. Loans also include a credit card, car loan, personal loan, mortgage, etc. If you have a bad credit score—one below 620—lenders consider you a high-risk borrower. If you have a history of either of these, you might be a high-risk borrower and qualify for a high-risk loan:

• A pattern of paying late or defaulting
• You keep credit card balances close to their limits—a high credit utilization ratio.

Can You Get a Loan With a Credit Score of Less Than 500?

If you have a low credit score of around 500, you have limited prospects for loans. You might qualify for a high-risk unsecured loan, but it’ll have a small loan amount and a higher interest rate.

There are a few steps that you can take to get a loan if you have a low credit score:

• Look over your credit score and credit report. All lenders will need this information before they consider granting you a loan. It’s important to know what your credit report looks like before you start the loan application process.
• Prove you can pay the loan back. Lenders need to know that you can repay your loan, so it’s a good idea to show how you’ll be paying it by providing proof of income or having a cosigner.
• Talk to your bank or credit union. Research what’s the minimum credit score requirements for personal loans by asking your bank or credit union.

What’s the Simplest Loan to Get if you have Bad Credit?

There are loans that you can qualify for if you have low or bad credit. Here are a few:

• A HELOC loan uses your home as collateral. Instead of focusing on your credit score, your lender will focus on how much your home equity is worth.
• There are unsecured personal loans out there for those with bad credit.
• If applying for a secured loan with a co-signer with excellent credit, your chance of getting approved might increase.

Why Choose a High-Risk Loan?

High-risk loans can be useful for multiple reasons, such as repaying other debts or rebuilding credit. If you make all of your payments on time, Track debt-levels, and keep them low, you can improve your credit score.

If you’ve made financial blunders in the past, slowly improve your credit score by starting with a lender who will take a chance on you.

Alternatives to High-Risk Loans

If you don’t qualify for a consolidation loan with an interest rate lower than your credit card APRs, you may want to focus on working on the cards themselves.

If you can no longer afford your credit cards’ minimum payments, that’s different.

You can negotiate with the credit card issuer for more reasonable payment terms and put those terms in a debt settlement letter.

Another option is a debt management plan (DMP). Work with a nonprofit credit counselor to reduce your interest rates and consolidate all your monthly debt payments into one.

A DMP can negatively affect your credit because the plan appears on your credit reports.

Network of Lenders

We understand the need for fast cash. We have formed a convenient Network of Lenders to quickly, conveniently, and painlessly help you get the loan you need online without having to run around to banks and other financial institutions. Just fill out a short online form with some basic information, and a Lender will contact you shortly if they can offer you a loan.