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Low Risk vs. High-Risk Business Funding

How to get funding is often at the top of any entrepreneur’s list of challenges. From getting a business off the ground to attracting customers to hiring staff and expanding, an enterprise is almost always in need of capital.

Thankfully, the last few years have seen a tremendous increase in the number of financing options for both new and existing businesses. Today, the bank isn’t the only choice of funding at a merchant’s disposal.

That said, not all business owners find it easy to acquire funding. Small businesses, in particular, are known to suffer rejections by lending institutions, while other types of businesses are usually exempt from applying altogether.

The Risk Index

When reviewing funding applications, a financial provider typically pays the most attention to information that determines the likelihood of a business paying back the loan. Using this information, the lender will calculate your “risk index” and with it decide whether to approve or reject your loan request.

The risk index is contingent on two key conditions: the nature of the industry in which a business operates and its financial stability. So, a business within a high-risk industry or with a high probability of failure will attract a high-risk index and consequently find it hard to acquire funding.

High-risk Factors

Financial institutions will label your industry as high-risk because of reasons like stringent government regulations, numerous chargebacks, susceptibility to fraud or accidents, and little support from the community.

Banks also view businesses that have a history of bad credit, no collateral and no proper plan as high-risk. Similarly, all small businesses are regarded as high-risk because they’re more likely to fail than established enterprises.

Financing a High-risk Business

Analyzing your business according to the high-risk factors above will help to determine whether it’s in the high-risk or low-risk category. If you’re running a high-risk operation, the chances are high that applying for a bank loan will be futile. Instead, consider alternative sources, such as high-risk business loans or often referred to as a merchant cash advance. Do your research to find the financier with whom you’re most likely to score funding, at the most reasonable rates.

Additionally, if your company is considered high-risk because of its industry, ensure it’s compliant with all related local, state and federal regulations. A financier will be more willing to help if you’re adherent to the law.

Lastly, high-risk funding usually comes with high down-payment requirements and repayment rates. It’s therefore not uncommon for financiers to take advantage of desperate merchants with exorbitant interests and processing fees. Before signing any contract, read the terms and conditions carefully, and make sure your provider is as fair and transparent as possible.