If you can’t qualify for a traditional bank loan, a high-risk business loan may still be an option. These loans may be available to startups or borrowers with bad credit, but usually come with less desirable rates and terms.
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What are high-risk business loans?
High-risk business loans are a type of financing offered to businesses that may not meet traditional lending standards, often because of poor credit, low revenue, limited operating history or industry risk.
These small-business loans tend to:
- Have higher interest rates.
- Have shorter repayment terms.
- Require frequent (daily or weekly) payments.
- Require collateral or a personal guarantee.
- Have faster funding timelines, with minimal documentation.
- Come from alternative and online lenders.
Which types of businesses are considered high risk?
A lender often considers a business “high risk” because it believes they’re less likely to repay the money they’ve borrowed. High-risk businesses may have the following characteristics:
- Bad or no credit. Although it’s not always the case, a bad personal credit score — usually a credit score from 300 to 629 — may reflect high credit utilization rates and spotty payment history, which are concerns for a lender considering issuing a new loan.
- Limited time in business. Newer businesses may be considered high risk simply because they don’t have financial records to demonstrate their ability to make payments on a loan.
- Operate in volatile industry. Volatility in business can affect the long-term predictability of a business’s revenue, and therefore its ability to repay a loan. This is why businesses that operate in volatile industries — such as energy, technology and financial services — may be considered high risk.
- Limited or unstable revenue. A lender may consider your business more risky if you can’t show steady revenue. Without proof of predictable income or stable cash flow, it’s difficult for a lender to believe you’ll be able to make your loan payments.
- Poor payment history. Businesses that have tax liens or past loan defaults demonstrate a poor repayment ability. To a lender, they are considered high risk because this payment history is an indicator of how likely they are to have difficulty making payments on any new loans.
Common types of high-risk business loans
Here are some of the loan types typically available to businesses that are considered high risk:
Online loans
Best for: Working capital needs, covering short-term expenses, specific business investments.
Online loans are offered by online lending companies, and the process can be completed entirely online. They can be easier to qualify for if you are considered a high-risk borrower; however, rates and terms will be less ideal than you would find with a bank.
Equipment financing
Best for: Purchasing equipment or machinery.
Equipment financing is a type of business loan used to purchase large equipment or machinery that’s necessary to run the business. Equipment financing uses the equipment being purchased to secure the loan, thus offsetting some of the lender’s risk.
Secured loans
Best for: Businesses with strong assets.
One of the ways your lender might look to offset its risk is through collateral, or by offering a secured business loan. Loans can be secured by assets like cash, large equipment, vehicles or real estate property. If you default on your loan, your lender can seize the collateral you’ve pledged in order to recover some of its money.
Invoice financing
Best for: B2B businesses with capital tied up in outstanding invoices.
Invoice financing uses unpaid customer invoices to secure a cash advance, reducing the risk to a lender. A lender advances a certain percentage of the unpaid invoices — to be repaid by the borrower once the invoices are paid, plus a fee.
This form of financing can be fast to fund; however, fees are usually charged by the week, and repayment is dependent on how quickly a business’s customer pays their invoices.
Merchant cash advances
Best for: Businesses with strong card sales; last-resort option.
Merchant cash advances (MCAs) are an alternative type of financing where a lender issues a cash advance in exchange for a fixed percentage of your future revenue, plus a fee. Exact payment amounts will fluctuate depending on your sales, and lenders will usually take payments directly from your account.
MCAs are one of the most expensive forms of financing for a borrower. MCAs can come with factor rates that convert to APRs of over 100%. In addition, since they technically are not loans, they’re not subject to the same regulations that lenders typically have to adhere to.
Top business loan options for high-risk borrowers
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| Product | Min Credit | Min Time In Business | |
|---|---|---|---|
 Fora Financial - Online term loan Nerdwallet Rating with NerdWallet Small Business | 570 | 6 months | with NerdWallet Small Business |
 Fundbox - Line of credit Nerdwallet Rating with NerdWallet Small Business | 600 | 3 months | with NerdWallet Small Business |
 eLease - Equipment financing Nerdwallet Rating with NerdWallet Small Business | 550 | 6 months | with NerdWallet Small Business |
 AltLINE - Invoice factoring Nerdwallet Rating with NerdWallet Small Business | 300 | N/A | with NerdWallet Small Business |
 Giggle Finance - Merchant cash advance with NerdWallet Small Business | 300 | 3 months | with NerdWallet Small Business |
 Uplyft Capital- Merchant cash advance with NerdWallet Small Business | 475 | 3 months | with NerdWallet Small Business |
 Expansion Capital Group - Merchant cash advance with NerdWallet Small Business | 500 | 6 months | with NerdWallet Small Business |
How to get a high-risk business loan
If your business can’t meet traditional lending requirements, here are some actions you can take to boost your chances of getting financing:
Improve your personal credit
Although this can be a slow process and may not be right for everyone, building your personal credit score can help expand your financing options. To boost your score quickly, you can try paying down credit card balances, limiting new applications and catching up on past due payments.
If your lower credit score reflects a younger age of accounts or a limited variety in types of credit accounts (i.e., loans, credit cards, etc.), as opposed to poor payment history or excessive utilization, make sure to inform your lender. Your lender may be more flexible if they understand your entire history when reviewing your application.
Offer collateral
Offering collateral can help you lower your risk level. Collateral, like equipment or real estate, is an asset a lender can seize to cover their losses in the case of default. Because of this security, a lender may be more likely to approve a loan with collateral.
Add a co-signer
A co-signer is someone who agrees to take over loan payments if you can’t make them. This person should have strong credit or assets to make your application more attractive to a lender.
➡️ Looking for more tips to increase your chances of loan approval? Check out the video below:
Alternatives to high-risk business loans
If you’re having trouble qualifying for a loan, you might also consider one of these financing options:
Microloans
Microloans are issued by nonprofit, community lenders. These lenders tend to focus their efforts on traditionally underserved businesses, including startups or those with lower credit scores. You may be able to get a microloan even if you don’t qualify for other traditional financing options.
These loans are often available in smaller amounts, up to $50,000, but can offer competitive rates and terms.
Personal loans
If you’re having trouble qualifying for a business loan due to length of time in business, you can use a personal loan for business. Like business loans, the best terms and rates for personal loans usually come from banks and require good credit history.
Equity financing
If you’re considered high risk because your business is a pre-revenue startup, you may consider equity financing, which involves raising capital by trading ownership stakes in your company. Angel investing and venture capital are forms of equity financing.
Peer-to-peer (P2P) lending
Peer-to-peer lending is a type of business lending that connects business owners with individuals or private investors. P2P loans are a way to borrow money without relying on banks, but they are often facilitated by a third-party company that provides a platform for business owners to connect with investors. They typically have less stringent qualifications than traditional loans, so they can be a good fit for high-risk borrowers.
Frequently asked questions
Do commercial banks offer high-risk business loans?
Banks don’t typically offer loans to high-risk borrowers; however, some may use different methods, such as collateral or special programming, to offset the risk.
What’s the difference between a high-risk business loan and a predatory loan?
High-risk business loans mitigate the risk through loan structure or collateral, or by offering smaller loan amounts. Predatory loans impose abusive loan terms on vulnerable borrowers without concern that the loan will be repaid at all.
