With over 2 million independent businesses operating in 193 economies across the globe, the GWP (Gross World Product) estimated for 2019 is around 80.8 trillion USD as reported by the IMF. It shouldn’t come as a big surprise that in China alone, there are about 77 million business entities with over 11,000 businesses registering themselves daily throughout the year. No wonder why the corporate world around us is producing fascinating digits that can boggle an average person’s mind. However, in the midst of it all, there are always small new businesses that are ever trying to emerge and create their impact on the trade and services industry. Many of these new entrants find the refuge with the high-risk lenders to help finance their business quagmires.
According to a survey conducted by the Small Business Administration (SBA) in 2017, nearly $600 billion are borrowed by enterprises each year. The average interest rate charged on a conventional business loan for small enterprises is around 4-6%. However, banks offer lower rates than other alternatives.
In this article, however, we would like to provide you with some suggestions as to why you should consider going for high-risk loans in contrast with popular beliefs. So let’s take a quick look at them:
When Unsecured Loans (High Risk for Lenders) Seem Like A Much Easier Option
When we talk about high-risk loans, the definition includes those loans that have a high possibility where the borrower is unable to pay off the loan, and thus the deal ends up in default. Hence the lender is at high risk of suffering loss. Similar to this aspect are unsecured loans which contradict the secured loans as they have no collateral attached within their clauses. Hence in a case of default, they are a high risk for the lenders. Nevertheless, the borrower still has to meet certain requirements such as income and credit ratings. On the other hand, it gives the borrower the main advantage of acquiring a range of loans starting from $5,000 to $500,000 depending on their credibility without having any collateral.
However, if you are unable to pay off the loan, the lender cannot seize the collateral and thus will issue a court order. In such a case, there is always a possibility where you can file your business for bankruptcy and thus might end up with a situation where the court discharges you for any or all unsecured loans. Nevertheless, this news goes public and tarnishes your image as well as announces to the world how insecure you are for lenders. Let’s hope that it never comes to that. But if all comes to the worst an unsecured loan can help you get away with the amount. Hence it can be looked upon as an advantage for some and probably unfavorable for those who prefer maintaining a good reputation.
When There Is Really No Option Left For You
Let’s be honest here and spurt the whole truth all at once. To be eligible for a business loan, the lenders take into account three major criteria, namely:
- Your business’ credit rating or the owner’s credit dealings
- The stability of your business and how long it has been running?
- Lastly, the profitability of your business and how much annual revenue it generates.
If you fail to qualify on any or all of the criteria as mentioned above, then the lenders will treat your request for a loan as a ‘high risk’. This means outrageous demands from their side which might include: higher than usual APRs (annual percentage rate – the combined interest rate for a year), smaller loan amounts, and shorter than usual repayment terms.
We know it sounds quite stringent, but at times many small businesses that have little to no commercial history, as well as low credit and lower incomes still, can be in dire need of immediate funds to sustain their operations.
During these times, a high-risk loan does seem viable as it is the only option if the small enterprise seeks to have a brighter future one day. Hence in a situation where everything is falling apart, and the only way to sustain your business is a high-risk business loan, then there is no question as to what you must do. We do wish that such a condition doesn’t occur on anyone, however, in a do or die situation your courage and self-belief can encourage you to make decisions that might end up being a success in the long run.
When You Qualify For SBA Loans (Reduced Risk)
The United States Small Business Administration offers SBA loans and commercial loans to existing and new small businesses that have recently emerged but are unable to secure for themselves a traditional method for bank financing. Though the government backs these loans, nevertheless they are still considered risky as chances may be high for any small enterprise to fail without paying back the loan. The main advantages of SBA loans include:
- Graciously prolonged payback terms such as a 10-year term for smaller businesses to return the amount.
- Caps on lending interest rates which include 2.75 points over prime on loans that exceed $50,000 and payback term of at least 7 years.
- Support of the government to finance up to 80-90 percent of the project costs.
- And lastly exceptionally low down-payment requirements.
However, with some pros, there are always some cons. This includes collateral from the borrower, so mostly it ends up making it a secured loan type. On the other hand, you might as well experience a much slower process if you end up dealing with standard lenders than preferred ones. Standard lenders who are unlike the later cannot make decisions on their behalf and thus effectively make the entire procedure devoid of all the urgency that it requires in the first place.
When You Have Considerable Company Owned Assets
One of the most common types of high-risk loans is high-risk asset-based lending. This is effectively a type of commercial financing in which a lender only approves of lending you the requested funds if they are secured against the assets of a company that is listed on their balance sheet. Hence your asset becomes collateral in this part of the agreement, and they can range from accounts receivables to real estate owned by the company or valuable machinery or equipment as well.
There are times when companies have opted for high-risk asset-based loans and enlisted their stocks and inventory under the collateral agreement. Hence if you are a company that has lower credit scores and little to no history, then this seems like a fine idea considering that you have assets that can be put under the collateral clause. In short, if you fall under this category, then high-risk lenders might consider you as a favorable borrower in their books.
When A Short Term Business Loan is Sufficient for You
Short term business loans are technically high-risk loans since they carry shorter terms for repayment and thus can also have tediously high APRs. While short-term loans can be more affordable and slightly a less accessible option when compared with other high-risk business loans, they are in no way cheap or easy to qualify for. Many of their requirements mostly include a business history of more than one year plus they also require a personal credit score of over 550+ and these are merely the minimum qualifications only. Adding more to the nuisance of short term loans are their lower payback term options and APRs that are easily above 10% even for the most qualified borrowers.
When Alternative High-Risk Lending Is All, You Have Got?
We are finally at the end of our list, and it goes to show that there might be a situation which a company or business might have to face where they are unable to even qualify for SBA loans. Under such dreadful circumstances, the most stubborn of all business owners will have no option but to go for alternative options to find a way to fund their operations. The only advantage here is that preapproval for alternative financing can be achieved in minutes and you will be receiving the funds in their totality within 5-7 business days.
The Final Word
These are some significant reasons when it seems viable for businesses to go and apply for high-risk business loans. We can only wish that there were better options available to comfort high-risk borrowers so that they can have a better chance of surviving in this cut-throat corporate sector. However, time and again, we have seen faith favoring the brave. Hence, in the end, it is advised to keep your market research strong and seek out ventures that have considerable demand within the industry. Paying back loans and defaulting on them is nobody’s plan of action. There is always the possibility of things going south. Your study and investigation regarding your decision to start a business should be strong enough to guide you in the right direction.