For almost all business owners, the idea of applying for a loan can seem like a burden, from the endless pages of paperwork with various requirements to the mind-boggling process of obtaining the loan, which does not even guarantee the obtaining of the loan. This process is a pain in the neck for even the most stable industries, so imagine the pain that business owners suffer in high-risk industries.
Are you considered high risk?
Commercial lenders evaluate many aspects of a business when deciding whether loan approval is possible. They evaluate the case and decide whether a client is likely to repay their loan based on a list of factors they consider necessary. These lenders are very reluctant to distribute loans to businesses and industries that are unstable for whatever reason. Lenders are in the business of making a profit based on the money they lend, so if your business defaults on a loan, then the lender loses money.
Some examples of high risk industries:
Real estate sales
These industries are less profitable or considered more likely to fail, making lenders less likely to offer financing. Therefore, several other factors could make a company risky.
Factors that give you a risk rating
A businessman with bad credit ratings First, not all lenders verify your credit score, but it is better to show a high score when they do. A credit score for a lender shows the ship's captain's spending habits. If the homeowner's credit score is good, lenders are more comfortable lending money because the beneficiary has a history of paying their debts on time. A higher credit score leads to a higher approval rate. Typically, some unpaid medical bills, late credit card payments, or bankruptcy hurt your chances of approval and force you to pay higher rates for any loan you receive. The more risk the lender takes, the more you pay.
Start-up companies Congratulations, you have an innovative new idea that you are excited to share with the world. Now all you need is a loan to start your business. Unfortunately, lenders can't match your enthusiasm for your startup because lenders understand the daunting truth of the industry. About 20% of companies close their doors in the first year, increasing to 45% in the first five years. These statistics lead lenders to prefer businesses with at least one year of operation to businesses in their infancy. It's paradoxical: your new company needs start-up capital, but it doesn't have a track record; so once you get a track record, you don't need startup capital. As a start-up, your best option is crowdsourcing and personal investments.
Low-income businesses A lender's main concern is whether or not they will be reimbursed. If your business is struggling to earn income, what would give lenders the impression that you can pay your debt? If you own a novelty holiday décor store, you are not just a niche seller, but a seasonal product. These are the types of low-income initiatives that lenders steer clear of because the opportunity for growth is small and the potential for failure is enormous.
Even if you fall into one of the categories above, don't be discouraged. You still have options to keep your dreams alive, like:
Merchant Cash Advances (MCA) Merchant cash advances are optimal for businesses that rely on credit card sales and face-to-face transactions, such as restaurants and retail stores. Lenders act as prospective customers who pay you upfront for the product, which you pay off gradually with interest. MCA loans are relatively easy to receive, but they can often hamper a business's growth, especially in industries where profit margins are not substantial after expenses are paid.
Invoice factoring is most beneficial for companies dealing with invoices. Like MCA, these companies prepay a company's unpaid invoices, allowing them to have working capital.
There are three types of factoring:
Total Billing - Businesses sell all of their invoices to a loan company, but generally must agree to sell all of their invoices over an extended period of time. While turnovers have the lowest rate.
Selective Invoice Factoring - Businesses can decide which invoices to include, but this option is more expensive than full volume losses.
Spot factoring - Companies sell individual invoices in a one-time deal, but this option is expensive.
Vehicle and Equipment Loans (V&E) - Generally, vehicle and equipment loans are the most likely to be approved because the item purchased with the loan is collateral. For reference, a construction company receives a V&E loan for an excavator and does not repay the loan; therefore, the lender owns the bulldozer. V&E loans generally require a 10-20% down payment.
Small Business Administration (SBA)
Small Business Administration loans are beneficial for large projects. The interest rate is relatively low because SBAs are backed by the government. SBAs have a loan limit of $ 5 million, which the government covers up to 85%. The downside to SBAs is that they are difficult to obtain because lenders consider many more factors, such as a criminal record. Applying for an SBA is labor-intensive, but the loan is worth it. However, because the business owner is dealing with the government, the legal ramifications could result in incarceration in federal prison if loans are misappropriated or found to be fraudulently obtained. Having said that, This loan is generally offered to low-risk, profitable businesses that have an owner with a strong credit history. High-risk industries will generally not be eligible for this program, as it is insured by the US federal government and disbursed by banks.
A short-term loan is intended for rainy days and emergencies. Lenders generally only pay $ 1,000 or less, and expect a refund within 7 to 30 days. Lenders know that the business is already at risk, so businesses look to pay very high fixed prices to balance the risk. Fixed fees can range from 10% to 30% of the loan's initial value.
How to qualify?
After reviewing the best loan based on your business model and comfort level, start putting things in place to improve your chances of qualifying. Here are some tips you can use to increase your chances of receiving a loan:
Pay off all your previous expenses before trying to acquire more debt.
Offer collateral as a way to resolve potential lender anxiety.
Have a business plan showing projections and potential growth for your business.
Find a lender that is favorable to your situation.
Amerishop Financial Services & Advisors is comprised of a team of seasoned finance professionals that work with honor and responsibility. Our staff provides unparalleled customer service and treats each business owner with the respect they deserve. We value the uniqueness of each business and pledge to put our merchants’ needs first. Furthermore, we are always working to improve our method to best suit the demands of our clients and partners.
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