Small business lenders, merchant processors and credit card companies often consider some types of businesses “high risk.” If your small business falls into one of those categories, you may find it more difficult to get financing or a merchant account.

Here, we’ll explain what can make a business high risk, what types of financing may be available to higher risk businesses, and how building strong business credit may help your business increase its financing options. 

What Is Considered a High Risk Business?

Lenders or financial institutions classify certain businesses as high risk because they are considered more likely to default on loans, or engage in fraudulent transactions, or be involved in potentially illegal activity. 

Most often they operate in industries with higher rates of failure, face intense competition, or have unpredictable cash flow. Other factors that can make a business high risk include an owner’s low credit score, lack of collateral, or limited business history. 

A business owner can be considered high risk if they have bad credit, or have been involved in businesses that have failed in the past. 

Each lender will maintain its own list of industries it will lend, and those  include startups, restaurants, retail stores, and companies in rapidly changing tech fields. 

Lenders typically charge higher interest rates or require stricter terms when working with high risk businesses to offset their increased risk. Despite these challenges, many high risk businesses can still access financing through specialized lenders or alternative funding options.

Factors That Can Make Your Business High-Risk

Here are the main factors that can make a business appear high risk:

Business credit and/or personal credit

Bad credit or no credit history can make a business appear higher risk

Industry risk/type of business

This is one of the common reasons why a business is categorized as high risk. Lenders may not lend to businesses in industries considered high risk.  

Legal and compliance risk

This includes businesses that have been involved in litigation, or are in an industry that’s a high risk for litigation. An example would be health and wellness products, where product liability risks are high. 

Even a daycare business could be considered high risk due to the risk of accidents or  

Time in business

Young businesses—those in business for less than two years—are often considered high risk. 

When Do Lenders Evaluate Industry Risk?

While it’s common for lenders to evaluate risk when a business applies for a loan, there are other times when lenders may evaluate risk:

• Before increasing credit limits,
• When economic conditions change, or
• Once a year, or at another interval.

Why Is Business Credit Important for High-Risk Businesses?

Good business credit can give small businesses more financing options. 

While it won’t change the fact that certain types of businesses are more high risk than others, it may provide more flexibility. 

It’s especially important for business owners in high risk industries to maintain good personal and business credit to help ensure they have as many options as possible. 

Keep in mind that business funding isn’t the only challenge for high-risk businesses. They may also find it difficult to set up credit card processing/payment processing. 

Challenges for High-Risk Businesses in Obtaining Credit

High risk businesses often find it tough to get financing simply because fewer lenders will lend into that industry. There are several reasons why a business might be identified as high risk.  

Industry-Specific Risks 

Certain types of businesses often fall into higher risk categories. Again every lender is different, but these are fairly common:

• Adult entertainment and dating services
• Airlines, accommodations, and ticketing agents
• Bail bonds
• Bankruptcy attorneys
• Calling cards and PBX VoIP systems
• Casinos or online gaming
• Collection agencies
• Cryptocurrency
• Dating/porn sites/escorts/massage parlors
• E-tobacco
• Extended warranty
• Financial counseling/credit repair/debt reduction
• Gaming and lotteries
• Golf clubs online
• Home-based gun shops
• Importers and exporters
• MLMs (Multi-Level Marketing)
• Online pharmacy
• Pawn shops
• Pharmaceuticals and online drug providers
• Prepaid debit cards
• Recurring billing/subscriptions
• Subscription services (magazines, collectibles, etc.)
• Telemarketing
• Timeshares
• Tobacco/E-cigarettes/cannabis products
• Travel companies
• Used car companies

Businesses are usually identified with SIC or NAICS codes. These are industry codes used to identify the type of business. If you check your business credit, double check to make sure yours is correct. 

Credit history issues (personal and business credit)

If you have bad credit, or if your business has low or no business credit scores, you may have trouble getting credit. 

Some lenders check business credit, some check personal credit, and some check both. 

Cash flow inconsistencies

Lenders and other companies that offer small business financing often require business bank account statements to verify revenues. If your revenue is declining, or shows unusual activity, your business may be considered high risk.

Get real-time cash flow insights.  

Sole proprietorships/new businesses

Some lenders consider businesses that operate as sole proprietorships to be risky. Forming an LLC or corporation may help your business appear more legitimate to prospective lenders and clients. 

Find business formation services here. 

Lack of collateral or assets

Not all lenders require collateral, but having collateral you can pledge may be helpful, especially with traditional lenders. (Some lenders don’t want collateral, but will require a personal guarantee from the business owner.) 

If your loan is secured with collateral, the lender will file a UCC filing. Too many UCC filings can affect your business credit, so make sure you check this section carefully on your business credit reports to make sure it’s accurate. 

Business Credit Options for High-Risk Businesses

Here are some high-risk small business loans and financing options worth considering. 

High risk bank loans

We’ll start here because many small business owners want to get a small business loan from a bank or credit union. As a general rule of thumb, though, banks prefer to make low-risk loans. (That said, there have been plenty of instances where banks were found to have made high risk loans, like in the 2008 real estate meltdown.)

Generally, though, banks prefer to make small business loans to businesses with:

• Track record of 1-2 years or more in business
• Strong income documented by business bank statements
• Owners with good credit scores and/or strong business credit
• Assets that can serve as collateral and/or personal guarantees

There are possible workarounds to this, including certain SBA guaranteed loans, such as 7(a) loans and 504 loans. But SBA loans have restrictions too. Not all types of businesses are eligible, and acceptable credit is required. 

Read: What are current SBA loan requirements?

And some banks do make loans to startups—just be sure to ask about your specific type of business if you suspect it falls into a generally high-risk category. 

Alternative Lenders

There are several alternative types of lending that may be a possibility if your business doesn’t qualify for more traditional financing. 

Online lenders

Online lenders may offer fast financing options with more flexibility than traditional lenders. As a plus, the application process is often much easier than for traditional loans, and you can likely get an answer to your application very quickly. Some will be very upfront about their requirements. 

Merchant cash advances

Businesses with strong sales may be able to qualify for merchant cash advances or business cash advances. This type of financing uses past sales to advance funding against future sales. MCAs often require weekly or even daily payments, though, and costs can be high. 

Invoice factoring and financing

Invoice factoring or financing may be an option for businesses that sell to other businesses (B2B). With factoring, the business sells or assigns unpaid invoices to another company at a discounted rate in exchange for cash now. The factoring company then collects the invoice. Invoice financing is similar, but the business uses invoices to  financing. Generally, the factor doesn’t care about the business owner’s credit: they are interested in the business of the company that owes money. 

Hard money loans

A popular source of funding for high-risk businesses, like real estate fix and flippers, or cannabis businesses, hard money loans are often made by private investors or groups or private investors willing to take more risk. 

Read: Best Hard Money Loans with 100% Financing

Equipment financing and leasing

Whether your business needs heavy equipment, computers, or something else,  equipment financing or leasing may help preserve cash flow. There can also be tax benefits. 

Because the equipment serves as collateral, these options may be more flexible. Equipment leasing companies may still have industry restrictions, though, so be sure to check. 

Business Credit Cards for High-Risk Businesses

Business credit cards may be an excellent option for business owners that fall into many higher risk categories. Most card issuers don’t care if your business is a startup, for example, or whether your business operates as a sole proprietorship. 

And industry restrictions are not common. You may not even be asked about your industry. If you are, you will likely choose from a drop down menu and you’ll choose as closely as you can.

The main qualifications required for many business credit card issuers are:

• Good to excellent personal credit scores
• Sufficient income from all sources (not just the business) 

Every issuer is different, of course, so you’ll want to review requirements before you apply. 

Nav can make it easy to find business credit cards based on your business data. Find a business credit card now. 

Business Charge Cards 

Some business charge cards have flexible qualifications requirements. With a charge card, you pay your balance in full. 

Secured Business Credit Cards

If your hurdle is low personal credit scores, you may want to consider a business secured credit card. 

High-Risk Merchant Accounts

Getting a merchant account to process credit card transactions can indeed be challenging for high-risk businesses. Some merchant service providers are more flexible than others. Be transparent with potential payment processors, and implement strong fraud prevention measures, among other measures. 

You’ll also want to look for credit card processors that specialize in high-risk industries. These providers are more likely to work with your business type and understand your unique business needs.

Read: How Being Considered a “High Risk” Merchant Account Affects Your Business

Building Business Credit To Improve Options

One way to help build legitimacy for your business is to build strong business credit. Here’s a quick primer on how to establish business credit: 

Separating personal and business finances

To build strong business credit, it’s crucial to establish a clear separation between personal and business finances. If possible, start by incorporating your business or forming an LLC and getting an Employer Identification Number (EIN). (You can build business credit as a sole proprietorship, but as mentioned earlier, a business entity is preferable.)
Open a dedicated business bank account and use it exclusively for business transactions. This separation not only helps with accounting and taxes but also lays the foundation for building a distinct business credit profile.

Working With suppliers that report to business credit bureaus

Seek out suppliers and vendors that offer net-30 payment terms and report to business credit bureaus. These relationships can be valuable for building your business credit history, especially since many vendors don’t check personal credit. It’s a good idea to get at least two to three tradelines reporting. As your business grows, consider getting additional accounts to strengthen your credit profile.

Timely payments and credit utilization

Consistently paying your bills on time is the cornerstone of building strong business credit. Even a day or two late can affect your scores. That’s because business credit agencies use “Days Beyond Terms” (DBT) to track payments. Paying a few days late may impact your business credit. 

Additionally, keep an eye on your credit utilization, especially with business credit cards. Maintaining low balances relative to your credit limits can help your business credit scores.

Regularly monitoring business credit reports

Want to see how your business is doing? Regularly review your reports from major commercial credit bureaus. This allows you to track your progress building credit, identify any errors, and even catch potential fraudulent activity. (Yes, business identity theft is a risk.) 

Stay on top of your credit so you can make identify what’s working and where you can improve over time. This will also help you catch any discrepancies that could negatively impact your business credit scores.

Drawbacks of High Risk Loans

There’s a trade-off when it comes to loans to high-risk businesses. Lendersh mitigate the risk in a number of ways that can impact you, as a borrower. 

Here’s what to look for. 

Higher interest rates and fees

Lenders often charge higher interest rates and fees for high-risk businesses. This approach helps offset the increased likelihood of default or late payments. The extra cost acts as a buffer against potential losses and compensates the lender for taking on greater risk.

Shorter repayment terms

By setting shorter repayment periods, lenders reduce their long-term exposure to risk. This strategy allows them to reassess the business’s financial health more frequently and adjust terms if needed. Shorter terms also mean the lender can recover their money faster, reducing the chance of default due to changing market conditions.

Personal guarantees

Many lenders require business owners to provide personal guarantees for high-risk loans. This means the owner agrees to be personally responsible for repaying the debt if the business can’t. Personal guarantees give lenders an additional layer of security and may motivate business owners to pay on time.

Collateral requirements

Lenders may ask high-risk businesses to pledge collateral to secure the loan. This could include business assets, equipment, or even personal property (like home equity). If the business defaults on the loan, the lender can seize and sell the collateral to recover their funds, reducing their potential losses.

Legal Considerations and Red Flags

Avoiding predatory lenders and scammers

Be careful. Loan scammers are a real risk if you’re having trouble getting financing for your business. Be cautious of lenders offering deals that seem too good to be true. Research potential lenders thoroughly, checking their reputation and customer reviews. Watch out for companies that requires upfront payments, or pressure to make quick decisions, as these can be signs of predatory loan practices or outright scams. Legitimate loan companies don’t ask for gift cards for payments!

Read: How to Check if a Loan Company Is Legitimate

Understand the fine print 

No one is saying it’s easy to read the fine print in a loan contract. But if you don’t, you could find your business trapped in a predatory loan. Review loan documents carefully and pay special attention to prepayment penalties and default clauses. Prepayment penalties can make it costly to pay off loans early, while default clauses outline what happens if you miss payments. Understanding these terms helps you avoid unexpected costs and know your rights and obligations as a borrower.

Talk to your legal advisor and check out AI tools that may help point out problematic language. 

State and federal regulations protecting borrowers

Various laws exist to protect borrowers from unfair lending practices. These include the Truth in Lending Act, which requires clear disclosure of loan terms on certain types of loans, and gives you the right to dispute certain credit card purchases, as well as state-specific usury laws that cap interest rates. These regulations can provide additional protections for your business.

Nav’s Verdict

While it can be more challenging to find financing for a high risk business, financing options do exist, even for these businesses. Building strong business credit and looking for alternative lending options can help expand your opportunities for financing to start or grow your business.

Nav can help with tools to build, manage, and monitor your business credit as well as access to 160+ lending options. With Nav Prime, you’ll also get detailed credit reports and tradeline reporting. Get started now. 

Frequently Asked Questions

Can I get a business loan with bad personal credit?

Yes, it’s possible to get a business loan with bad personal credit, but as mentioned above, it may be more challenging. Look for lenders that focus on business credit and business revenues rather than personal credit scores. Alternative financing options like invoice factoring or equipment financing might be more accessible for those with poor personal credit.

How long does it take to build business credit?

Building business credit is a process that takes time. Consistent, on-time payments and maintaining good financial habits are key. The time frame can vary depending on factors like the number of reporting accounts and your payment history.

Business owners who get tradelines that report to business credit, pay them on time, and keep debt low, can often see results in several months to the first year. Your results may vary. 

Are there grants available for high-risk businesses?

It depends on what makes your business high risk. If you are in a high risk industry (real estate flipping, or online gambling, for example), grants will probably be few and far between. 

If your business is high risk due to your location, bad personal credit, or similar issues, you may find business grants that are available despite these issues. Look for industry-specific grants, local economic development programs, or grants targeting minority-owned or women-owned businesses. Remember, competition for grants may be intense, so have a solid business plan and elevator pitch ready.

What’s the difference between secured and unsecured business credit?

Secured business credit requires collateral, such as equipment or inventory, which the lender can repossess if you default. Unsecured credit doesn’t require collateral but may come with higher interest rates or stricter qualification requirements. Secured credit often offers lower rates but puts your assets at risk.

How can I tell if a lender is predatory?

A big red flag is a lender that wants you to pay money upfront. They may ask you to wire money to cover “the first three payments” or “insurance”, for example. Other red flags include pressure to make a decision quickly or promises that seem too good to be true. Legitimate lenders will clearly disclose all terms and fees. 

Again, be very cautious with lenders who guarantee approval without checking your credit or who require upfront fees before providing a loan.