In this blog post we will discuss characteristics that classify a business as “high risk” and thus eligible for high risk loans. We cover several scenarios leading to a high risk categorization. We also explain what a high risk loan is, and why this sort of loan may apply to your business.
Here are some high risk “red flags” to consider, along with some tips on how to handle these situations.
- Owner’s low credit score. As a business owner, you may be worried about a low credit score. However, you don’t need to run from it. Instead, you can find ways to work on improving your score while securing alternate forms of credit. Look beyond credit cards and banks for financing options. Solicit help from family and friends. You can also check out micro lenders and web-based lenders. A home equity line of credit might also be possible. Be wary of credit cards or lending options that are designed for people with low credit scores, because these are typically at much higher interest rates. Finally don’t overlook gifts and grants, as they can also be great places to secure financing.
- Risky industry. Certain fields are considered “risky” by definition. For instance, adult services, electronic cigarettes, and online pharmacies are generally considered high risk. Additionally, untested new trades, such as the burgeoning cannabis industry in Washington and Colorado, tend to be tagged as high risk. Legal complexity and uncertainty lends to high risk classification. Alternatively, the company considered high risk could be selling to customers in a different country in which it is based.
- High number of chargebacks. Chargebacks occur when a credit card payment is cancelled and the charges are reversed. Banks and lenders do not like to see this, so when this happens too frequently, a business could be reclassified as high risk. Certain industries are more likely to incur chargebacks: the travel industry, adult entertainment, and companies that deliver goods or services that are paid for well in advance, to name a few. Businesses can reduce chargebacks by maintaining logs of IP addresses for internet sales, and obtaining a signature on face-to-face credit card sales.
- Years in business. If your business is just getting started, it could be difficult to obtain a merchant account, partially because your firm hasn’t yet established a credit score.
The above factors can lead to a high risk denomination. A high risk label doesn’t spell death to a business. High risk loans can allow firms to secure financing.
High Risk Loan Options
There are many options for high risk loans. Some banks will offer a high risk loan with a high interest rate. It’s best to select a solution based on your firm’s particular challenges. For instance, if you’re considered “high risk” because your online customers aren’t physically present to sign a credit card receipt, consider a MOTO, or Internet Merchant Account. This type of account delivers the ability to process a credit card when no card is physically present.
If domestic banks deny your account for being too High Risk, you might also consider an offshore account which is a network of merchant processing business partners that combine high and low risk accounts into one. This mitigates the risk for the banks and might also be a viable solution to your high risk business financial needs.
For accepting credit card transactions, you can set up a High Risk Merchant Account, in which the bank takes extra time reviewing your documents, and may offer a higher transaction fee. Over time, you may be eligible to qualify for a regular loan, which will normally come with a lower transaction fee.
A home equity line of credit may be a viable option for you as well. However, if your startup is risky, beware: you could lose your home if the business doesn’t pan out.
Finally, remember that only 25% of early-state entrepreneurs’ funding comes from credit cards and bank financing. Loans from friends and family, microloans, and internet-based loans are a few of the alternative funding options for high risk merchants. We’re happy to provide additional advice on obtaining funds—indeed, we’re in business to make sure any business can get the financing it needs to accept credit cards, process online payments, and cover start up costs. Call us to learn more about how we can help.