Some entrepreneurs prefer selling goods that are considered generally safe. This often includes dropshipping, consulting services, tutoring services, and direct sales. Low-risk merchants often enjoy high-rewards for the products they sell are usually in demand. There is little risk involved, which puts them in a better position of securing a loan for their brand.
But for high-risk businesses, some are not so lucky.
What Are Considered High-Risk Businesses?
High-risk businesses can range from businesses that offer gambling services and tobacco products to health and wellness goods and any adult-oriented business type. Many factors dictate if a business is considered high-risk. The business could be operating under a high-risk industry and the probability of continued profitability is at risk.
High-risk businesses are considered very risky due to the increased possibility of higher levels of chargebacks. It usually happens when customers pay via credit card but decides to cancel the transaction. Credit card fraud, refunds, and returns are high.
High-risk types of businesses also often operate in dangerous worksites. For instance, think of companies handling hazardous chemicals. There is a need to ensure all employees are safe and hazardous waste handling is mandated or the business will be penalized.
Challenges of Running a High-Risk Business
When you own a high-risk company, you have more barriers to success. Your offers may be in demand and customers may flocking your store. That won’t guarantee future success as you also have lots of other things to worry about.
Regular Insurance Is Not Enough
When you have a high-risk business, the regular insurance policies that are usually sufficient in other businesses are not enough. Your employees and customers are at a high risk of getting hurt due to the kind of offers you have. This means if something goes horribly wrong and anyone gets hurt within your premises, a lawsuit could already be waving.
What you can do is buy enough insurance for your brand. For instance, you own a firearms business. To ensure you are buying the right kind of policy, it is best to invest in insurance underwriting for gun stores.
An insurance underwriting helps assess the risks of insuring your brand. Your insurance provider will determine your business risks and check which of your risks can cause the greatest harm to your brand. They will then recommend the type of policy that best suits your business needs.
Difficulty Getting a Loan Approval
Many banks and lenders are wary about lending money to high-risk businesses. They want businesses that can easily make money and have a high chance of continuously making money. They are also concerned about businesses operating under high-risk industries due to all the health and safety concerns surrounding your sector.
Traditional lenders would check on their borrower’s creditworthiness before offering to finance. They usually look at the 5 Cs which include the following.
Capacity
One’s capacity refers to a business’s ability to support expenses and the additional debt. If you have unsteady cash flow and not enough cushion for every income of your debt service, lenders will consider you as a low-capacity borrower. They will usually factor in your Debt-to-Income Ratio (DTI ratio), among other things.
Capital
Businesses have capital assets; these include any commercial real estate and cash, and equipment under your name. Your capital serves as your additional security in case your business experiences a financial setback.
Character
Your character refers to how you manage your credit and how you make payments. This is reflected in your credit history. Credit histories often reflect up to 10 years’ worth of credit information, including loan amounts, types of loans, bankruptcies, etc.
Conditions
Condition is how you intend to use the money you are borrowing. The conditions of a loan consist of the amount of capital and interest rate that influences your lender’s desire to offer you the loan.
Collateral
Most lenders will want their borrowers to put up collateral in case they fail to pay them back. These are assets you own that your lender can use as another source of your repayment.
More often than not, businesses under high-risk industries will go for high-risk business loans as their last resort. You can try building your business credit score, pay your dues on time, and save enough funds to get approved for traditional loans. There are also alternative options you can try if you believe that a high-risk business loan is too risky for you.
These are but two challenges high-risk businesses often face. They often find it hard to secure a business loan and typical business insurance is never enough protection. The good news is, you can mitigate risks and still get the funding you need even if you are running a high-risk business. You just need to make sure you weigh in your options before making a final decision.
