As the term indicates, a high-risk business loan is one that involves high risk on the part of the lender, as well as the borrower. Typically, high-risk loans are issued to those debtors who have a bad credit history, or are unable to supply the requisite collateral, or have no clear idea of how they will go about repaying the loan. For a lender to approve a loan to such a borrower naturally requires drastic measures to safeguard the lender’s interests, and hence high-risk loans will always be accompanied by very high rates of interest and a high down payment.
Take the case of Marsha Haynes, who set up an online linen store along with her sister Terri in Atlanta, Georgia. “The idea was to base the business on online purchases, and our initial success was stupendous,” says Marsha. Buoyed by this, the sisters took on many more orders than they could meet and embarked on an ambitious expansion plan that involved the setting up of an offline chain of stores. “We never even considered expenses and our cash flow management was erratic at best,” says Marsha. The result: their business ran out of steam in the third year. “Where we were employing 25 people, we came down to three,” says Terri. Today, Marsha is single-handedly trying to revive the business after Terri moved up north.
As Marsha scouts the market for a loan, she is aware that she falls in the high-risk category. “The business has a history of bad debts and delayed payments to suppliers, and I don’t expect the road ahead to be easy,” she says. Nevertheless, she is fairly sure of securing a high-risk business loan from a reliable source, and intends to stick to payment schedules this time.
The trouble with businesses like Marsha’s is that there is a distinct possibility that a borrower will default on a loan, or if not the entire amount, then certainly on more than one installment. Despite that, however, some lenders choose to approve this kind of loan for a short term at extremely high interest rates. “That way, they recover most of the principal amount before the defaults begin,” says Arnold Sayers, a financial consultant. M
In Marsha’s case, she is looking to family and friends to finance at least part of her business recovery plans. “They will lend me the money, true, but without interest,” she says. Not surprisingly, the crux of a high-risk business loan is the astronomical interest that a borrower pays. In most cases, a high-risk loan has a ceiling put on it, so you can’t borrow more than a fixed amount anyway. Therefore, you need to reduce the loan requirement by as much as you can before approaching a lender.
Also, since most high-risk business loans are unsecured – that is, they do not involve a collateral – it is usual for the lender to specify that repayments will be drawn straight from the borrower’s bank account or credit card account. “That way, the lender feels a little more secure about repayments and ensures maximum recovery in case of defaults,” says Arnold.
It isn’t as though only those businesses with a bad credit history are the targets of high-risk business loans. Areas such as biotechnology and information technology are seen as more high-risk than others, as entrepreneur Wayne Cheung found out when launching an e-learning portal. “The common refrain was, ‘Oh no, not another dotcom,’ and I began to realize that I was trying to set up a business in the high-risk category,” says the 35-year-old Korean expatriate.
Whatever your situation, however, there are certain benefits of applying for a high-risk business loan. “For one thing, it gets you out of an impossible situation,” says Arnold. “And it also gives your business a chance to re-establish credibility by making repayments on time, because if you are behind schedule with high-risk loan repayments, you know you are in real trouble, so most borrowers try desperately to avoid that situation.”
For most entrepreneurs who have burnt their fingers with their start-ups, a high-risk business loan is often the only way out. “I am sure that I can repair my business because I have learnt from past mistakes and now have a very clear ides of where I am going,” says Marsha. “I am also confident that I will never again default on repayments and hence want a chance to prove the creditworthiness of my business.” Life is all about second chances.