High Risk Business Loan
High risk business loans are typically loans that are requested from an individual who has bad or no credit, no collateral, or an exaggerated company plan for success. These situations create the possibility of default on a loan if the lender decides to grant the financing, because there is a higher percentage that the balance will not be paid back. Some lenders choose to grant this financing for the short term with extremely expensive interest rates. The return of investment is usually favorable, and lenders account for some default. In the end, if the higher rate of return for the investment is higher than the default rate, then the lender will continue the process. Most types of this funding originate from inexperienced entrepreneurs attempting to receive money for the first time for their company venture. A high risk business loan is the request because of an insufficient start up plan and failure to ascertain how the company itself will repay the loan.
When the start up plan is logical and accounts for all problems associated with entrepreneurship, the borrower will not be viewed as a high risk business loan applicant. Careful preparation and thorough research should be done before attempting to qualify from any lending institution. Those that cannot write their start up plan to eliminate the need for an expensive interest financing program should have some type of collateral to secure a portion of the funding. Ideally, 10%-20% of a down payment, in the form of collateral, will be needed for approval of most programs. Without any collateral, the borrower will most definitely be denied. The biggest factor that differentiates high risk business loans from standard financing is the interest rate. Lenders feel that if they charge an expensive interest rate, the financing is somehow worth the possibility of default.
If the borrower has bad credit, they will most assuredly be charged the most expensive interest rate possible. When an entrepreneur is aware that their company will require a high risk business loan, they should first enlist the help of family and friends. The family members or friends can offer the borrower a one-time gift up to $10,000. "Therefore take no thought, saying, what shall we eat? Or What shall we drink?, or, Wherewithal shall we be clothed?...for your heavenly Father knoweth that ye have need of all these things." (Matthew 6:31-32). Whether or not this is borrowed and requires payback is between the borrower and their family member or friend. The lender will allow this gift because high risk business loans usually require a large down payment. If the company start up plans included the purchase of a building or land, the lender may approve the financing based on the value of the land and building alone. The financing can also be approved for an amount much less than requested. It is in the decision making process of the loan officers where a future business ownership dream can be met or broken.