Small Business Lending Risks

High Risk Small Business Lending

Within the last 10 years the market for high risk small business loans has increased dramatically. One of the main reasons is because banks are not lending to small businesses. This is due to regulatory constraints and “old school” underwriting. High risk small business lending via alternative lenders is providing a necessary service to our economy.

Why Do Businesses Apply for High Risk Small Business Lending

Often times small businesses choose to pursue a high risk small business loan because they have exhausted their other options. These include applying for a bank loan or factoring their accounts receivable. However, these high risk small business loans are still able to provide the desired effect for the business owner. Most of the time it is easier for small businesses to apply for these high risk small business loans than any other option.

One of the biggest positives of high risk lending is that business owners can receive the necessary cash immediately. This comes in handy when a small business is strapped for cash and in immediate need of financing.

Another benefit of high risk small business lending is that the borrower has no long-term commitment to the lender. These alternative business loans are short term relative to a traditional bank loan. Terms range between 3-18 months. They are primarily used to provide some sort of relief to a short term business problem. This provides a great amount of flexibility for those who are in need of cash.

Other options such as factoring accounts receivable can “handcuff” a business in the long-run. That makes it hard for a company to move away from factoring once it is get started.

Why Do Companies Provide High Risk Small Business Loans?

With such a high demand of small businesses who are in need of immediate cash and cannot utilize other options it is simple to understand why high risk small business lending is such a successful business.

The companies which provide the high risk small business loans are in the unique position of having a surplus of money to support the ever increasing demand as banks fail to provide the necessary capital infusions that small businesses need. When the borrower pays back the loan it is accompanied with a relatively high cost of capital which mitigates the overall risk of their portfolio. The more money that lending companies have to lend out to these small businesses, the greater the number of opportunities small businesses will have to grow.