What is a High-Risk Business?

Ken Black
Ken Black
Businessman giving a thumbs-up
Businessman giving a thumbs-up

A high-risk business may be considered any business in which the owner has no previous experience, no collateral to start the business or obtain a loan, or one that operates in certain fields that are considered more prone to failure than others. The classification of such a business may be different depending on whether the business is seeking credit card processing services, or a high-risk business loan. Depending on the situation, there may be some ways to mitigate the disadvantages of being labeled a business with high risk.

Essential to many start-up businesses is being able to secure a loan at an affordable rate. Getting a high-risk loan may not be that difficult, but getting one at a good interest rate can be a big challenge. Even if the borrower does not have the money to get started, or the capital built up in the business, there may be other ways to secure the loan, including using personal property as collateral. This could show the lender the owner is serious about making the business work, and provide some guarantee in the event the business is unsuccessful.

One of the other elements that may classify a business as a high-risk endeavor is the credit rating of the business owner. If an owner has poor credit, the chances are much greater that the bank will see any investment as a high-risk business loan. Therefore, if an owner is working with a partner that has better credit, it may be possible to avoid the label of high-risk business by having that other partner secure the financing. That could also mean the other partner assumes all of the financial risk as well, without a legally-binding contract in place spelling out the mutual risks and rewards.

Another area where a business could be labeled high risk is in the area of credit card processing. In such cases, individuals wanting to process credit cards may have to open high-risk business processing accounts. These accounts are generally more costly than traditional merchant accounts for credit cards because the risk of chargebacks is higher. This increases the administrative costs to the processing company, which seeks to offset those with higher fees. Businesses that often fall in this category include travel, adult products, gambling, telemarketing, debt collection, and even electronics, to name a few.

Those who need credit card processing, and are a high-risk business, may need to do a great deal of comparison shopping to find the cheapest service. Fees could include an access fee, transaction fee, chargeback fee and others. While some merchant account providers specialize in high-risk business services, many of these may be based in other countries. That could affect an owner's ability to resolve a dispute.

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