10/06/16

The Risk Factor of Your Industry May Impact Your Loan

Did you know that there are certain industries that banks can flat-out refuse just because of the industry the business is in?

It may come as a surprise, but there are in fact certain industries whose risk factor is labeled “high-risk”, making it sometimes almost impossible to get a small business loan. Here’s a little more about what factors go into play when banks and lenders make decisions – even when you have stellar credit.

Multiple FICO Scores

Between the three major credit bureaus (Experian, Equifax, and TransUnion), there are currently a total of 28 different FICO score cards used for personal credit scores, depending on what category the credit or application falls under. Additionally, there are business score cards as well. And just as the personal score cards have industry-specific cards to base part of their decisions and risk factors off of, so do the business score cards.

Have you ever gotten a car loan for a sports car and the insurance was much higher than your old generic beater you drove for over a decade? It’s the same concept. The risk is much higher with a more expensive car because people tend to typically drive more dangerously with a sports car. So even though you yourself have not given them any reason to believe you will react the same way, the industry standard predicts that you will, and thus you pay a much higher premium.

Business Codes

Each industry has a different code it is labeled with. When creating your business and completing all the necessary paperwork to become official, you will select what’s called a SIC code or a NAICS code. This code will classify your business under a certain type of industry. If you know that the risk factor is higher for a particular code and you can tweak your business slightly to legally classify it under a different and less risky code, that may be a path to very seriously consider if you intend to seek out future financing opportunities.

mainstreetamerica

Location Matters

Unfortunately, the physical location of your business may matter when applying for a small business loan. Maybe you are trying to revive a section of town by putting your business in the center, with the hope of bringing new life to the area. But if the bank or lender deems it a dying part of town, the risk factor goes up and your loan application may not get approved, no matter what else you can bring to the table.

While this may be frustrating, here’s a little perspective that may help you to understand why. To the banks and lenders who have access to analyses of areas, demographics, and industry standards, it would be like saying “I want to build my business right next to this active volcano that typically erupts once every summer and destroys several businesses each time it erupts.” When it’s denied, you exclaim, “But remember 5 years ago when it didn’t actually hit the town?! That might happen again and then we’d have a good year.”

This goes back to choosing a good location on your own. If you know for a fact that every store in a particular outlet mall has been steadily declining for years, would you want to open up shop there? For that same reason, lenders won’t always agree to finance you if your location is not deemed acceptable by them. Bottom line? Make sure you choose your location wisely.

If you have yet to start a business, make sure you know full well the level of risk your industry inherently holds. If you have your heart set on starting a business in one of those high risk industries, or in a high risk area, be prepared for some possible roadblocks. It’s not impossible to succeed in a high-risk industry, but that risk factor will definitely impact certain business operations. Plan ahead, go into it with your eyes wide open, and be determined to succeed. If you do that, then you can succeed in any industry, regardless of the risk that others may attach to it.

Get more small business tips from Lendio.

About the author

Marisa Smith
Marisa Smith is a small business writer. She enjoys creating content that inspires small business owners to find new methods and techniques to improve their business operations.

Comments

More like this