What do we mean when we refer to certain industries as “high-risk”? Are you in one of those high-risk industries? Can this cause problems as you build your company’s credit? What can you do to avoid those setbacks? We want to answer all of these questions for you so you are best prepared and have every resource you need to be successful as you apply for credit and funding for your company.
What does “high-risk” mean?
“High-risk”, from the perspective of lenders and creditors, are companies (or industries) that exhibit patterns of default (failure to fulfill financial obligations) at greater frequency than other companies or industries. This includes:
- Industries that are susceptible to changes in economic conditions
- Industries influenced by changes in legislation
- Over-saturated industries (large amount of competitors)
- Replaceable business models (by tech/AI)
- Industries susceptible to supply chain shortages
Examples of High-Risk Industries
All industries carry some amount of risk. For example, every industry is susceptible to economic changes, however some industries are much more so. Here are some examples of industries deemed higher risk by lenders and creditors:
- Alcohol/Tabacco
- Cannabis/CBD
- Credit Repair
- Crypto
- Financial Services
- Insurance
- Investments
- MLMs
- Real Estate
How do underwriters evaluate risk?
One way underwriters evaluate risk is through your SIC and NAICS codes. Certain codes carry higher risk than others, based on industry. They can also get a sense of your company’s model through your company name as well as visiting your company’s website which is often asked for on applications. Some loan products may even require you to submit a business plan as a part of underwriting.
Potential Problems
Not only will some lenders not extend funding to certain industries, some merchant account providers also have industries they will not open payment processing accounts for. However, this is often not a black and white issue. There are plenty of lenders that will still extend funding to these industries, they just may do so with less ideal terms like higher interest rates. There are even merchant providers that are designed to open payment processing accounts for these higher risk industries, again they may just have higher merchant processing fees since they are taking on the risk of your business.
In some cases you could be denied for credit due to the perceived level of risk associated with your industry, despite having a perfect track record of payment history. If this is the case, the denial letter will say something along the lines of “Risk associated with company’s industry”.
What to do if you’re in a high-risk industry?
All industries carry some level of risk, however there are some steps you can take if you find that your industry leans high-risk. You can expand your business model which may allow you to adapt the name as well as your SIC and NAICS.
For example, if you offer investment services (higher risk) but expand to offer a variety of other services, you may be able to change your company name from something like “ABC Investments LLC” to “ABC Consulting LLC” and can adjust your SIC / NAICS accordingly. This is a viable option for many but make sure you’re not altering your industry codes to ones that do not line up with the services you offer.
Conclusion
At the end of the day, every industry has some amount of risk and you may not be able to avoid every setback that could result from this. It is also not advisable to take measures that may be deemed dishonest, just to avoid being classified as high risk however the steps mentioned above are a great place to start if they do apply to your situation. And just know that there are funding products that cater to higher risk industries as well!
