Many small businesses accept too much risk and are unprepared for sudden calamity. The very first thing every small business owner should do is read up and admit to the risks of running a business. After that, a plan of action to curb that risk should be implemented.
What defines a high-risk business? Looking at the word itself, risks are elevated, making a venture into unknown territory more predictable. While some businesses thrive on a risk-taker lifestyle, some don’t.
What are some signs? Here are signs of risk and some factors that define a high-risk business.
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What Is a High-Risk Business?
A high-risk business has a high chance of failing, usually, because it is financially unstable, doesn’t follow the law, or has moral problems. Investors often take a risk when they put money into these businesses because they have a higher chance of losing money than other businesses.
A high-risk business could be anything from a company looking for oil to a new tech company to an unusual real estate venture. Most of the time, they need a lot of money to get started and business and legal knowledge.
Businesses that take on a lot of risks often need extra insurance and money set aside in case of an emergency or legal trouble. High-risk businesses can be hard to finance and keep going in the long run because they have a high chance of losing money and could be sued.
What Are the Signs of a High-Risk Business?
There are several signs that a business may be considered high risk:
Industry
Some businesses are at high risk because they are in inherently riskier industries. For example, businesses that deal with online gambling, high risk adult sites, or CBD oil may be seen as high-risk. This is because they may run into legal or regulatory problems and have a higher chance of fraud and chargebacks.
Banks and payment processors may look at these industries more closely, which could make it harder for them to get money. Businesses in these fields may also have to pay more or meet stricter criteria to get a loan.
Payment Methods
Credit card transactions are vulnerable to fraud and chargebacks, so businesses that mostly accept credit cards may be considered high risk. Banks and payment processors may be less likely to do business with these companies because they pose a higher financial risk.
Because of this, these businesses may have to pay higher fees or meet stricter criteria to get loans. Businesses that accept other payment methods, like ACH or wire transfers, may be seen as less risky because fraud and chargebacks are less likely to happen with these payment methods.
High Transaction Volume
Businesses with many transactions, especially those with high ticket prices, may be considered high risk. This is because they pose a bigger financial risk to banks and payment processors.
These businesses might be looked at more closely, and banks and payment processors might ask for more paperwork or charge higher fees. But businesses that do a lot of transactions can negotiate lower fees or better terms if they can show that they are financially stable and have good credit.
Poor Credit History
Businesses that have had money problems or gone bankrupt may be seen as high risk because they are less likely to be able to pay back debts or meet other financial obligations. Banks and payment processors may be less willing to do business with these companies, making it harder to get financial services.
These businesses may also have to pay more or meet stricter criteria to get a loan. But businesses with bad credit may be able to improve their creditworthiness over time if they take steps to improve their financial stability and credit history.
Geographical Location
Businesses in countries or regions where fraud or money laundering is common may be considered high risk. Because these businesses are more likely to lose money, banks and payment processors may be more cautious about working with them.
Because of this, these businesses may have to follow more rules or pay more fees. But businesses in these areas may be able to lower their risk by taking strong steps to stop fraud and showing that they care about doing business legally and ethically.
Reputation
The reputation of a business can have a big effect on how risky it is. A business with a bad reputation for customer service or quality may be considered high risk. Customers may be more likely to dispute charges or file chargebacks.
Banks and payment processors may need to be more cautious about working with these businesses. They may have to pay higher fees or meet stricter underwriting criteria. But businesses with a good reputation for quality and customer service can negotiate better terms or lower fees.
Legal Compliance
Businesses that work in industries with strict legal or regulatory requirements may be seen as high risk if they don’t follow those requirements. Banks and payment processors may be less likely to work with these businesses because they could face fines, penalties, or legal action if they don’t follow the rules.
Because of this, these businesses may have to pay higher fees or meet stricter criteria to get loans. But if a business shows its commitment to following the law by putting in place strong compliance programs, banks, and payment processors may be more willing to work with it and give it better terms.
New Businesses
Startups or businesses that haven’t been around for long may be seen as high risk because they need a long history of making money. Banks and payment processors may be less likely to do business with these companies because they pose a higher financial risk.
These businesses may have to pay higher fees or meet stricter criteria to get a loan. But new businesses can lower their risk by showing that they are financially stable and creditworthy with good business plans, financial projections, and other documents.
It’s Better To Be Aware of a High-Risk Business Than To Risk It All
Businesses that handle large sums of money and require a high level of security to protect customers and their data are high-risk businesses.
A high-risk business should consider implementing technologies to protect its customers and their records. Contact a professional today to learn how we can help your business become secure and high-risk compliant.
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