Funding Challenges that High Risk Businesses Face

All high risk businesses face four broad funding challenges of financial risk: market, credit, liquidity, and operational.

Every company faces some level of risk when opening its doors to conduct business. Most of those endeavors eventually fail. Some risks have some controls, while others are beyond what can be managed.

Banks are averse to risk. That makes it challenging for companies in those categories to obtain credit or loans.

Some businesses are considered high-risk ventures because of the products or services offered. Cannabis products are at or near the top of this list in many areas, along with casinos, prepaid debit cards, legal services, health and wellness, and certain forms of entertainment.

What Are the Struggles of a High Risk Business?

Each high-risk situation is different, but here are the typical funding challenges that arise for businesses today.

First Funding Challenge – Limited Banking

Many high-risk businesses find themselves working as cash-only ventures. With access to limited banking at best, there might not be ways to access payment processing services. In some industries, banking opportunities aren’t even allowed because of their current legal status. Someone in the cannabis industry in 2022, for example, cannot work with a federally insured bank in the United States.

Without the option to take different payment forms, it becomes harder to secure customers. Fewer consumers equate to lower funding opportunities.

Second Funding Challenge – Negative Stigma

People have the right to form their own opinions about specific goods and services. When most individuals in the general public believe that something should be illegal and it is not, it creates a high-risk business venture. It can be challenging to establish a professional network when others are concerned about how others would view their association.

Third Financial Challenge – Safety and Security

Since many high-risk businesses operate in cash, advanced security measures must be taken to protect profits and products. It’s harder to recover in these circumstances because the insurance policies that protect against these losses are harder to afford.

Without proven safety protocols to follow, funding is less likely to occur.

Fourth Funding Challenge – Business Structure

If you operate as a sole proprietorship, you’re functioning as a high-risk business in today’s environment. You’re open to personal liability for any lawsuits and litigation, which means someone can come after your home, car, and other assets. It helps to structure yourself as a limited liability company or partnership to eliminate this potential threat, but that option isn’t available for all businesses.

Even high-risk entrepreneurs avoid sole proprietorships because of this liability concern.

Fifth Funding Challenge – HR Quality

High-risk businesses face concerns about equal opportunities, fair wages, benefits, and other human resources problems. Since there is often less familiarity with the products or services offered, finding and retaining top talent is more challenging. That means more needs to be spent on recruiting, training, and retainment than in ventures with less risk. Without top people, it’s harder to convince lenders to provide funding.

Even when high-risk businesses can find lending opportunities, the costs are often significantly higher because the lender takes a considerable chance providing financial services. That’s why finding those who specialize in unconventional loans and credit is essential to the survival of these companies. Having access to financing won’t solve every problem, but it does provide some relief.