A company is considered a high-risk business based on two conditions: it operates within a high-risk industry and risk of financial failure exits. Either or both conditions might apply. The first condition addresses safety and health concerns, and the second condition addresses your company’s viability (continued profitability). However, both circumstances might affect your company’s ability to acquire financing, insurance and merchant accounts.
Banks and merchant account providers consider a business as high risk because of a high level of charge backs, a merchant receives credit card payments, but customers cancel transactions; refunds and returns; and credit card fraud, according to High Risk Expert. Furthermore, banks view companies that have bad credit histories (late paying bills) or that provide no collateral for loans as high risk, according to FastUpFront.com. In addition, companies in industries that have high numbers of fatal or nonfatal accidents are high risk.
If your company is considered a high-risk business based on its industry, you must ensure that your company is compliant with local, state and federal laws, and regulations related to high risk, such as meeting Occupational Safety & Health Administration (OSHA) standards. For example, a site control program, such as hazardous waste clean-up operation, must include the use of a buddy system, which is a minimum of two employees working together, if your company handles hazardous waste, according to OSHA.
When applying for a high-risk loan, a high-risk business with a bad credit history will always pay a high loan rate and make a high down payment, according to FastUpFront.com. To meet local, state and federal compliance requirements, a high-risk business faces expenditures for compliance-related resources, such as additional personnel and protective gear.
Industry And Business Examples
The agriculture, construction and mining industries lead the nation in fatalities, according to the Centers for Disease Control and Prevention (CDC) as of 2002, Therefore, these industries are high risk. In addition, CDC reported that health care is a high-risk industry because it leads in the number of nonfatal accidents. Many high-risk business types exist, such as pawn shops, seminars, computer stores, Internet vitamins and gun shops, according to High Risk Expert.
If your company is a high-risk business, your insurer might charge you high premiums to provide coverage required to conduct business. For example, you might pay high premiums for errors and omissions (E&O) coverage if you operate a business that provides vitamins on the Internet. Furthermore, your business is susceptible to penalty fees and lawsuits if you are non-compliant with local, state and federal compliance requirements.
- Adult entertainment.
- Financial services.
- Virtual assistant.
- Direct sales.
- Service business.
- Senior care.
So, the most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.