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Why Do Banks Categorise Some Businesses As High Risk?

Laila Azzahra
Why Do Banks Categorise Some Businesses As High Risk?

Banks are literally the definition of a business that functions by lending money. Of course, they need to protect themselves from borrowers who may default on their loans. To do this, they use a risk assessment process to evaluate borrowers and categorize them into different risk brackets.

Banks use a variety of factors to assess the risk of a potential borrower. Some of the most common factors include the borrower’s credit score, the type of business, the amount of money being borrowed, and the loan repayment terms. So lets focus on the high risk part of this – If a business is requesting a loan for a high-risk  venture, the bank will be more hesitant to lend money. This may seem unfair, but keep in mind that banks are looking to minimize their risk when they lend money.

In this article, we take a look at online banking providers and how they cater to high-risk businesses by offering specialist merchant accounts. We looked into Monneo, as we heard they have been causing quite the splash in the fintech world. From this process we came up with the following information for high-risk businesses.

Is Running a High-Risk Business Actually a Good Idea?

Operating a high-risk company can be a super idea for a number of reasons. First, high-risk businesses tend to be high-reward businesses, so if you’re successful, you can make a lot of money in a short space of time. Secondly, high-risk businesses are most likely going to be dealing with new and innovative products or markets, so you will get in on the ground floor of something huge at an early stage.

The question of whether or not running a high-risk business is a good idea is a complicated one with multiple layers of consideration. There are many factors to think over, such as the potential rewards, the risks involved, and something to keep in mind is your personal tolerance for risk. Overall, there is no simple answer to this question. It depends on a variety of factors and ultimately comes down to a personal decision.

But, what we will say is that if you do go for it, make sure you’ve got the right banking solution to make things go smoothly from day 1.

OK Great… So What Businesses Are Regarded as High Risk Then?

If you are a business owner or are looking to start a new company, you’re doing the right thing by researching this. The best way to check this, is to contact your bank (or a popular business bank) and ask them directly. However for now, here’s a list of businesses that are commonly regarded as high-risk to give you some idea.

As you will notice here, all of these listed sectors are completely legitimate business models that comply with the law. Of course, this varies a great deal depending on the country you are operating from. But the fact is, why should travel agents or sites that simply sell adult toys be penalized for trading just like any other company?

Well, these companies may just be within sectors that are more prone to fraud, like crypto (historically)… but more likely it’s simply because there are an increased number of charge backs taking place due to the nature of their service (for example, if a customer changes their mind about a holiday booking). This is something that traditional banks are slow to adapt to.

Luckily though, there is an easy answer and that is to look to digital banking. Online banks are growing at a fast rate because trivial problems just like this require quick and effective solutions that regular banks simply cannot provide. High street banks are red taped up to their eyeballs, due to investors, policies, and internal politics which makes reacting to growing markets particularly slow.

How to Go About Business Banking, If Your Company Is In a High-Risk Sector

First and foremost, make sure your company actually is high-risk. If this is confirmed we’d recommend a high-risk merchant account. This is a special type of bank account that is designed for companies that are thought to be high-risk. These services come with a number of cool benefits that can aid your business by ensuring things run smoothly. This can include: higher limits, more flexibility, and avoiding chargebacks. If you’re looking for a way to take your company’s business to the next level then a high-risk account is likely the best solution.

But Wait… Make Sure You Do The Research

High-risk merchant accounts are absolutely ideal solutions for lots of businesses but they often come with higher fees compared to old-fashioned business banking accounts. The benefits can seriously outweigh the costs though. If you’re thinking about obtaining a high-risk merchant account, do make sure to do some decent research before you go for it. Don’t be afraid to arrange a meeting with a provider to ask some questions specific to your needs.