Before discussing how to know if your business is considered high risk, let’s first determine what a high-risk business is and why a credit card processor would be reluctant to get into business with it.
Various factors come into play when considering a business high-risk. However, the two most common indicators are:
For instance, if you were a weapon or fire-arm merchant, it would fit within the second indicator. High-risk industries, such as the e-cigarette industry, attract significant chargebacks that make them financially risky. If a small business brings less than $1.2 per annum in revenue, it may be considered high-risk.
Many businesses only become aware of their risk status when searching for a credit card processor or merchant. This becomes a problem since they’re obliged to pay higher fees and rates for payment processing services.
Credit card processing companies aren’t keen to partner with a business with many issues such as fraud or chargebacks since they’ll be responsible for all your business transactions. Ultimately, most processors acknowledge that it isn’t worth the headache for them.
As we highlighted before, there are many indicators as to whether your business is high-risk or not. For instance, if you’re a new enterprise, have poor or no credit, or work in “unattractive” industries, many credit card processors will consider your business a high risk.
The list above isn’t a definitive list of all high-risk businesses.
If you’re a high-risk merchant, there’s both good and bad news for you. Let’s start with the more positive news. There are credit card processors that’ll work with you even if you’re considered high risk. The bad news is; the terms and contracts they offer won’t be as advantageous as you hope.
Regardless of the situation, below are some tips we’ve gathered to help you in the search for high-risk credit card processors.
Not fully disclosing the services and products you sell will not help you fool processors. They will make an audit and eventually find out that your business is high risk. Tell your processor the truth and if they can’t work with you, continue searching for one that will. There are processors out there that will accept you.
The ability to demonstrate and validate that you’re well-capitalized is one of the best ways to gain a processing provider. Your resources can range from buildings, inventory, equipment, tools, and machinery to generate revenues for your business. Underwriters and banks may agree to provide payment processing services if you’ve got productive assets since it indicates that the business can sponge up financial losses and is well-funded.
You’ll need to furnish your processing provider with past processing history if you don’t have access to significant capital resources. This allows them to have an idea of how you processed payments in the past. If a previous low-risk processor dropped you, don’t be concerned.
They could have dropped you because they viewed your financial services business as too risky for them to handle and not due to fraud or chargebacks. It’s better to show your current processor that your account wasn’t dropped because you weren’t in compliance with the rules or engaged in illegal activities.
Depending on the number of transactions they’ll process, your processor will give your high-risk business a preset limit. While that’s not an issue for new businesses, it’ll affect you when you start processing a significant amount of transactions when your business takes off. If you exceed the preset limit, the processor may charge penalty fees. When searching for a credit card payment processor, choose one that will help you scale and offer you unlimited transactions.
It would be best to have two high-risk accounts if possible. You never know if you’ll get your account terminated due to increased chargebacks or new underwriting guidelines. This way, you’ll still have another account to process payments if you get dropped by one processor.
Your account will have a certain amount of money set aside by high-risk processors so they can take care of payment issues like debit transactions, claims, and chargebacks. For instance, there are two types of reserves required by PayPal:
Holding 5-10 percent of sales could do severe damage to some businesses. It could mean disrupting the cash flow and not having the ability to accommodate the difference. Before selecting a processor, make sure you’re aware of and can financially handle the reserves and other fees.
So, what happens if you don’t have any previous history of payment processing? Unfortunately, processors will consider your account riskier than other accounts.
This means that they’ll impose restrictive and pricey terms. However, as long as you have a three-month history for your card processor to review and analyze, you can re-negotiate reserves, rates, and other terms of your contract.
If a processor declined you after applying, they could still approve your application once you provide 3-month statements.
The provision of virtual terminals and secure payment gateways is non-negotiable when it comes to a payment processor. Ensure every online transaction has the protection of encrypted server transactions that adhere to updated regulations set by the PCI-DSS (Payment Card Industry Data Security Standards).
Finding a payment processor that works exclusively with high-risk companies will help you build your reputation and trustworthiness, as well as give you access to services that help reduce fraud or chargeback instances.
Finding a secure, fair, and reputable high-risk merchant isn’t easy for high-risk businesses. But it can be done and is done each and every day. Knowing that your business is considered “high-risk” is the first step to successfully getting over this hurdle.
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