Merchant account providers classify merchants according to the risk that they pose. Risk is assessed according to several criteria which include the credit risk of the business, its trading history and prospects, and the business sector in which it operates.
High street banks and other mainstream merchant account providers refuse to provide merchant accounts for high-risk businesses, however there are many high-risk merchant account providers who are happy to provide merchant accounts for businesses with bad credit histories.
Bad credit can refer to an individual who is a director or owner of the business, the business itself, or both. Credit records will show details of borrowing and repayments while highlighting any missed or late payments as well as any defaults, county court judgements (CCJs) or bankruptcies.
Merchant account providers use complex processes in assessing merchant risk. These include factors specific to the individual enterprise as well as ones that relate to the business sector in which the enterprise operates. Read on for the main factors.
Company longevity and financial stability
The track record of a business is an important consideration. New start-ups with limited capital are generally considered to be high-risk, particularly if the credit card processing volume is high compared to cash in the bank.
Creditworthiness of directors and owners
If the business principals have a blemished credit record then the likelihood of the business being considered high-risk is increased; though this can be ameliorated if the principals can offer personal guarantees.
The way in which the business accepts payments is important in assessing risk. If the business takes payments in advance, for instance for a subscription, the risk is considered to be higher. When there is a long time span between payment and delivery there is an increased chance the business could stop trading. The further in advance the business collects payments, the higher the risk.
Additionally, payments taken online or over the phone are considered to be higher risk than those taken when the card holder is present during the transaction.
Merchant account providers consider certain business sectors as being high-risk because of the proportion of charge-backs, cancellations, and non-authorisations of payment that occur during the day-to-day running of the business. For instance businesses that relate to travel are considered high risk, as factors such as the vagary of the weather, the inclination of travellers to change their travel plans, and the potential for cancelled flights result in a higher than average proportion of charge-backs. As an example of this, while the restaurant business, a very low risk category, has credit card transaction losses of around 0.01%, the travel industry has average losses that are ten times higher at around 0.1%.
Some examples of high risk sectors are:
- Online auctions
- Ticket brokers
- Online pharmacies
- Health and nutritional supplement products
- Travel and timeshare
- Monthly membership and subscription services
- Debt management and collection agencies
- Adult services
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Additional things to consider
Naturally as the providers are accepting a high risk, it is only natural that they will mitigate this by offering accounts on less favourable terms.
For instance they are likely to charge higher transaction fees, an extended settlement period to reduce the possibility of a chargeback, a rolling reserve fund to act as a payment buffer, and high annual and monthly fees. Some high risk merchant account service providers charge businesses a fee just for applying for an account.
Attitude to risk
Not all high merchant account providers assess risk in the same way. While some might consider you to be very high risk and make it difficult for you to obtain a merchant account on reasonable terms, others might treat your business as being just a medium risk and be able to provide you with competitively priced merchant services.
Specialist high risk merchant services
Some providers specialise in providing merchant accounts for specific high risk business sectors such as adult services and gambling that others won’t consider. As they specialise in such sectors they are skilled at assessing and mitigating the real risk and thus can offer accounts with realistic charges.
Offshore high risk merchant accounts
For merchants who cannot obtain a high risk merchant account in the UK, a fallback position is to set up an offshore merchant account. There are several offshore high-risk merchant account providers that you can research, but it is important to be aware of all the consequences of an offshore account.
The downsides of an offshore account can be considerable. It might only be possible if you incorporate your business in the relevant jurisdiction; it might be difficult and expensive to deal with any legal disputes with the supplier; rates could be significantly higher; and it could have a negative impact on your business reputation. However there are upsides too; for instance there could be tax advantages especially in some market sectors such as gaming.
High risk merchant account provider reviews
We have reviewed a number of high risk merchant account and high risk payment gateway providers. You can view these reviews in the related articles.
- First Data Merchant Services Review
- Paysafe Merchant Account Review
- Ogone Payment Services Review through their technical partner accept cards
- PayEase Payment Gateway Review
If you're interested in securing a merchant account for a charitable business read our article - Merchant Accounts for Non Profit Organisations.
How to Get a Merchant Account with Bad Credit
Even if you have bad credit, this shouldn’t stop you getting a merchant account, though you should be prepared to put some work into the process and shop around for the high-risk merchant account services that are right for your business.
Check the Records
It isn’t unusual for credit reports to have errors which adversely affect your credit rating. It is important to check both your personal and business credit reports to ensure that damaging errors aren’t affecting you. According to the Wall Street Journal a survey carried out in 2012 revealed that 25% of small businesses that checked their company credit reports found errors; although these were small US businesses, there is no reason to suppose that this isn’t also the case in the UK. If you do discover errors, then there are a number of well documented procedures that you can follow to ensure that they are corrected.
Provide An Explanation
There are many reasons why businesses and individuals get into financial problems from which they are capable of bouncing back; even Donald Trump has filed for corporate bankruptcy on four occasions ranging from 1991 to 2009.
Put together an explanation of why and how you get into bad credit and what you will do to ensure that it doesn’t reoccur. You will find that many high-risk merchant account providers will be willing to listen to what you have to say; after all it is in their interest to support the entrepreneurial effort of individuals who have learned lessons the hard way and, as a consequence, are less rather than more likely to repeat them.
The Future Is Rosy
Ensure that you have a business plan that is both honest and detailed which shows where your business is heading in the future and how you will ensure that your cash flow can meet all your commitments.
Provide a Personal Guarantee
It isn’t unusual for merchant account providers to request a personal guarantee from the directors of limited companies. Not only does this mitigate their risk, it also displays your personal commitment to ensure the business will be a success; after your home could be at risk should you fail.
There are many high-risk merchant account providers with flexible approaches to applicants with bad credit, so you may need to shop around to find one that is able to offer you with the best deal for your business. In a related article we provide further information on bad credit merchant account providers, so check it out.Get Free Quotes