Starting a business can be tricky. But here you are, boldly charging ahead on your entrepreneurial and business journey despite those dangers. As you continue to overcome challenges along the way, you might find yourself face to face with one scary phrase: high risk merchant.
But what does this mean?
It starts with the utter ubiquity of credit cards. It’s become clear we’re trending towards an increasingly cashless society, with over three quarters of Americans having at least one credit card and many reporting they don’t make any cash purchases in a typical week.
Given that, it’s a foregone conclusion that you’ll need to accept credit cards to stay competitive in your industry these days. Because of this, you’ll need a high risk merchant account to accept payment. In the era of convenience, if your customers can’t pay the way they want to, they’ll simply buy somewhere else.
Therefore, it’s imperative to understand some of the things that could get you labeled as a high risk business. Doing so will help you stay ahead of the curve and let you work towards getting your payment services in order. So, let’s explore a few of the reasons why your business might be labeled as ‘high risk.’
1. The industry you’re in
This one is a biggie, and also the reason that makes the most intuitive sense. Industries with high risk make for risky companies to work with on all fronts, particularly regarding payments.
But what constitutes a risky industry?
For starters, it doesn’t just refer to what you sell. Of course, something like firearms and ammo would fall into a high risk category because of the associated dangers. The same is true for CBD-related businesses, given the heavy regulations in the industry. But would you automatically consider non-profits, software as a service (SaaS), and dating services to be high risk businesses too?
Probably not.
The risk of a certain industry is about much more than just the product or service itself. Factors like average transaction size and whether your business is based on a recurring payment (i.e., subscription model) play into the designation as well. Given that, you start to realize the list of industries that fall into the high risk category is much more expansive than previously thought.
2. Poor credit
This one relates personally to business owners and your business.
Your credit matters quite a bit when starting a business. You might be a great person, thoroughly reliable among your peers. But to banks, processing companies, and the like, your reputation and trustworthiness are tied directly to your credit score and it’s something that can definitely hold you up while starting a business.
In other words, how you handle your personal and business credit determines your level of risk for various services, including payment processing. If you’re carrying a large balance and aren’t covering the minimum or are not making payments on your loans or bills on time, it shoots up immediate red flags.
A low credit score isn’t necessarily the kiss of death but it certainly makes it harder to secure what your company needs, and will probably land you in the high risk group. Conversely, a high or even average credit score opens the door to the perks of preferential treatment. These can include potentially lower interest rates, due to your proven trustworthiness.
3. Your business’ chargeback ratio
While a chargeback fee is a term you may not have heard before you started your business, it’s one that you’ll surely grow familiar with quickly.
A chargeback fee is one that banks charge to a merchant (your business) as a penalty for processing a bad transaction. It happens when a customer bypasses you entirely and contacts the card issuer directly for a refund. Ultimately, it’s something meant to protect the consumer. Usually the cardholder is given the benefit of the doubt and issued a temporary credit while giving you the opportunity to show if the transaction was indeed valid.
These fees aren’t the end of the world. In fact, they’re a normal part of doing business. Naturally, certain industries and types of businesses are more prone to higher chargebacks rates than others. The key is keeping the ratio of chargebacks as low as possible. On average, they should be less than 1% of your monthly transactions. Anything above that is considered excessive and will likely be deemed high risk.
What to do if you’re deemed high risk
Being high risk doesn’t mean it’s game over for your business aspirations, not by a long shot.
Fortunately, whether you’re just starting out or are looking to expand your existing business, you can still get a high risk merchant account. As mentioned before, going cashless may be the long term trend in the coming years. Therefore, offering your customers ways they want to pay will go a long way towards increasing your sales in the short term.
Story by Allison Eilhardt
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