Most small business owners will never hear the term “high-risk merchant account” until their businesses have been identified as such. It does seem a bit mysterious at first. In some cases, it may feel like an unfair judgment against your business, the service you provide, the products you offer, or you yourself. That isn’t the case. From the perspective of the merchant provider, it is often an indication that your business poses a greater risk for chargebacks and has nothing to do with what your business has done or how it has performed.
What Makes a Business Risky
Every day, banks turn down online merchants that have excellent credit scores, good reputations, and solid revenue streams because they don’t have bricks-and-mortar businesses or enough assets. Banks classify these companies as high-risk merchants because there is a greater chance that these businesses disappear or go bankrupt before they pay back their debts.
Traditional financial institutions also don’t like to work with businesses, such as online dating, auction, and gambling sites, adult entertainers, telemarketers, and web-hosting services. Banks turn them away their rates of failure are higher and they sell what they consider questionable products or services.
Understanding this critical designation gives you the keys to the universe when it comes to understanding how merchant services work and identifying the best payment processing partners to work with your business. Unfortunately, there is no one industry-wide standard that identifies one business as high risk while absolving all others of this designation. It is incredibly subjective, and some factors simply make your business a more likely target for this designation including the following:
- You work from home – The location of your business matters and home-based businesses are riskier propositions for payment processors. For this matter, doing business out of the country can also designate you as a high-risk merchant account, so keep that in mind before you plan to take over the universe.
- The length of time you’ve been in business – The longer you’ve been in business, the more willing partnerships you’ll have available to you.
- Your history with other merchant accounts – It matters. Keep your records and be honest when shopping around for new merchant partnerships.
- Amount of chargebacks– There isn’t enough to be said about this. Avoid them whenever possible. Create policies to mediate customer problems, offer refunds, and communicate with your customers to avoid them.
- You’re in one of the identified high-risk industries – Some industries are just riskier than others from a payment processing partnership perspective.
- Your personal credit – Believe it or not, this has a bigger impact than many business owners realize. Improving your credit makes you look like a more favorable risk for business partners to assume.
Of course, there may be reasons not included on this list that identify your business as a high-risk merchant account.
How a High-Risk Merchant Account Impacts Your Business
In some instances, being designated as a high-risk merchant account means you’ll have to go through extra scrutiny in order to receive merchant services. You may even be limited to a certain number of transactions in a month or be required to have a certain amount of cash reserves.
In most cases, you will be required to pay higher fees and/or processing rates to receive a variety of merchant services due to your high-risk designation. Some providers may even refuse to work with you.
Benefits of Having a High Risk Merchant Account
You may be surprised to learn that there are several benefits to being identified as a high-risk merchant if you’re willing to pay the additional fees and go through the added scrutiny and oversight high risk merchant account holders face. Among those benefits are the following:
More flexible payment acceptance options – Low-risk merchants can only collect certain types of revenue by credit card. High-risks merchants have fewer limitations, meaning they can:
- Offer recurring payments
- Process higher sales volumes for launch events and special sales
- Sell a wider variety of products and services
Ability to work internationally – Low-risk merchants are limited and severely restricted when it comes to international transactions. High risk merchant accounts have fewer restrictions that might limit their goals for global expansion.The key is to choose wisely when selecting high-risk credit card processing partners and merchant services providers.