Credit Card Processing Guide For High Risk Businesses

For most businesses, accepting credit cards as a form of payment is a necessity. If a business does not accept credit cards, they risk losing a lot of business. However, credit cards also come with a lot of risk for business owners as some people might use stolen credit cards. This is a major risk associated with credit card purchases but this risk is much higher in certain industries which are classified as high risk industry by credit card processors.


A credit card processor is on the hook for all the money that is processed by them which means they like to limit their exposure and do not allow all merchants to open an account with them. This is the reason, businesses that are typically classified as high risk find it difficult to open an account with various merchant services providers and they have to specifically look for merchants that specialize in high risk credit card processing.


Classification of High-Risk Businesses

One of the most important things you need to understand is that there is no universal definition of high-risk businesses. Every merchant account provider is free to determine which type of businesses they want to keep into high-risk categories. So, while a merchant may classify your business as a high-risk, others may not. Some businesses such as collection agencies, bankruptcy attorneys, debt consolidation services, fantasy sports website, pawnshops, mail order sales and other such categories are automatically classified as high-risk businesses by most merchant account providers.


Most merchant service providers have a strict criteria for categorizing a business as high risk. The best way to figure out whether your business is likely to be categorized as high-risk is to check the website of a merchant services provider. It will save you a lot of time when you are searching for a merchant account provider for your business.


As far as the treatment of high-risk businesses is concerned, it also varies with merchant services providers. While most providers do not accept any high-risk businesses, there are providers that allow businesses considered to be high-risk but at significantly higher rates as compared to the businesses not in high-risk category.


Here are some of the common factors that are typically used by merchant service providers to categories a business as high-risk.


If a business has a historically high fraud or chargeback rate, it is deemed high-risk by merchant services providers and is likely to be classified as high-risk. If a business is based overseas but operates in the United States, it is likely to be flagged as high-risk. If these services or products being sold by a merchant are of questionable legality such as drug paraphernalia, it is likely to be classified as high-risk. If the business owner has bad personal credit, their business is also likely to be flagged as high-risk. Also, if a business has a high average ticket sale rate, they are likely to be as high-risk.


Choosing a High Risk Merchant Account

While it’s true that you are expected to pay higher fees and charges for your high-risk business by merchant services provider but it does not mean that you should not shop around and pay whatever is demanded by the merchant service provider. Here are a few tips to help you find the right merchant account provider for your high-risk business.


Find a Specialist

When you’re looking for a merchant services provider, it is important to choose a provider specializing in serving businesses in the high-risk category. It will help if they already have some businesses in your industry which means they are likely to allow you to open an account and let you take payment through credit cards.


Always Be Honest

One of the most common mistakes made by business owners when they know that their business is likely to be classified as high-risk is that they lie about their businesses when applying for a merchant account. You should never make this mistake.


The merchant services provider is always going to find out and they will close your account without any notice. You should never lie about your business. Instead, you should be completely upfront with the processor and let them know about the risks associated with your business.


Have Sufficient Capital

If you feel that your business is likely to be deemed high-risk, you can still get a good deal by proving that your business has sufficient capital. It can be in the form of machines, buildings, equipment, inventory or any other thing that can be used for generating income. It gives confidence to the processors as it means that your business has the ability to absorb losses.


Share Processing History

If you have been doing business for some time, you should share your company’s processing history with the payment processor. It will allow them to take a deep look into your business and you can show them that you have always followed regulations and are an honest business owner.


Learn about Reserves

A merchant services provider is always going to keep some of the money in a seller’s account to deal with claims or chargebacks and other such things. This type of money is usually kept in two main reserve types including the rolling reserve and the minimum reserve.


Rolling reserve refers to a part of each day’s sales that is held by the processor for a set period. For instance, they may keep 10% of each day’s sales for a period of 90 days and this money is released on the 91st day. Other reserve is the minimum reserve which the seller has to keep with the processor at all times. It might be taken as an upfront amount or as a percentage of the sales until a threshold is reached.


You should be aware of these reserves in order to compare different merchant services provider.


Keep Renegotiating

It’s not easy for high-risk businesses to open an account with a merchant services provider without any past processing history. This usually restricts their choices in the beginning but you should always renegotiate the rates, charges, reserves and other terms once you have at least three months of processing history.


Keep in mind that once you have a history, you can also be accepted by processors who have previously turned down your application. So, do not think that you are stuck with a processor and have to keep paying those high charges and fees.


Managing Chargebacks

One of the most common reasons businesses are classified as high-risk is that they have a high chargeback rate. So, you should take steps to prevent chargebacks.


You can do that by clearly mentioning your refund policy on the receipt and by making security upgrades to prevent use of stolen credit cards on your website. You should also actively look for red flags that typically indicate fraud. It is also recommended to use a chargeback alert system to keep you aware of potential chargebacks.


Overall, it’s a challenging experience to find a merchant services provider who is a good fit for your business, especially when your business is in the high-risk category. However, it does not mean that you should let predatory merchant processors to take advantage. You should always research and make sure you are dealing with the right payment processors.


So, carefully read the terms and conditions on the merchant application in order to make sure that you are getting a good deal even if you are in the high-risk category. Also, do not forget to renegotiate after a few months as you’re likely to get better rates once you have a few months’ worth of processing history.