In today’s world, more and more people are using credit and debit cards to pay for goods and services. Last year, a whopping 35 million card payments were processed, which was 12.1% higher than the previous year, and 29% of all point of sale purchases were made via card. This trend illustrates the fact that plastic is fast becoming the payment method of choice, even though cheques have not yet been discontinued.
Many businesses can’t function without card payment handling facilities. Retail businesses, particularly online ones, wouldn’t last five minutes if customers were only able to pay via cash, cheque or bank transfer. They would lose a huge amount of business and probably fold within a short space of time.
However, to the uninitiated, accepting card payments probably seems rather difficult to organise. Stores have to have specialist card readers in order to accept debit and credit card payments and if a customer wants to pay online, it is even more difficult, right? After all, it’s not as if you can accept cash over the internet.
In order to accept card payments, online or in person, a company needs to have a merchant account. This type of account is held directly at a bank. When a customer makes a payment, their payment details are sent via a secure payment gateway and processed by the merchant account. If the payment is successful, i.e. all of the customer’s information is correct and there is no evidence of fraudulent activity, the payment is approved and the customer is notified. The customer’s funds are deposited in your merchant account (minus any fees of course), after which you are then free to withdraw the money and place it in a different account.
There are fees attached to merchant accounts, which vary between different lenders. You may also need to set up a payment gateway if one is not included in the package. There are other simpler options such as PayPal, but if you envisage your business growing, adopting PayPal as your merchant account provider is not going to be a successful long-term solution.
Regular low-risk businesses will not have too many problems finding a lender willing to offer them merchant account utilities. This is not to say the application process is easy – it isn’t – but as long as you have a professional business plan, a good credit history and a successful business, you should be approved for a merchant account by most mainstream lenders.
It’s a Risky Business
Some businesses are deemed to be ‘high risk’. If this is your business, it can be incredibly frustrating to be told by a lender that you are too high risk to consider for a merchant account. Unfortunately, however, if your business falls into a high risk category, you won’t be eligible for a mainstream merchant account.
Providing merchant account facilities is risky for a lender. On the one hand they are able to charge for the privilege, which can be lucrative for them, but on the other they are liable for any chargeback payments if the business has financial difficulties or a relatively high number of customers demand a refund.
Why Are Some Businesses Classified as High Risk?
There are many reasons why some businesses are considered to be high risk. As we have already mentioned, any business where a higher than average number of customers are likely to demand a refund will be considered to be high risk.
For example, online businesses where products are subjective or delivered by way of a subscription, e.g. diet pills, are high risk. Businesses in certain niches are automatically considered to be high risk, no matter how successful they are. For example, gambling and adult websites are high risk by virtue of the fact people won’t want to be associated with them and are therefore more likely to deny a payment is legitimate when it shows up on their credit card statement.
Location of the business is also important, so if your head office is based in Nigeria, you may as well tear up your application for a mainstream merchant account right now because you are 100% guaranteed to be turned down without so much as an apology.
Basically the list of businesses that don’t qualify for a mainstream merchant account is very long. In fact you might not even be aware that your business is classed as high risk until you apply for a merchant account and are refused by several lenders.
In the post-financial crash ‘risk averse’ climate, the majority of lenders won’t touch a business they perceive to be risky. From their point of view it is pretty understandable. After all, look what happened to all the mortgage companies who had large portfolios of sub-prime mortgages at the start of the 2007 global economic recession – many of them went to the wall as a result of their high exposure to toxic loans. Consequently many lenders are now unwilling to put their shareholders at risk and so avoid high risk products.
The good news is that there is a solution to this conundrum in the form of specialist high risk merchant account, which are designed for high risk businesses that don’t qualify for mainstream merchant accounts.
Starting a New Business in a High Risk Niche
In the early days of setting up a business, high risk or otherwise, turning to an aggregate lender like PayPal might seem like an attractive option. Companies such as PayPal make it really easy to offer card payments. You can elect to accept card payments in person or offer a card payment facility on your website with a ‘buy it now’ button. Customers are familiar with PayPal and seeing the PayPal logo on a website is comforting to them. PayPal is ideal for start-ups and web-based entrepreneurs, but in time you will soon discover there are serious limitations to the service.
The problem with using PayPal as your merchant account provider is that if you operate in a high risk business sector, PayPal might decide to shut down your card processing facility without any warning whatsoever.
The reason for this is simple. In order to make PayPal payment services accessible to the masses, PayPal doesn’t run many checks when businesses apply for a merchant account. This means scammers and fraudsters slip through the net and start selling their dodgy diet pills or advertising internet brides with impunity. However, although the sun shines in paradise for a while, once customers start demanding refunds and the chargebacks begin to pile up, PayPal pulls the plug and the money is locked away out of sight until the problems can be resolved.
As a high risk business, you will experience more chargebacks and payment issues than the average business. This puts you directly in the firing line with a company like PayPal, so although it might work when you are first setting up the business, as the business grows and prospers, you will need to look at high risk merchant accounts.
Cash Flow is Crucial
Positive cash flow is essential for a successful business. Without cash flowing freely into the business you can’t invest in new stock and it becomes increasingly difficult to pay the bills. The last thing a growing business needs is to have their merchant account provider withdraw all card processing services and lock down the merchant account. For any business this would be a disastrous scenario, but for a start-up it could spell the end.
Businesses can’t afford to risk a cash flow crisis, so if your business is operating in a high risk sector, you need to make sure your merchant account provider doesn’t decide to call a halt to your card processing utility one fine day. Since mainstream merchant account providers tend to be risk averse, it is sensible to apply for a merchant account from a specialist lender with the right experience.
The best way for high risk businesses to ensure the cash continues to flow through the business via card payments is to investigate high risk merchant accounts. With the right account in place, things like chargebacks won’t be a massive problem.
If high risk merchant accounts are your only option because of the type of business you run, you won’t have as much choice when it comes to finding a sympathetic lender. You may also find that some lenders charge a lot more than others.
To avoid being hit with high fees for operating a merchant account and payment gateway, don’t rush into signing any agreement. Instead, take your time and read the small print to make sure you are not going to be paying any more than necessary.
Look for an experienced lender who is willing to take the time to understand your business and how it works. Even better, look for a lender who is familiar with the niche you operate in. It really will make life easier.
Don’t underestimate the value of good customer support when you are looking for the right high risk merchant accounts. There will inevitably be problems along the way, so it helps if the lender is sympathetic and is willing to work with you to resolve issues related to things like chargebacks and customer refunds.
Some high risk lenders will insist on locking you into a long contract if you sign up for their services. This might seem like a good idea if every other lender has turned you down, but remember: your risk profile might drop over the next twelve months and if this happens you will be eligible for better rates from other lenders.
The Advantages of Using High Risk Merchant Account
Working with the right lender will be beneficial to your business. Mainstream lenders reduce their exposure to risk by freezing accounts or suspending card payments as soon as they suspect there might be a problem. Whilst this will protect the lender and its shareholders from financial woes, it isn’t very helpful for you and your business.
High risk speciality lenders are used to working with high risk businesses. Their underwriters are more familiar with the problems faced by internet dating websites, debt collection agencies, holistic healthcare companies and the like, which means they are better equipped to help you grow your business.
How to Lower Your Risk Profile
Depending on the type of business you are in, there are ways and means to reduce your risk profile in the eyes of a lender, no matter what type of business you operate. A good example of this is a travel services provider. This type of business has to deal with a lot of customer cancellations, which puts it firmly in the high risk category. However, with a bit of effort, it is possible to lower the risk and be more appealing to a mainstream merchant account provider.
The longer you are in business, trading successfully, the less risky you will appear to lenders. Most lenders are wary of new start-ups because they have very little trading history, but once you can prove your worth as a business, lenders will be far more likely to offer you a mainstream merchant account.
Lenders like to know that a business has a good cash reserve in the event chargebacks and debts need to be covered. The more money you have in a savings account the better, because it means the lender won’t have to step in and repay your disgruntled customers.
There are many business sectors where it won’t matter how much effort you put into lowering your risk profile – only specialist lenders will consider your application for a merchant account. In some cases, it can be advantageous to work with an agent, as they will be able to make an application on your behalf.
It isn’t always easy to submit a successful application for a high risk merchant account, but if at first you don’t succeed, review your application and try again with a different lender. You’ll get there in the end.