If your business is struggling with poor credit, you’ve likely been turned down for a merchant account by your standard, low-risk provider — but don’t worry. In fact, 39% of businesses are known as “ghosts”, meaning they have suboptimal credit scores or zero revolving trade accounts. We’ll explore the importance of bad credit merchant account providers, how to know if you fall into the high-risk category, and how to get a merchant account with bad credit.
What Is a Bad Credit Merchant Account Provider?
A bad credit merchant account provider allows businesses the ability to process credit card payments regardless of their business credit history. When a business accepts a credit card payment from a customer or client, the funds from the transaction are held in their merchant account until settlement. From there, they’re released into the merchant’s business bank account.
Why does this matter? Accepting credit card payments allows your business to reach more customers — which means more sales — as approximately 28% of all payments are completed with a credit card. If you’re an e-commerce business, accepting credit card payments is a necessity.
What Types of Merchants Need a Bad Credit Merchant Account?
If you’ve ever been (or tried) to get approved for a loan, getting approved for a bad credit merchant account isn’t all that different. The most important thing to remember is this: banks don’t like liabilities. If a bank has reason to suspect there’s a significant chance you couldn’t pay the money back, then getting a line of credit can be difficult (though, not impossible).
It’s also important to remember that every merchant account provider has a slightly different definition of what they deem to be a “bad credit merchant.” However, you’re most likely considered a bad credit merchant account if any of the following apply to you.
#1 Low Credit Score
If your FICO score is 580 or less, which is a “Fair” rating in the FICO system, your business will be placed in the below average credit score group. This means you’ll likely qualify for and need a bad credit merchant account.
How is a FICO credit score determined? FICO Scores are calculated using a variety of different data points in your credit history. This data is grouped into five categories, each accounting for a specific percentage of your credit score: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
While the right high-risk merchant can help you with a bad credit score, you should still prioritize building up your credit so you can work on setting your business up for success as best as possible.
#2 Prior Bankruptcy
More businesses fail than succeed, it’s the way of an entrepreneur and there’s no shame in learning from past missteps. However, a prior business endeavor that ended in bankruptcy, or a file for personal bankruptcy, will almost certainly place you in the bad credit category.
If your bankruptcy was filed under Chapter 13, then expect it to stay on your credit report for seven years. If filed under Chapter 7, it can take as long as ten years before you’re eligible to switch to a low-risk merchant account.
#3 Outstanding Liens
Outstanding liens (a legal right or claim against a property by a creditor) on your property will negatively impact your credit score. However banks will often evaluate the circumstances surrounding a lien when taking your credit worthiness into consideration.
For example, unpaid taxes will certainly hurt your chances of getting approved for an account much more than a lender who filed a lien as collateral because you took out a loan to finance installing solar panels on your roof.
#4 Outstanding Judgments
Less common than some of the other reasons, an outstanding judgment (imposed by a civil or criminal court) will significantly impact your credit worthiness until paid in full.
What Industries Can Benefit from a High-Risk Merchant Provider?
Businesses from across all different types of industries may be in need of a high-risk merchant provider, even if they’re credit isn’t bad. Some industries are considered high-risk due to the nature of the services and solutions they offer. This includes — but is not limited to — the following:
- Online Gaming & Casinos
- Multilevel Marketing
- Moving & Transportation
- TMF Merchants
- Jet Charters
- Educational & Seminars
- Online Firearm Sales
- Online Ticketing Sales
- Debt Consolidators
- Bail Bonds
- Online Furniture Sales
- Calling Cards
- Travel & Timeshares
- High-Ticket Accounts
- Penny Auctions
- VOIP and Telecom
- Cigars and Pipes
- High Volume Merchants
- Software and E-Book Merchants
The Difference Between Low-Risk & High-Risk Merchants
A few general characteristics that constitute a low-risk merchant to a payment processor include:
- Low transaction volume (less than $20,000 per month)
- Average transactions under $500
- Business in one country that is labeled low risk (the U.S., Canada, Japan, Australia and the countries in Europe)
- One currency
- Very low or zero chargebacks and a low percentage of returns
- Industries labeled low-risk
It’s important to remember that your risk status can change as your business does. High periods of growth could result in your business developing a high-risk status. Additionally, expanding to different countries or shift industries could put you in the high-risk category.
If this were to happen, two things could occur: (1) your payment processor will change your status, or (2) your provider will drop you if they’re unable to support high-risk merchants. If the latter occurs, you’ll need to find a high-risk, bad credit provider that’s able to help you process your payments.
High-Risk Equals Higher Fees
While every payment processing platform is different, high-risk merchants are usually subject to higher processing fees. Typically, the fees for all transactions are higher, and can even be double the cost of low-risk merchant accounts.
Low-risk merchants must also pay a chargeback fee (the fee you owe when a customer disputes a charge directly with their credit card), though high-risk merchants are usually subject to even higher chargeback fees.A high-risk merchant may also need to lock into longer contract terms, an early termination fee, or a monthly or annual fee.
High-risk merchant accounts with bad credit may also be subject to a rolling reserve. This is where the payment processor holds back a certain percent of income until it further verifies that none of the charges were fraudulent or at a significant risk of a chargeback.
Remember, choosing a bad credit merchant account provider is important, as failing to choose one that can accommodate your unique needs may just leave you with higher processing fees and no legitimate help. Be sure the vendor accepts your type of business and the industry you’re in. It’s important to note that even some account providers specializing in high-risk merchants don’t accept all businesses or industries.
Bad Credit? No Credit? Can You Still Get A Merchant Account?
You can still get a merchant account with bad credit, but the provider has to be one that specializes in high-risk accounts. Remember when we mentioned how banks don’t like liabilities? Because of this, it’s highly unlikely (to impossible) you’ll get approved by a bank.
At EMB, we understand that running a business can sometimes feel like a rollercoaster, we just don’t think getting a merchant account should. We’re high risk merchant account specialists dedicated to helping you get the freedom you need to start and grow your high risk business and get back on track.
How To Get A Merchant Account With Bad Credit
Wondering how to get a merchant account with bad credit? It actually doesn’t differ all that much from applying to a merchant account with good credit. However, some bad credit merchant account providers require additional financial details (during the underwriting process), like a personal statement of affairs (PSOA) that lists your business’s assets and liabilities.
Why is a PSOA important? This type of document helps ensure your provider accurately understands your company’s current financial position.
6 Essential Need-to-Knows for a High-Risk Merchant Account Application
If you’ve been turned down for a merchant account in the past due to bad credit, then you’re well aware how frustrating it can be to have to repeat the process. However, we’re here to help you better understand the process and get everything you need in order.
Principally, we recommend you assemble a package of documents with the following information:
- Business license documentation.
- Business incorporation documents.
- Bank statements.
- Processing statements from previous providers, if any.
- Links to your business website(s), showing clear published return/refund policies.
- Information on previous chargeback history.
The Bottom Line
Bad credit can feel like a whole that’s difficult to climb out of. However, the road to recovery begins today, and while it may not be the smoothest walk, it definitely isn’t impossible. Thankfully, bad credit providers exist to help you get what you need today so you can grow your business as you grow at improving it and optimizing it for longevity.