Every business has its fair share of risks. That’s just how the business work works. However, some merchants face more risks than others, the extent of which significantly influences various aspects of their businesses. If you’re thinking of becoming an entrepreneur, too many high-risk factors may discourage banks and potential investors from funding your endeavor, and payment processing companies from lending you their services.
Sure, being high-risk doesn’t necessarily mean you’re going to fail. But you’ll probably face an uphill battle getting your business off the ground.
Banks and payment processors may label you as high-risk because of various reasons. Some may be superficial, depending on your industry or clientele, and others may be directly related to your business practices.
If you operate in a sector that is known for its high rate of chargebacks, unpredictable demand, high numbers of fatal or nonfatal accidents, strict government regulations or illegal activity, a financial institution will likely consider you a high-risk merchant.
The same goes for merchants that have had a shaky relationship with previous financiers and payment processors or a bad credit history. Most banks also consider new businesses and SMEs as high-risk.
According to the Center for Disease Control and Prevention (CDC), agriculture, construction and mining top the list of industries with the most fatalities in the US. Therefore, any business operating in these sectors will automatically be deemed a high-risk enterprise. Other known high-risk industries include healthcare and pharmaceuticals, travel, Forex and cryptocurrency trading, casinos, adult services, and debt collection.
Because of the lack of physical buyer-seller interaction, all online merchants are usually regarded as high-risk. Of course, the level of risk will vary with the type of goods or services a business offers.
Consequences of Being a High-Risk Merchant
If financial institutions or investors consider you a high-risk merchant, you’ll likely find it difficult to acquire funding. Financiers always look after themselves, so any business that puts them at risk of losing their money is often turned away. Similarly, a payment processing firm will be reluctant to partner with you if your business is high-risk, which means you may be locked out of accepting cashless payments from your customers.
Of course, high-risk lenders exist, but they can be hard to come by, depending on the “riskiness” of your business. If you do find one, be prepared to pay a higher loan rate or down payment than usual. High-risk processors also charge more for high-risk merchant accounts, but you’ll have no option but to comply if you’re a high-risk merchant.
High-risk businesses also face extra expenditures for compliance-related resources like protective gear and additional personnel so that they can meet state or federal compliance requirements.
If you’re a high-risk merchant, getting certain business services may be very difficult. To avoid frustrations, therefore, only apply to companies that are known to deal with high-risk merchants. Also, keep in mind that high-risk loan providers, payment processors, and insurers may charge you high rates to provide the services your business needs. Lastly, ensure you always remain complicit with local, state and federal regulations to avoid costly penalty fees and lawsuits.
Succeeding as a high-risk merchant is far from being a walk in the park, but it’s not impossible.