Companies with a higher level of financial risk often have difficulty securing company insurance, payment processing choices, and loans. Find out whether or not your company is at high risk and what you can do about it. You can get the impression that the obstacles you must overcome are insurmountable.
Obtaining company financing, credit card processing solutions, and insurance may be complex for high-risk enterprises; this is particularly true for eCommerce business owners who depend only on credit and debit card transactions to be paid. To put it another way, payment processors often prefer bigger, higher-volume firms over smaller ones, even though the latter pose a higher risk.
Understanding The Concept of ‘High-Risk”
Because businesses in every sector are working toward the same objective, the worldwide economy is expanding. This objective is to accomplish the most significant possible amount of transactions, resulting in the highest potential income directly proportional to the number of sales.
However, the formula is not relatively as straightforward as it may seem. Customers, businesses, and financial institutions cannot collaborate effectively when they are not receiving the value they are paying.
The client expects that they will get precisely the goods they have bought, with the exact delivery and quality guaranteed by the manufacturer. The retailer’s goal is to make a sale and collect payment from the consumer in the shortest amount of time.
In contrast, the financial firm desires that both buyers and sellers uphold the value of their memorandum of understanding without ever contesting the transaction or abusing the structure of the transaction processing system. This is what establishments are responsible for covering the full risk associated with payment processing.
Because banking firms take on the risk of processing online payments, and it entails a cost to do so, they have a vested interest in ensuring that the related expenses are kept to a minimum wherever feasible.
Risk Level: Red Zone and grey Zone
There are a lot of different things that might lead to your company being categorized as high risk. They may be split up into two distinct groups: the red zone and the gray zone. Red Zone indicates that you are involved in a field that belongs in “high-risked industries” regardless of the specifics of your company’s past. In comparison, the gray zone suggests that the companies have a significant risk associated with them due to their processing background or competence.
The Red Area
- You are operating in a high-risk business industry with a high chargeback ratio.
- You work in a high-risk business industry with a high staff turnover rate.
- You do business in nations with a high rate of chargebacks, such as Russia and Brazil.
- The industry you work in is included on a list of High-Risk Industries.
- You are not in compliance with the safety standards required by your industry.
- Your company has been around for a while, and its experience with credit card processing is minimal at best.
- You are seeing a percentage of chargebacks much higher than 1%.
- Your establishment has received the designation of Terminated Merchant (TMF), which indicates that you have already been kicked out of the services of a merchant processor owing to an increased proportion of chargebacks.
- You have a history of poor credit card behavior, such as not timely paying bills or failing to provide collateral when applying for loans, making you a high-risk borrower.
- You run a firm that deals in many currencies and are an overseas trader.
- There is a significant number of customers requesting refunds and returning items.
Importance of Risk Level
It is not unusual for business account providers to see the sales and marketing strategies used by high-risk enterprises as dubious, at the very least. Because of how the general public views the nature of your company, you will have to deal with the concept of guilt by association even if your goods and/or services do not directly violate any laws. This is especially true if your goods or services are seen to be of dubious legality.
Companies operating in high-risk sectors and those operating in high-risk industries often have a larger number of compliance requirements that they need to satisfy. These rules, the most well-known example of which is OSHA’s standards, may be imposed at the state, federal, or municipal levels. They are often connected to high-risk company categories.
The fees associated with high-risk merchant accounts are often higher than those related to non-high-risk accounts. It will cost you extra money for account fees and processing costs, and you’ll likely be locked into lengthy contracts with hefty termination fees if you try to get out of them early.
Grey Zone Businesses
If your business works in a gray area, the credit card processing available to you will be highly impacted by your company’s history. This is especially true if your company processes credit cards.
A company’s lack of processing history may work against them, particularly with transactions involving cards that aren’t physically in the customer’s possession, where the danger of fraud is greater.
In most cases, businesses operating on the perimeter may find a supplier that will aid them in allowing credit card transactions. This is the case as long as the companies have a stable processing and financial background. On the other hand, newer businesses and those with a less than exceptional track record will have a more difficult time accomplishing this goal.
Red Zone Businesses
Even if your company is in a high-risk industry, you could still be able to discover a provider that can aid you in taking payments online. MYMOID is a payment gateway that collaborates with acquirers to provide virtual point-of-sale systems to companies operating in high-risk industries.
Optimal Charge-Back Percentage
As was pointed out, several sectors that fall into the red zone, such as the tourism, reservation, and lodgings industries, are regarded as high risk due to the high rate of payment transactions they encounter.
Any high-risk company should be aware that chargebacks are a normal and expected part of operations, which is for the development of their company. Every business person will face a chargeback, either a credible one or one that is not legitimate. This is essential information that a high-risk company should be aware of.
Consider the Fees and Rates of Payment Processors for High-Risk Industries
Having to deal with high processing charges is a sad fact of life for high-risk businesses. Even while the precise rates that you pay might vary from one processor to another, you should plan on paying close to twice as much as a similar non-high-risk firm that has the same sales volume would spend in order to process credit card payments.
You will also need to take into consideration the high-risk accounts are subject to something that is referred to as a rolling reserve. Contracts with a high level of risk often contain a contract termination charge, which becomes payable if you shut your bank before the end of the contract period. There is also the possibility that your agreement has a provision for liquidated damages, which would boost the overall cost of breaching the agreement.
High-Risk Business Repercussions
If either your firm or the sector in which you operate is regarded as high risk, you might expect to have a tough time opening a primary account with the majority of acquirers. This is because most acquirers need specific financial stability from their customers.
In most cases, most businesses will be required to choose a high-risk merchant account, subjecting them to various limitations and increased processing costs.
Managing Business When You Are Operating in a High-Risk Sector
As the owner of a high-risk firm, you are aware that the payment processing choices available to you are restricted. Unfortunately, your company’s finance and insurance choices are restricted. Loan providers may be hesitant to work out a deal with you if you run a startup, have little revenue, or have poor personal credit.
We strongly suggest you contact online lending institutions that provide high-risk business loans such as quick loans, trade financing,, bank loans, and company credit cards.
Your high-risk company categorization will also affect the alternatives available for commercial insurance. It is in your best interest to get in touch with commercial insurance firms that focus on the high-risk industry since some carriers may be hesitant to provide you with a contract that is in your best interest.
Paying for a general liability out of pocket is even riskier for high-risk organizations owing to issues like chargeback-related fraud and inconsistent income sources. Therefore, high-risk enterprises must choose a specialist that offers general liability protection without overcharging.
You can now start working towards finding solutions to the problems preventing you from taking digital payments since you better understand the key ideas and repercussions of being high-risk industries and all the principles that surround them.
Finding professional services suited to your individual company’s needs is never simple, but it is even more challenging for high-risk businesses. Even if your options are more restricted than those of traders who are not considered high risk, there are service providers on the market willing to work with high-risk businesses and supply them with services of high quality and at reasonable prices.