What Small Businesses Should Know About High-Risk Processing for Credit Cards

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As a small business, you have to take extra steps to protect yourself. Here is what you should know about high-risk processing for credit cards.

Recent statistics suggest chargebacks are increasing, as much as 41% every two years. This is a big problem for a small business. However, for companies who experience high-risk processing, this is one more obstacle to endure.

If you are a small business merchant that worries about high-risk credit card processing, the best advice you can get is to do your research. When you know how to navigate the world of high-risk processing, you can boost profits.

Here are the facts on high-risk credit card processing so that you can be successful with your small business finances.

What Is a High-Risk Credit Card Processing?

A payment processor will label a small business’s merchant account “high risk” if they are at a higher risk for credit card processing challenges like chargebacks and fraud. Because of this, a small business may pay higher processing fees than other businesses do so that the payment processor can receive compensation for the risk they take on by doing business with the company.

Credit Card Processing High Risk

Unfortunately, if you are looking for a central authority on how to decide if your business is a high risk, there is no single framework. Instead, each provider or payment processor contains its own standards for determining high-risk processing.

You may find that a payment processor you wish to work with will say that they do not work with companies in certain industries. Other providers will welcome all.

No matter the case, every payment service provider will usually have you submit an application from the start. They want to know more about your business to determine any potential risk factors.

High-Risk Industries

Your industry will affect your application, as they may consider some a higher risk. High-risk industries can include:

  • Adult services or products
  • Automotive accessories and parts
  • Bail bonds
  • Coins and precious metals
  • Computer software
  • Credit repair
  • Debt consolidation
  • Dropshipping
  • Electronics
  • Extended warranties
  • Firearms
  • Free trials
  • Jet charter
  • Legal services
  • Multi-level marketing
  • Nonprofit
  • Online gaming
  • Pawnshops
  • Self-storage
  • SEO or SEM services
  • Tasers and stun guns
  • Tax preparation and accounting
  • Tech support
  • Tobacco products and cigarettes
  • Travel and vacations
  • Web design
  • Weight loss programs

These are among other high-risk industries. However, this list should give a good indication of whether your small business is in a high-risk category.

There are other ways to measure your risk factors, too. If your small business has a subscription model, this can be a risk factor. So can international sales and highly regulated industries.

Little or no business experience, past fraud or illegal activity, long fulfillment time frames, and a big number of card-not-present transactions are risk factors.

What Makes High-Risk Processing Different

Mostly, the processing fee you will pay is higher if you have a high-risk account. For instance, chargeback fees can be higher. Not only would you have to refund the original transaction, but the payment processor could also charge you an additional fee, ranging from $20 to $100 each.

However, the actual fees you will end up paying depend on your unique business and your application.

Speaking of the application, it can take longer, too, for certain small businesses. In fact, a high-risk processing small business could take a few days for approval. They may ask you for bank statements, and the processor may need to check on your personal credit.

Cash Reserve Requirements

As a part of a new agreement, the payment processor may decide to hold a portion of a small business’s cash as a hedge. The cash reserve requirements may play out in one of the following ways for the merchant.

Capped Reserve

For each completed transaction, the payment processor will withhold a percentage until you reach a certain predetermined balance level. Then, the contributions will stop. Until they need the reserves, they will remain there.

Rolling Reserve

For every completed transaction, the payment processor will set aside a percentage. It can be as high as 10%. You will receive this money later, depending on the basis of your agreement.

If you have a six-month rolling basis, for example, they would disperse money collected in May to you in November.

Upfront Reserve

You could have a deal with a payment processor where you allocate a certain amount in the beginning as a reserve. Sometimes, the payment process holds the proceeds of all completed transactions until you reach your reserve level.

Volume Caps

High risk credit card processing could mean that your small business can only collect a set amount of money per month. They would bar you from collecting over that threshold.

It’s a Long-Term Relationship

High risk processing, like any other type of credit card processing business, should be something your business achieves for the long haul, not a brief period of time. This means that there is a financial stake that is always ongoing for the payment processor. It is the payment processor that is assuming the risk for the chargebacks should a merchant not be able to cover it.

That is why a payment processor will have such a rigorous step-by-step process for starting a relationship with a small business that has high risk processing. They want to know that you are a good fit for them, which includes profitability.

If You Need a High-Risk Processing Account, Here Is What to Do

There are a few best practices to help you with finding the right payment processing partner. First, be honest about your situation during the application process. If you are not transparent or offer too little detail, it will only hurt your application.

Then, review your cash levels, because having cash on hand will prove to the provider you are stable. Have between 25% to 50% of what you expect your monthly transaction volume to be.

Next, have the right documents ready to go, including three to six months of banking statements. The provider may want to see recent tax returns, too.

Finally, do not feel you need to be an expert on payments, that is the role of the provider to help you. Be open to learning, however. Communicate clearly, but be an active listener too.

Your Payments Simplified

If you are looking for a payment processor that cares, look no further than Payline. We offer transparent pricing, virtual terminal access, custom reporting, and next-day funding for all our clients, including high-risk processing clients.

Not only that, but you could also be eligible for one month free! Apply with Payline today.

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