So, you’ve finally gone and done it. After years of hard work, random jobs, bouncing around career paths, you have finally got it together to start your own small business. Be your own boss. Make your own rules. And while a number of thins associated with that effort are challenging and fun, there is also the business aspect. And that is where your seemingly small decisions, including choosing payment processing for your high risk business will make a big impact on your success or failure.
Most business owners think of their bills. Paying their lease, utilities, vendors, employees and more. But what about ACCEPTING payment for your services? PayPal doesn’t really cut it for a brick and mortar business. And this day and age, only accepting cash doesn’t really cut it either. So how in the world does a small business owner get set up to process credit cards?
Payment processing is important to businesses, as it handles how transactions are automated between the customer and the business. Payments are made around the world, all day, every day. And consumers rarely take a second thought about how that happens. However, payment processing is a vital part of any business and can build customer confidence if it is set up effectively.
It is important that business owners select a reputable and effective payment processing system. In additional to processing transactions quickly and reliably for consumers, payment processors are also trusted with a customer’s most personal financial data. Payment processing must include protecting that personal credit or debit card account information and safeguarding against fraud.
If businesses do their due diligence when setting up their payment processing system, it can be one of their biggest assets. A seamless system that inspires confidence from customers. And a shaky payment processing system can do more damage to a business’s reputation that you can imagine.
First and foremost, you will need a Merchant Account in order to get started. A Merchant Account is a bank account that enables the account owner to accept credit card payments. It is an agreement between a retailer, a bank and a payment processing company that allows the retailer to accept credit and debit card payments and settle those payments accordingly.
When a business charges a customer’s credit card, the funds for that transaction are deposited into a Merchant Account. Once the transaction is settled, the funds are transferred into the business owner’s business bank account as a deposit. This is normally a scheduled transaction that takes place at regular intervals, normally daily or weekly.
Business owners must apply and be approved for a Merchant Account. And while there are a number of options available for Merchant Accounts, competition for the best customers is high and approval for a normal Merchant Account is high. Some factors considered in evaluating applications for Merchant Accounts include:
- Length of time in business. The longer the better in this case.
- Type of industry. Some types of businesses have been identified as being at a higher risk due to the frequency of charge backs or fraud in the industry.
- Business financial history. Basically, credit report information for your business.
- Record of previous Merchant Accounts. Have you had other Merchant Accounts in the past and if so, how did you manage them? Were they closed in good standing?
- Personal financial history of the business owner. This is your credit report. Remember when mom said to pay attention to your credit report because you never know when it will impact your life? This is one of those times.
Consumers need to be aware of contract conditions and fees associated with Merchant Accounts. Common contract conditions include additional fees, pre-determined term, and minimum transactions. While these fees vary by provider, some common fees include:
- Application Fees
- Setup Fees
- Monthly Fees
- Transaction Fees
- Rental Fees for terminals and other equipment
When applying for a Merchant Account, the review and approval process is similar to an individual applying for credit or bank accounts and different Merchant Account providers have different guidelines for approval, as well as different fees and terms. A very large part of the evaluation process involves assessing the risk of the business applying for a Merchant Account.
What is a Low Risk Merchant?
Low risk merchants are coveted by Merchant Account providers because they are generally the basis of a more successful, hassle-free business relationship. Low risk merchants have some common characteristics:
- Process less than $20,000 per month, with the average transaction being under $500
- Low chargeback ratio
- Business is based in a low-risk industry (online clothing, parking garages, books, household goods) and is incorporated in a low-risk country
Low risk merchants often earn better fees and contract terms, as well as a faster application process.
What is a High Risk Merchant?
High risk merchants are another story and some Merchant Account providers shy away from them due to the uncertainty of the situation. High risk merchants typically have some of these characteristics:
- New merchant with little or no credit history or poor personal credit history of the business owner
- Excessive chargebacks. Chargebacks occur when a customer is not satisfied with a purchase, doesn’t receive a product paid for, or the business closes before delivering a product. They are different than refunds, as chargebacks are given directly by the bank, without business owner involvement. Chargebacks can also result from fraud.
- Sales are seasonal or inconsistent for some reason
- Process more than $20,000 per month, with the average transaction being over $500
- Business is based in a high-risk industry (marijuana-based stores, adult products and services, dating services, magazine subscriptions) or is incorporated in a high-risk country
High risk merchants face a unique set of challenges. While low risk merchants can generally get set up with a Merchant Account with proof of a solid business and financial responsibility, high-risk merchants are not so fortunate. High risk merchants often face the following challenges:
- Higher processing rates and fees, as well as extra account charges intended to protect the Merchant Account institution.
- Rolling reserves may be required. This arrangement allows the Merchant Account bank to hold back a certain percentage of sales in order to ensure they are covered in the case of chargebacks or the business closing.
- Volume caps may be instituted that only allow merchants to process a certain amount of transactions in any given month. The cap is usually between $25-$50,000, which limits the business’s ability to expand and grow, but protects the Merchant Account bank.
- Finding the right Merchant Account. High risk merchants have a harder time finding acceptable payment processing solutions. There are a number of reputable businesses out there, but sifting through it all is more difficult than walking in to your traditional bank.
What if you are a High Risk Merchant?
The good news is that there is a solution out there for you. There are many payment processors who specialize in high risk merchants. They are often able to set up arrangements, including lower fees and waiving rolling reserves, that make processing payments less cumbersome that with a traditional bank. The most important thing for you to do is your research. Find the high risk Merchant Account that best suits your individual business needs.
Keep in mind also that there may be nothing you can do about being a high risk merchant. If you are in an industry identified as high risk for merchants. You aren’t going to change your business model to meet payment processing requirements, so you will need to find a work around, one way or another.
Impact of being a High Risk Merchant on Your Business?
It is going to cost you more to process transactions if you are a high risk merchant. It just is. Merchant Account institutions have to do something to protect themselves and it comes out in fees for everything and rolling reserves. However, if you find the right provider, you may have an opportunity to prove your business and lessen some of those fees. As far as customers are concerned, however, they will not know the difference between a high risk and a low risk business.
While there are a number of high risk merchant processing solutions out there, it is best to do your research to make sure you are getting the right fit for your business in the payment processing realm. One example of such a payment processor and Merchant Account provider is GAM Payments. This boutique payments provider that specializes in high risk Merchant Accounts. While focusing on partnering with selected merchants to deliver top level customer service, GAM Payments prides itself on being transparent and affordable for high risk merchants. The small, dedicated, caring team at GAM Payments will be there to support your payment processing needs. They know the ins and outs of the payment processing industry and seek out high risk merchants to help provide effective solutions and enable business success.
Determining your business’s payment processing needs plays a vital role in business success. From inspiring consumer confidence to seamlessly cashing out your earnings, such companies facilitate it all and are the key to getting in the game. And even if your business is identified as a high risk merchant, you will survive. There are payment processors who specialize in the needs of high risk merchants and will help you get on your feet.