How Does Credit Card Processing Work for High-Risk Businesses?

high risk credit card processing

Credit cards are an integral part of the modern economy; without credit, some people can’t purchase anything. And a business that doesn’t accept credit cards will miss out on an ocean of potential sales. Running a good business means being there for your customers, no matter how they want to pay.

Unfortunately, some businesses have a harder time processing credit transactions than others. That’s because these businesses are usually in industries that are considered high-risk. And high risk credit card processing fees and applications can burden businesses, as well as the regulations surrounding them.

Yet, they’re important to protect lending agencies. And they’re important for businesses to ensure they can run without interruptions or financial difficulties. They’re also important to ensure that people pay what they owe whenever they make a purchase.

All that takes work, which takes money. Yet, it’s also a valuable part of any business which enables you to make sales in the first place. Keep reading below to learn how credit processing works when a company is a high risk!

The Shadier The Industry, The Higher The Risk

Knowing what qualifies as a high risk industry takes many rules of thumb. Basically, if an industry has been in an unsavory spotlight or isn’t fully established, creditors consider it high risk. Below is a list of industries whose companies are usually considered high risk:

  • Casinos
  • Credit repair or counseling
  • Collection agencies
  • Lingerie retailers
  • E-cigarette retailers
  • Modeling agencies
  • Psychics
  • Pawn shops
  • Cannabis merchants
  • Social media websites

Since most tech companies are start-ups, without an established history, they can be considered high risk. This is especially true for new social media networks since it’s difficult to get one off the ground.

Companies in tech aren’t always considered high-risk though. If the company has already been established, then the creditor may think of it as a safe bet. Tech companies that have built a reputation may find it easier to open a merchant account than others. It doesn’t matter if they’re in the same industry.

However, nascent industries like the cannabis industry, as well as most online shops, are considered high risk. So are shops in industries that have low reputations, like psychics or pawn shops.

Your Credit Score Doesn’t Score Too High

Credit agencies can take an individual’s credit score into account when determining how risky their business is. However, there are more factors in play that influence their decision. The biggest factor is the industry that a business is in.

However, that also means that if an individual has a good credit score, their business may be seen in a better light. The creditor may be more likely to trust the business if the person running it manages their finances well. Having a high credit score can save your business high processing fees and financial hardship down the line.

High Risk Credit Card Processing Means High Fees

Since there’s more to processing credit transactions at high risk locations than others, there are higher fees as well. Credit agencies need to do more work to get businesses the money they deserve for the sale. That’s because the customers that high-risk businesses may attract may not always have the best credit.

That means there’s more of a chance a person may not repay their bill after a creditor gives a business its money. To mitigate that chance, a credit agency may investigate a person more than usual, which will lead to higher fees for the business.

Small businesses may be able to avoid these higher fees by using a payment service provider like Paypal. These providers process all sorts of payment types your customers may try to use. They also often allow you to automatically pay for and print shipping labels.

It may sound nice to stick with Paypal as you grow, but there will come a point where you need to stop using it. Paypal simply doesn’t allow a certain volume of sales, and it’s not equipped to manage large amounts of purchases. When you get big enough, you’re going to want to look into accepting credit cards.

It’s Not Impossible To Process Credit

If your company is considered high risk, you may think that the easier solution is to just not accept credit. However, even if you’re business is high-risk, you can still process credit cards for your customers. You just need to take a few extra steps to make credit purchases viable for your business model.

You may want to pass the higher fees onto your customers by increasing the prices for items. You can also set a minimum amount of people need to spend in order to use a credit card. By implementing strategies like this, you can recoup some of the money you spend on higher credit processing fees.

Most of the contracts high risk businesses have with creditors last for three years, with an automatic renewal clause. You will also likely expect you to set up a rolling reserve with some of the sales you make. With this, you basically set aside money from your sales to use in case of chargebacks, or even outright fraud. 

Creditors will also probably offer you a tiered pricing contract to process credit transactions. With this, the fees you would have to pay individually are instead grouped into different categories. Those categories are then adjusted according to the business and the creditor’s offers.

It’s not impossible to process credit card transactions as a high risk business. It just takes more steps than a traditional business.

Customers Want Choices

The extra work you put into high risk credit card processing will be worth it. After you start accepting credit cards with your sales, you’re bound to notice more traffic to your company. That’s because almost half of all credit card holders prefer to use their cards for daily spending.

People enjoy using credit cards because it gives them more security with their purchase. It also usually comes with cashback bonuses or miles people can use to travel. People enjoy it when they’re rewarded for shopping, and credit cards do just that.

If you don’t accept credit cards at your company, you’re missing out on an ocean of customers. We can help you tap into those new customers. Just contact us and we will help you bring your company into the modern era and start accepting credit cards!

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