As a merchant, being placed in the “bad credit” category for any reason can be discouraging, but it doesn’t necessarily mean that you won’t be able to obtain a merchant account. Several merchant account providers offer “bad credit merchant accounts” to cater to business owners with low credit scores, past bankruptcy, high chargeback ratios and other credit issues that make them high risk. If you are trying to get a merchant account with poor or bad credit, it’s important to understand:
- Why bad credit poses an issue for merchant account providers
- How a merchant can come to be labelled as high risk for bad credit
- What to expect with a high-risk merchant account
- How to get a merchant account with bad credit
Why Bad Credit is Risky for a Merchant Account Provider
When merchants accept credit cards to pay for goods and services, it’s not as simple as when a customer pays for goods in cash. Credit cards, by design, allow customers to spend money they don’t have and pay the bank back after 20 to 30 days. In the meantime, the money for the goods and services is fronted by the card-issuing bank and the acquiring bank (the merchant’s bank).
When the customers pay off their credit card purchases, the issuing bank and acquiring bank receive the money due to them and everyone goes home happy. However, if a customer reverses a charge made with a credit card by initiating a chargeback against a merchant and the merchant isn’t able to pay, the issuing bank or acquiring bank (depending on the time elapsed) will have to cover the difference.
How Merchants Are Classed as High Risk
There are several reasons why acquiring banks may doubt a merchant’s ability or willingness to pay or suspect a higher likelihood of chargebacks. In some cases, the likelihood of chargebacks is higher because of the industry that the merchant is in (concert tickets, event tickets and airfares are notorious for cancellations). However, a past history of bad credit can make a merchant a liability as well.
If any of the following “bad credit” situations apply to you, you may be considered a potential liability for credit card processors:
- Low personal credit scores. A FICO score of 580 or less is a risk for banks because of the lack of a solid history of taking out loans and paying them back. A low personal credit score is often an issue for first-time business owners who don’t have much credit history.
- A negative bank account balance. A negative bank account balance indicates problems with cash flow management and little to no ability to pay back a debt.
- Past bankruptcy. Past bankruptcy indicates a lack of skill in financial management and hence a high risk for the acquiring bank.
- Outstanding liens and judgments. Tax liens issued against your personal property are seen as a major red flag regarding your willingness to pay the money you owe. The same applies to unpaid judgments issued by a court.
- A past terminated account. Having had a previous account terminated makes it less likely other financial institutions will want to work with you.
- A chargeback ratio over 2%. A high chargeback ratio often indicates poor customer service, poor product quality, poor handling of complaints and returns or a lack of documentation, tracking and follow-up for shipments. Merchants who have been placed on the MasterCard MATCH list will have a particularly hard time being approved for another merchant account.
High-Risk Merchant Accounts
The good news is that if you have poor credit for any of the reasons mentioned above, you may still be able to get a merchant account and continue to accept credit card payments through a global payment gateway. For many businesses, credit card payments represent the bulk of their income and having this option taken away would effectively mean going out of business.
The bad news is that bad credit merchant accounts come with much higher fees and much stricter terms than a regular, low-risk merchant account. These conditions protect the acquiring bank in the case of multiple chargebacks or merchant insolvency.
You can expect your high-risk merchant account to come with:
- Higher monthly account maintenance fees
- Higher fees for credit card processing (either tiered pricing or interchange plus at more than twice the usual rate)
- 5-10% of funds withheld as a rolling reserve
- Long-term contracts (typically three years or more)
- Cancellation and early termination fees
- A monthly cap on credit card processing volume
The good news about a bad credit merchant account, besides being able to continue to accept credit cards and enjoy a full suite of merchant services, is that if you are able to improve your track record and transform your bad credit history into good credit, you may be able to transfer to a low-risk merchant account in a few years. This is a significant advantage compared to merchants who are “high risk” because of their industry. While high-risk-industry merchants will always have to deal with a high-risk merchant account, your situation is (hopefully) temporary.
How to Get a Merchant Account with Bad Credit
Step 1: Pay Off Any Debts that You Can
Merchant account providers want to see that a business owner with bad credit is willing and responsible to pay their debts. If you are a first-time business owner, pay off any outstanding personal debts, credit cards, liens, judgements and negative bank balances. If your business is already established (and has established a separate credit history), pay off any business debts.
Step 2: Publish Comprehensive Privacy and Refund/Return Policies on Your Website and Secure Your Website
Step 3: Address Any Negative Reviews
If you have negative reviews, have a customer service representative respond to thank the reviewers and make any necessary changes. The simple act of responding to reviews shows your past and present customers that you care and, in turn, does wonders for your PR.
Step 4: Gather the Necessary Documentation
Once you’ve done all you can to demonstrate your commitment to improving your score, gather the required documents for opening a merchant account. For a merchant account in Europe, this will usually include:
- ID and employer identification number (EIN) or taxpayer identification number (TIN)
- Business documents
- Financial documents
- Application form
Having the basic documents plus supporting documentation (such as a plan to improve your credit scores or chargeback ratio) will make the underwriting process quicker and easier.
Step 5: Get Multiple Quotes, Negotiate and Review the Contract before Signing on the Dotted Line
Bad credit merchant accounts are always more expensive than regular merchant accounts. However, some providers charge far more than others. When researching high-risk merchant accounts, get quotes from at least three different high-risk merchant account providers and use these quotes as a basis for negotiation. If possible, ask to have an interchange-plus pricing structure, the lowest possible account maintenance fees and have the early termination fee waived.
Once you find a merchant account provider you’re happy with, supply the required documents and wait for the underwriting process to be completed. This process may take a few days or even a couple of weeks. However, completing the underwriting process is the only way to avoid having your account suddenly frozen or terminated without warning if there is suspicious activity or you receive a high number of chargebacks (as often happens with an aggregate merchant account).
If you are approved, review the contract carefully before signing to make sure you are happy with all of the terms and the rates are the same as those you discussed. If necessary, consult with a lawyer or merchant account broker to make sure the terms are reasonable and fair.
Finally, sign the contract and start accepting credit card payments!
Bad Credit Merchant Account: A Pathway to Better Tomorrow
While it’s a little more difficult to get a merchant account with bad personal credit, it’s not impossible. For a time, you can expect higher rates, more restrictions and stricter terms.
However, if you work hard to build a positive credit card processing history, you should be able to have some of the restrictions removed and eventually transfer to a regular merchant account.