Business owners are also intimately familiar with risks – rarely is it not a tremendous risk to start a company, especially as growth scales and you need to hire staff, upgrade technology, beef up security, and make sure your day-to-day operations are running smoothly, and at the end of the day you are turning a profit. There are many business owners who sat down in front of a bank representative to ask for a loan and were denied, or met with an insurance agent who said they unfortunately couldn’t sell them a plan right now. They may have walked away from those meetings and wondered why. In many cases, it all comes down to risk. In these instances, these financial institutions considered the business likely to fail financially – in other words, “high-risk.”
You may have wondered, would my business be classified as one? There are a few different reasons for this type of designation:
Type of business
There are certain industries that are considered more controversial than others – think adult entertainment, tobacco and cannabis, etc. Public perception still matters a lot, and factors like how prevalent the business is within the market and how heavily it is regulated could cause some payment processors to wonder about its financial livelihood. For example, out in Las Vegas a business with gambling associations would be completely normal, given the prevalence of casinos. But go to another area of the U.S. where gambling is not popular, and starting a slot machine business would probably not get you on the low-risk list. Businesses known to have inconsistent revenue or that use shady marketing practices can also be flagged as questionable (think 1-800 chat lines).
Business activity
All of your banking activity can be reviewed to see if you have a significant history of chargebacks, reports of fraud, or have a high volume of large transactions. Other considerations include where and how you do business – if you are a U.S.-based company that does international transactions, you could be labeled high-risk due to how banking is run in the countries you do business with.
Security and compliance
Your compliance can also be scrutinized. If you have a history of failing inspections, not meeting safety regulations, or your technology is not secure enough to prevent cyber-attacks, a payment processor may consider you too risky to do business with. The situations mentioned above regarding chargebacks and fraud could indicate your company is not keeping customer data safe – a major red flag for consumers too.
Owner activity
If you are a business owner, the reality is that financial institutions will also be looking at you. We all know the importance of practices like maintaining a high credit score, not making late payments, etc. This also translates to your business. Even if you’ve been running your company responsibly, your business could still be labeled high-risk due to your own personal financial history.
What are the consequences of being perceived as high-risk?
- Being denied a loan or insurance. At the end of the day, your bottom line and the bottom line of any financial institution is the same – to make money. So if there is any suspicion that you may not be able to pay back a loan or afford the insurance, they may be unwilling to give it to you.
- Difficulty finding a credit card processing solution willing to handle your transactions. This also ties into the above point – if you have not been able to acquire a loan or get insurance for your business, a payment processor will be interested in why that is.
- You might also be charged more or incur more fees. If a payment processing solution thinks you might not be reliable, they will likely bake exorbitant fees into your contracts, raising the amount you would be charged for things like early termination. This way they are insuring themselves against the perceived risk should your business fail. In some cases, the rates can actually be almost double what a normal-risk business would pay.
But don’t worry – it’s not all bad news. Fortunately, there are plenty of payment processing solutions out there that are completely willing to work with high-risk businesses, and some that actually hire specialists who exclusively work with risky businesses. The trick is in discerning which companies are reputable, and which are just looking to capitalize off a business desperate to get their payment processing up and running regardless of cost.
