How To Get A Merchant Account With Bad Credit: Navigating Credit Checks, The 5 Best Processors, & More
In the world of credit card processing, your business can be pigeonholed very early on as a low-risk or high-risk business. Once you’ve fallen into the high-risk category, you’ll quickly realize that there are, even within that category, many different flavors of high-risk.
Maybe your business is very new. To banks, that’s high-risk. Maybe you sell CBD, or your average ticket size is high. That’s high-risk as well. Maybe you’re a bankruptcy lawyer whose clients already have money troubles. The unpleasant truth is, as long as there’s a higher chance that your customers will dispute the payment card charges or refuse to pay, then banks treat your business as high-risk.
If you have bad personal credit, then your business is high-risk too.
Credit is…a consideration. [E]ach bank determines the kinds of credit that is acceptable to them. Some just use the credit score while others may choose to look at specific items on the credit report like mortgage lates, or 30 day lates on consumer credit, judgments, etc…. As one might expect, maintaining a clean credit history can make or break a merchant’s chance of getting approved.
–Jeremy Seegmiller, Technical Support Manager at National Processing
In this article, we will discuss how your personal credit might affect your business’s high-risk status. (We have other articles discussing other aspects of high-risk businesses.) We will briefly touch on how credit scores work in payment processing and show you how you can use this knowledge to get a merchant account.
We will also suggest some processors for your consideration. Keep in mind, though, that even with highly regarded processors who specialize in “bad credit merchant accounts,” you will almost certainly pay higher rates, and you might have to sign a multi-year contract with an early termination fee (ETF).
Still, there are some processors who are better than others. Some might work with you on rates and waive the ETF. Others can provide great customer support, which will make a great deal of difference after you sign on.
So, if your new business has been designated as high-risk merely because it’s new and you have bad or poor personal credit, don’t despair. You’ll still be able to accept credit card payments. As to how and with which processor, read on to find out more.
Read more below to learn why we chose these options.
Table of Contents
- How Does Your Credit Score Affect Credit Card Processing?
- Can You Get A Merchant Account With No Credit Check?
- What Can You Expect From A Merchant Account If You Have Bad Credit?
- The Best Ways To Get A Merchant Account With Bad Credit
- Can Bad Credit Doom Your Merchant Account Prospects Forever?
- In Summary: The Best Ways To Get A Merchant Account With Bad Credit
How Does Your Credit Score Affect Credit Card Processing?
Your business and you, as an individual, have separate credit scores. In an ideal world, the two scores are judged separately. However, many small businesses fail to separate business expenses from personal expenses, and as much as 46% of small business owners use a personal credit card for business purchases. So, when evaluating the creditworthiness of a small business–especially a new-ish one with little to no business credit history–payment card processors tend to pay more attention to the personal credit score than the business score. After all, you control the operations of your business and your personal spending and repayment habits tend to bleed over.
But reviewing credit history only makes sense when you’re borrowing money, either as a loan or for a credit card. Why is creditworthiness important for taking payment cards? After all, you’re not the one spending or borrowing–your customers are. What does information about your or your business’s ability or pay off loans have to do with your customers paying with credit cards?
To understand the problem, we have to look into how a credit card transaction works. When a customer pays you with a credit card, the customer’s money isn’t immediately moved from his bank account to yours. That money is actually paid by the customer in 30 days, 60 days — or sometimes longer. In order for you, the merchant, to get the money just a few days after the credit card is used, both your bank and the customer’s bank are essentially fronting the money until the customer ultimately pays. If the customer refuses to pay for the purchase (e.g., by disputing the charges, committing fraud, etc.), the banks want you to have responsible financial habits so that you can pay back the money they fronted you.
This is why your personal financial stability is important, and this is why credit card processors pull your business and your personal credit scores.
Can You Get A Merchant Account With No Credit Check?
There are two general ways for a business to take credit cards–apply for a merchant account through a traditional processor or sign up with a third-party processor. With a traditional processor (and despite misleading advertising by some of the less reputable ones), you will absolutely have to go through a credit check before you can be approved.
Does A “Bad Credit” Merchant Account With Instant Approval Exist?
Being mindful that a merchant account is a very specific type of account with a very specific method of taking credit card payments, the short answer is “no,” bad credit merchant accounts with instant approval do not exist. As we explain elsewhere, if you want a merchant account, it will often take at least a few days to get approval. Those merchant account providers who advertise instant approval are merely taking a shoot-first-ask-questions-later attitude, and eventually, you’ll get into trouble by either having to pay exorbitantly high fees or be terminated with little or no warning.
But You Can Process Credit Cards Without Going Through A Credit Check
If you insist on avoiding a credit check–or already know you won’t pass one–then you can still set up credit card processing with a third-party processor such as Square, Stripe, or PayPal. These processors typically only ask enough questions to make sure they conform with laws related to money laundering and identity verification before they approve you to process credit cards. They do not check the creditworthiness of your business or you, individually. (For instance, we have a step-by-step guide on how to sign up for PayPal, so we know that they do not check your credit history.) Because of their business model, they might be more tolerant of a poor credit history, as long as you and your business can show financial responsibility after you sign up with them.
There are, of course, some disadvantages to working with third-party processors, and the top issue is account stability. Third-party processors are usually very risk-averse, so the moment your account does something outside the norm, be it a large chargeback percentage or suspicious activity that suggests fraud, they will stop doing business with you. Often, you’re not notified of any issues in advance or given a chance to explain, but are simply notified that your business relationship has been terminated.
Note, however, if your business is new and also operates in an industry that is typically categorized as high risk, then third-party processors are definitely not for you. Third-party processors are very specific on the types of businesses they will and will not work with, and they won’t work with the general category of high risk. Fortunately, exactly how they define this category is often fairly easy to find on their websites, and there is often a specific list of industries the processor refuses to work with. So, be sure to check against the list when you explore your options with third party processors.
What if you need a merchant account, have poor credit, and operate in an industry that’s traditionally categorized as high risk? You’re still not dead in the water. What you need is a high-risk processor.
What Can You Expect From A Merchant Account If You Have Bad Credit?
High risk [merchant] banks also often require a reserve. There are several ways a merchant bank will handle a reserve but many work like this. The merchant bank will take 5%-10% of all transactions up to a specified amount. This reserve balance is kept to cover chargebacks or fees if the merchant can’t or doesn’t pay. Sometimes this reserve can be removed after a year or so of clean processing, but this depends on business type and underwriting guidelines established by the merchant bank. If/when a merchant closes their merchant account, the reserve balance is kept for 6 months, at which point the reserve funds are released back to the merchant.
–Jeremy Seegmiller, Technical Support Manager at National Processing
As you can see from the above quote, one of the main inconveniences a high risk merchant must endure is a reserve fund. Unfortunately, that’s not the only concession. Other standard high-risk account features include:
- Higher processing fees
- Longer term contract
- Penalties for early contract termination
There’s a reason for these less than favorable contract terms being forced on high-risk merchants, and — unsurprisingly — it basically all comes down to risk. In many ways, it’s a fair trade for a processor to take a chance on a high-risk merchant but insist on a longer-term working relationship so that the losses from chargebacks and fraud can be balanced by higher fees and a longer timeframe from which to recoup the losses.
Despite these fairly standard disadvantages, you shouldn’t settle for the first high-risk processor who offers to do business with you. Shop around. Talk to a few processors to get the best deal for you. You’ll have to actively negotiate your rates and contract terms and provide plenty of financial documentation such as bank statements and existing processing history to prove the soundness of your finances. But, at the end of the day, you should be able to find a processor. Keep reading for some recommendations.
The Best Ways To Get A Merchant Account With Bad Credit
We have articles about high-risk processors in general and recommendations of good processors. However, as mentioned earlier in this article, there are many flavors of high risk, so it shouldn’t be a surprise that some high-risk processors advertise especially to merchants with bad credit scores (known as “bad credit merchant accounts”). Below are a few picks from us, in no particular order. For a bigger list of high-risk processors, be sure to check out our comparison chart.
- Good for high-risk businesses
- No account setup fee
- Free credit card terminal
- Excellent customer support
- No publicly disclosed pricing
PaymentCloud specializes in providing payment processing solutions for eCommerce, mail order/telephone order (MOTO), and other generally high-risk businesses. In fact, PaymentCloud has been so successful working with these hard-to-place merchants that Stripe and Dharma Merchant Services–two processors we think highly of–recommend them when they can’t place an account.
Much of PaymentCloud’s success is due to its extremely hands-on approach during the initial application and underwriting process, as well as the intensive follow-up support and advocacy provided to existing clients. Take a look at our full review of PaymentCloud to get the details on pricing, contract terms, reputation among real-world merchants, and more.
2. Durango Merchant Services
Durango Merchant Services
- High-risk specialist marketing directly to bad credit merchant accounts
- Offers offshore accounts for international merchants
- Fair pricing and contract terms
- Offers EMV-compliant mobile card reader
- Dedicated account manager for customer service
- Early termination fee in rare cases
No merchant account provider is ever perfect, and high-risk providers often come with more than their fair share of problems. Durango Merchant Services stands out from the crowd by offering fair pricing in a segment of the market that’s notorious for charging highly-inflated prices. They invariably provide excellent solutions to complex merchant situations. In fact, they specifically market to bad credit merchant accounts and have lots of experience with this. And, if they can’t work with you for whatever reason, they’ll be straightforward and honest about it.
The company also offers customer service that far exceeds the industry standard, and a sales team that features honest, knowledgeable staff. They provide the expertise needed to set up international merchants from basically any country in the world and to deal with fraud proactively and effectively. If you’re interested in Durango, be sure to check out our full review.
3. Host Merchant Services
Host Merchant Services
- Transparent interchange-plus pricing
- No early termination fee
- No setup or application fees
- No monthly minimums
- Good customer support
- Can be expensive for low-volume merchants
Host Merchant Services (HMS) was created from the founder’s experience operating a web hosting company, so their service is especially suited/tailored towards other web hosting companies and cloud service providers.
Host Merchant Services differs from most of the competition in two ways. First, they only offer interchange-plus pricing and will readily admit if the rate structure won’t work the best for your business. It could be too cost-prohibitive for a very low-volume, mobile business, for example. (And new businesses tend to fall into this category.) Secondly, there are almost no complaints on consumer review sites, which directly corroborates the company’s “service first” philosophy. Balancing these two points, if you’re low-volume, the excellent customer service of HMS might be worth the somewhat higher processing costs. Be sure to do your math and make the best decision for yourself.
Check out our full review of HMS to learn a bit more about what it’s like to work with this merchant account provider.
4. Easy Pay Direct
Easy Pay Direct
- Accepts a wide variety of high-risk industries
- Load balancing feature for high-risk merchants
- No equipment leases
- No early termination fees for most merchants
- In-house sales team
- $99 account setup fee
- Three-year contract with automatic renewal clause
If your business is classified as high-risk not only because you have bad credit but also because you fall into one of the traditional high-risk industries, you might wish to consider Easy Pay Direct. Easy Pay Direct offers a unique service called load balancing, where a single merchant is provided with multiple merchant accounts. You can specify which percentage of your sales will go to each account. This redundancy helps to avoid the risk that an account hold or freeze will leave you unable to process credit cards until the hold is lifted.
In addition to the load balancing feature, Easy Pay Direct’s EPD Gateway is a solid, feature-packed product that’s compatible with most online shopping carts. They offer a broad selection of both wired and wireless terminals, POS systems, and mobile payment systems, and will sell them to you at wholesale prices. The company’s perfect record with the BBB is another strong indication that they provide a reliable service and are keeping their merchants happy.
At the same time, you should be aware of a few minor shortcomings. The company primarily charges processing rates under a tiered pricing plan, and you will likely have to agree to a three-year contract rather than being billed month-to-month. The lack of an early termination fee (in most cases) takes a lot of the sting out of the long-term contract, but you might still run into problems if you try to close your account early. You can also expect to pay a $99 account setup fee when you first sign up. Despite all this, Easy Pay Direct is probably less expensive overall than most other high-risk providers in the industry.
Learn more about Easy Pay Direct from our full review.
5. Honorable Mention: Square
- Predictable flat-rate pricing
- Ideal for low-volume merchants
- No monthly fees
- Impressive feature set
- Affordable chip card readers
- All-in-one payments system
- Free tools for selling online
- Available to Canadian merchants
- Account stability issues
- Not suitable for high-risk businesses
This recommendation might be a little surprising because we typically do not recommend Square for high-risk businesses. Square is a third-party processor, so their business model makes them pretty skittish about risk. They tend to back out of any business relationship at the first whiff of danger.
But, if the only reason you’re having trouble getting set up to take credit cards is because of your bad credit, Square might still be the right fit for you. Square has a long list of business types that they consider high risk, but “bad credit” isn’t on that list. So, you get a second chance, and if you watch your chargebacks, then you might be able to process with Square without issues.
As far as value goes, it is tough to beat Square. Its pricing for card processing is competitive for a pay-as-you-go processor, and it can sometimes beat out or at least break even with interchange-plus plans.
With features such as inventory management, a free and fully functional virtual terminal, advanced reporting, offline processing, recurring billing, online sales, and more — all executed very well — Square has more features than any other no-monthly-fee provider. If you’re willing to pay a bit extra, there are even more services/software features available to you.
Here’s our detailed Square review, if you’re interested in learning more.
Can Bad Credit Doom Your Merchant Account Prospects Forever?
Credit is a fluid thing. You can turn good credit to bad and bad credit to good, all in a span of a few years. When you apply the concept of evolving credit scores to a new business, understand that while your business’s credit will at first rely heavily on your personal credit, as your business continues to grow, its credit score will eventually stand on its own. Even if your business and personal credit scores are less than stellar in the beginning, it won’t last forever.
High Risk merchant banks will specialize in the kinds of risk they will take by industry type. You may have to do some digging to find one that works for your business. Remember, if you have to use a high risk bank due to bad credit or because you are a startup, you can work your way out of that and eventually get a lower risk bank with lower fees by cleaning up your credit, keeping chargebacks low and staying off the MATCH list. Some industries like CBD oil, are likely to stay considered high risk for the foreseeable future so expect higher fees.
–Jeremy Seegmiller, Technical Support Manager at National Processing
With careful practice, you can improve your business’s credit score and, in a few years, look for other processors that can offer you a better deal. You might be able to enjoy the processing rates of businesses not at all considered to be high-risk, or — even if you are in an industry traditionally considered high-risk –, you could still be eligible for a better deal.
So, take heart, take care of your business, and, one day, you’ll get your choice of the best processors to work with.
In Summary: The Best Ways To Get A Merchant Account With Bad Credit
- PaymentCloud: PaymentCloud specializes in providing payment processing solutions for eCommerce, mail order/telephone order (MOTO), and other generally high-risk businesses. They stand out by taking a hands-on approach during the initial application and underwriting process, and they provide intensive follow-up support and advocacy to existing clients.
- Durango Merchant Services: Durango Merchant Services offers fair pricing in a segment of the market that’s notorious for charging highly-inflated prices. They specifically market to bad credit merchant accounts. The company also has above-average customer service and an honest, knowledgeable sales team.
- Host Merchant Services: Host Merchant Services offers service especially suited to the needs of web hosting companies and cloud service providers. They offer interchange-plus pricing and have very satisfied customers (almost no complaints on consumer review sites).
- Easy Pay Direct: Easy Pay Direct offers a unique service called load balancing, where a single merchant is provided with multiple merchant accounts to reduce the risk of account holds and freezes paralyzing the entire business. They offer a full suite of processing hardware and software, as well as excellent customer service, but there are some minuses such as a tiered pricing plan and likely a long term contract.
- Square: It's pretty well established that Square won't do business with high-risk merchants. But, if the only reason you're classified as high-risk is because of your bad credit, Square might still be the right fit for you. If you minimize chargebacks, you might be able to process with Square without issues.