Which Businesses & Industries Are Considered High-Risk? (& What It Means If You’re On The List)
Running a high-risk business comes with its own set of challenges and complications. However, the “high-risk” designation need not be a death sentence for your business. In this article, we’re going to explain why.
While the continued existence of countless high-risk businesses demonstrates the fact that it is entirely possible to run a successful one, it’s true that a high-risk business classification complicates your ability to access certain business essentials, including business loans, credit card processing, and business insurance.
The example of payment processing illustrates these challenges. If you’re an eCommerce entrepreneur, credit/debit cards are just about your only option for getting paid. Although very small businesses can get by with a payment service provider (PSP) such as PayPal or Square, once your business reaches a certain size, you’re going to want to upgrade to a full-service merchant account. Payment processors do not treat all businesses equally. Larger, high-volume businesses demonstrating financial strength receive lower processing rates and often get more generous contract terms. Businesses are also treated differently based on the degree of financial risk they present to their processor. All processors will carefully judge your business to determine whether you fall into the “high-risk” business classification.
High-Risk Merchants & Credit Card Processors [Video]
If your business classification is designated as high-risk, the consequences can be severe. Many processors will simply refuse to approve you for a merchant account, while others will charge you significantly higher rates and fees than you would otherwise pay. Unfortunately, there are also plenty of merchant services providers that deliberately market to high-risk businesses that are struggling to get approved for a merchant account, only to rip them off with outrageously high fees and rates, as well as draconian contract terms.
In this article, we’ll discuss the risk management factors that lead to a business being labeled high-risk and how this determination affects your ability to operate. We’ll also provide some recommendations for high-quality providers that specialize in servicing the high-risk sector. Finally, we’ll give you some tips for avoiding the not-so-high-quality providers that prey on high-risk merchants.
Looking for the best high-risk credit card payment processing companies? If you’re having trouble getting approved, take a look at our top picks for high-risk merchant accounts.
Table of Contents
- What’s The Big Deal About A High-Risk Business?
- How To Determine Whether Your Business Is High-Risk
- Choosing Merchant Services Providers For High-Risk Businesses
- 3 Tips To Avoid Predatory High-Risk Credit Card Processing Providers
- Navigating Other Aspects of Business When You’re In A High-Risk Industry
- High-Risk Merchant FAQ
- I’m On The High-Risk Merchant List, Now What?
What’s The Big Deal About A High-Risk Business?
Businesses get designated as high-risk by entities ranging from banks to credit card processors to insurance companies due to the heightened risks associated with servicing them. This is due to a combination of risk management factors, including whether a business type is heavily regulated by the government (or disparately regulated by the various states), whether a business type runs a higher risk of defaulting on a loan or incurring chargebacks, or whether a business operates in a market oversaturated with businesses of the same type. What a high-risk designation means for a business depends not only on the type of institution in question, but on the policies of particular companies.
For example, a payment processor determines whether you fall into one of their high-risk categories when you apply for a merchant account. Either you’re high-risk, or you’re not – there is no middle ground. Beyond that, it gets complicated as every processor has its own unique guidelines for determining whether you’re in its high-risk merchant category. While some business types, such as pornography or drug paraphernalia, will always be placed in the high-risk group, others may or may not be, depending on your processor. If you’re considering a particular provider, check their website or contact them directly to see if they find your business to be high-risk.
While the exact criteria for determining high-risk status vary from one provider to the next, the following factors are usually used to determine whether a business qualifies as high-risk:
- High chargeback or fraud rate: If your line of business has historically shown a high chargeback rate or outright fraud, you’ll probably be deemed high-risk, too. This determination is usually based on the behavior pattern of your customers, not you personally.
- Offshore businesses operating in the United States: If your business is headquartered overseas, but you primarily sell to US customers, you might be flagged as high-risk. While the potential for fraud is a strong factor here, lax banking regulations in your home country can also be a determining factor.
- Products or services of questionable legality: This factor is the one most people associate with high-risk businesses. Distributing pornography or selling drug paraphernalia are the most obvious examples, but there are many others as well.
- Questionable sales and marketing practices: Is your business the type that’s often thought of as a scam? If so, the principle of guilt by association is alive and well, and most providers will label you as a high-risk business.
- Bad personal credit score: While most criteria for determining high-risk status focus on your business, this one focuses on you, the business owner. If you have a low personal credit score, you’re more likely to be placed in the high-risk category by some processors.
- High average ticket sales: If your business routinely accepts unusually high-cost purchases via credit card, you could be considered high-risk. This factor primarily affects businesses such as furniture stores and companies who process a lot of B2B transactions.
How To Determine Whether Your Business Is High-Risk
Please review our high-risk industries list below. While this list doesn’t cover every single possible high-risk business, it does include the categories that are most often regarded as high-risk. Remember that every provider has their own criteria, so while you might be on one provider’s high-risk business list, you might be approved for a regular, non-high-risk account by a different provider.
Here are the most common types of high-risk businesses:
Choosing Merchant Services Providers For High-Risk Businesses
If yours is a business likely to be designated as high-risk by merchant services providers, know that you’ll still have plenty of choices when it comes to providers willing to work with businesses of your type. Some of these providers are high-risk specialists, while others are processors that do business with both high-risk and “regular-risk” outfits. It’s not possible to definitively state which of these processor types are preferable to work with — it really depends on the individual processor and the kind of arrangement they are willing to work out with you.
For examples of payment processors that we’ve found to be honest and reasonable partners to high-risk businesses, have a look at our post detailing the 6 best high-risk payment processors and contact one or more of the providers listed to see if they jibe with your business plan. In terms of individual companies, Durango Merchant Services (see our review) and SMB Global (see our review) are both honest examples of how the high-risk payment processing industry works.
Understanding Payment Processor Fees & Rates For High-Risk Industries
If you’ve been reading this so far and you’ve determined that your business is in the high-risk category, it’s time to face this harsh reality: Merchant accounts for high-risk businesses inevitably cost more than those for non-high-risk ones. In fact, they usually cost a lot more. You’ll pay more in both account fees and processing charges, and you’ll probably be stuck in longer contracts as well.
Higher processing costs are an unfortunate reality for high-risk merchants. While the actual rates will vary widely between processors, you can generally expect to pay close to twice as much as what a comparable non-high-risk business with the same sales volume would pay.
Another expense high-risk accounts have to deal with is a rolling reserve. Your contract will also usually include an early termination fee that applies if you close your account before the end of your contract term. You might even have a liquidated damages clause in your contract that raises the price of breaking it even further.
Do review your proposed contract thoroughly before signing up with any processor.
Understanding The Dangers of Chargebacks For High-Risk Companies
Part of what goes into determining a business’s risk status is the estimated likelihood (based on the nature of the business) that said business will incur a high chargeback rate. Conversely, excessive chargebacks can also be determinative in getting classified as a high-risk company in the first place.
One thing to keep in mind is that the standard chargeback threshold is 1% — that is, if 1% or more of your transactions ultimately get charged back, you’re likely to get penalized by your payment network. Given the harm of high chargeback ratios, you’ll want to do everything you can to get your chargeback rate under 1%.
Data from midigator.com indicates that both Visa and Mastercard have seen fraud-related chargebacks have comprised an ever greater proportion of total chargebacks each year from 2017 to 2019. Additionally, a white paper published by the Federal Reserve Bank of Kansas City in January 2016 found that merchants were only able to successfully dispute 20%-30% of fraud-related chargeback claims. That’s why a payment gateway with strong fraud detection tools can help your business avoid being designated as high risk or, failing that, help minimize the damage that fraud-related chargebacks ultimately do to your business.
Some businesses may benefit from asking their processor for a review of their processing history every so often. If you can show a good track record re: chargeback prevention, you may be able to shake off your high-risk business designation.
For more on minimizing chargebacks, read the following articles.
- Friendly Fraud Survival Guide: How Small Businesses Can Reduce Their Chargebacks & Save Money
- The Small Business Owner’s Guide To Preventing Chargebacks
3 Tips To Avoid Predatory High-Risk Credit Card Processing Providers
As we’ve noted, there are plenty of merchant services providers who claim to serve the high-risk community, but actually charge highly inflated rates and fees to unsuspecting business owners who are desperate to get approved for a merchant account. If you’re a high-risk merchant, know in advance that the deck is stacked against you. While some providers will treat you fairly and charge you reasonable fees, countless providers seek to take advantage of your plight.
It’s not always easy to distinguish the reputable high-risk providers from the predatory ones, but we can offer a few tips to help you avoid the latter.
Check The Company’s Website
If the processor’s website layout looks very basic or dated, that’s a bad sign. Many predatory providers are small companies that don’t have the budget for a snazzy website, and a lot of them simply haven’t updated their site in years. A website with a 90s look should be your first clue that something’s amiss with the company. On the other hand, a modern website with clear, actionable information often indicates a business model focused on the needs of high-risk businesses.
Check The Company’s Online Reputation
Research what others are saying about the company on the internet. Review sites such as ours should be your first stop. If the reviews are bad, stay away. If you can’t find any reviews, that’s an even stronger indication that the company should be avoided. Also, don’t forget to check out consumer protection sites such as the Better Business Bureau (BBB) and Ripoff Report for feedback from merchants who’ve done business with the company. Consider how the company responds to any disgruntled users. A lack of meaningful responses to such complaints is a definite red flag!
Look For The Company’s Terms & Conditions or Merchant Application
Relatively few providers offer sample contracts online, but if you can obtain a copy of the company’s standard Terms & Conditions or Merchant Application, review it thoroughly. It’s usually in the fine print of these documents that you’ll uncover the many ways the company can rip you off. The less information of this sort you can find, the more reason to be concerned about the company’s potential practices.
A high-risk business classification not only impacts your payment processing choices, but also the types of business financing and insurance you’ll be able to access.
Business loan vendors tend to consider businesses exhibiting the following characteristics to be high-risk:
- Startups & new businesses
- Businesses with low revenue
- Businesses with bad personal credit
- Businesses in unstable industries
Banks typically won’t offer a business loan to businesses like these, so you may want to look to online lenders that offer business financing options often used by high-risk businesses, such as short-term loans, invoice financing, asset-backed loans, and even personal loans for business use. Additionally, you can always apply for a business credit card.
Your high-risk business classification can complicate your search for business insurance as well. Luckily, there are agencies specializing in providing business insurance to businesses (and business owners) considered high-risk. You may want to seek out such an agency if you find other providers to be reluctant to deal with you or offer you a fair deal. You may also want to read our article on general liability insurance to better understand how it works.
High-Risk Merchant FAQ
I’m On The High-Risk Merchant List, Now What?
Finding business services that suit your particular business is never easy, but it’s far more difficult for high-risk merchants. While you’ll have to pay higher fees and processing rates, you shouldn’t have to settle for sub-par customer service and support. Thankfully, there are providers on the market that offer high-quality service and fair pricing to the high-risk community, although your choices are more limited than they are for non-high-risk merchants.
Likewise, for certain merchants, being diligent about preventing fraud and excessive chargebacks can actually prevent you from being designated high-risk in the first place, or, failing that, remove the high-risk designation from your business after a certain length of time.
Here are some more helpful high risk business resources!