How common are bad credit merchant accounts?
There are no statistics about what the average credit score is for a merchant account holder, nor any on how many bad credit merchant accounts exist. So, the best way to extrapolate this data is to look at the average credit score of American’s generally, and layer that with statistics that have compared the credit scores of business owners relative to the public at large. What we see, is that the credit scores of all Americans are as follows:
- 300 to 579: 29.7%
- 580 to 639: 25.4%
- 640 to 699: 21.8%
- 700 to 749: 12.7%
- 750 to 850: 10.4%
Treating credit scores under 580 as having “bad credit” there are approximately (301.3 million total Americans x 29.7% = 89.48), so there are approximately 89.48 Million Americans who, if each one had a merchant account would need a bad credit merchant account.
But, every American doesn’t need a merchant account, only business owners do. So, if we look at the relative credit scores of US business owners v. non business owners we see, according to a 2015 Fundera report, that business owners have only a modest 5 to 10 point higher average FICO credit score than non-business owners. Using that data, the percentage of bad credit merchant accounts v. non bad credit merchant accounts is roughly 3 to 1. And looking at the total active merchant accounts in the US, (the best data indicates that there are approximately 8,485,700), we can estimate that there are roughly (8,485,700 x 25%) 2,121,425 total active bad credit merchant accounts in the US today, representing roughly 25% of all merchant accounts.
Obviously, these are all rough numbers, but in general, the point is that there are tons (literally millions) of successful small and mid-sized businesses run by individuals with poor credit scores (many below 500). For these individuals, a bad credit merchant account is the solution.
Getting a Bad Credit Merchant Account
In this section we’ll look at everything a business owner with poor credit needs to know about obtaining a merchant account.
What is a bad credit merchant account?
A bad credit merchant account simply means a merchant account for a customer who has bad credit, usually a bad FICO credit score. Underwriters for all credit card processors care a whole lot about your credit score, and so if it’s bad, you likely won’t get approved for a low risk merchant account (see full discussion below). So, if your business wants to accept credit cards, you’ll need a bad credit merchant account, which is provided by a high risk credit card processor (like us). It typically has a slightly higher percentage rate as opposed to a low risk credit card processor, and often has some additional restrictions such as a rolling reserve, funding delay or monthly processing volume cap. Many of these restrictions can be lifted after a few months of successful credit card processing.
Why does my personal credit affect my ability to get a merchant account?
First thing’s first, at any small business (defined as a business doing less than $5M per month in gross revenue) the owner’s personal credit is often viewed as a proxy for the business’ credit. So, even though your merchant account is written through your business, your personal credit is relevant (plus you’ll likely be personally guaranteeing the merchant account). Now, why are credit scores relevant…A merchant account is, in many ways, exactly like a short term loan from the credit card processor (and their sponsor bank) to you. That’s because, when you accept a credit card from a customer you generally expect to have those funds deposited into your bank account within 24-48 hours. Unfortunately, often the credit card processor does not receive those funds for anywhere from 48 hours to 30 days after. Now, imagine a scenario where you the merchant got paid, but it turns out that all of the credit cards used were fraudulent stolen or you never actually delivered the product you sold. The credit card processor is going to come to you and ask for payment. Thus, they will run your credit to gauge the likeliness that you’ll have the ability and willingness to pay up in such a situation.Additionally, the credit card processor / sponsor bank has paid you well before the chargeback window (6 months) has closed. What that means, is let’s say you sold something for $100 to a customer paying with a Visa credit card. You then got paid by the processor 24 hours later via a direct deposit into your bank account. Now, let’s say that 3 months from now, that same customer decided to initiate a chargeback against your account. If they do so, the $100 will be directly debited from the processor, who in turn will try to debit you. But let’s say either that your business bank account is empty or that you’re no longer a customer of the credit card processor. In those situations, the processor might be left to pay for the $100.Because of these two risk factors for the credit card processor, the float and the potential for chargebacks, merchant account providers will factor your personal and business credit score into any calculation of their willingness to enable you to process credit cards through them. Consequently, if you have a low credit score you may find it difficult to obtain a low risk merchant account, and instead need to obtain a high risk merchant account, typically at slightly higher rates and with slightly higher restrictions.
Who Offers Merchant Accounts For Bad Credit Individuals or Businesses?
Typically, a person with a low credit score or bad credit rating (as determined by the underwriter looking at your application) will be unable to obtain a low risk merchant account. That’s because low risk merchant services are streamlined to keep costs extremely low, and as a result don’t have the protections in place in their payment systems needed to ensure against significant losses for the payment processor in case of significant chargebacks or collections issues on the merchant account. As a consequence, low risk processors simply won’t write businesses in which the business or owner has a low credit score, has been in a recent bankruptcy, etc.
By contrast, high risk merchant account providers specialize in providing credit card processing for bad credit businesses and individuals. They typically charge slightly higher rates, and incorporate protections into the account that ensure that the processor won’t face significant losses in the event that the account turns bad. Generally, these same protections work in the merchant’s favor, because the comfort that the high risk merchant account provider has, enables them to allow you to process with slightly higher chargeback thresholds or lower capital requirements or rolling reserves. So, if you’re looking for a bad credit merchant account, you can generally skip low risk processors (unless you just enjoy wasting your time and getting told no), and apply with a high risk merchant account provider.
How do I get a Bad Credit Merchant Account?
The simply answer is apply. Most high risk credit card processors take on businesses with bad credit. I would suggest, that you know your credit score ahead of time, and you share it with the high risk merchant account provider’s salesperson at the beginning of any inquiry. The reason, is that all high risk merchant account providers will run a credit check anyway before you get approved. And they all have a pretty clear credit score line below which they won’t write your business. And a competent salesperson should be able to tell you the line.
So, save yourself the hassle of going through the sales process, and just tell them up front what your score is, and the additional benefit is that your credit score won’t get pinged a couple of dozen times as you call and apply with various credit card processors that have clear guidelines that you won’t meet anyway. If you’ve got a credit score around 500 (and certainly above that) consider applying with us, Soar Payments.
Does Soar Payments offer bad credit merchant accounts?
Yes, of course, otherwise, why would I have created this big article to explain how they work to you? Seriously though, at Soar Payments we provide all-inclusive high risk credit card processing services to hundreds of merchants with bad credit, ranging from startups led by individuals with no credit, to business owners with low sub-500 credit scores or recent bankruptcies. The process of getting a merchant account is simple, just complete our 5-minute free online application, then we’ll email you a PDF copy which lists all terms and pricing for your electronic signature, and once approved, you can begin processing. We’ll handle setting up your chargeback management tools, your payment gateway, and generally making the process easy and simple.
What is an underwriter looking at when determining my credit rating?
The first thing to note here, is that a low risk credit card processor and a high risk credit card processor’s underwriting teams operate very differently. For a low risk processor, the rules are bright and clear. If your credit score is below X, you have a bankruptcy in the last Y years, etc. you aren’t getting a merchant account. By contrast, with a high risk merchant account provider, there’s a bit more of a balancing / weighing that is taking place. Here are a few of the factors that they’re looking at: FICO credit score, and then the nature of what comprises that score (e.g. if you’ve got a history of not paying bills with multiple vendors over years vs. most of your incidents related to a specific period of time where you can explain the cash crunch you were in), your business credit history, any recent bankruptcies, your business industry, the amount of processing your seeking, the types of processing you’ll do, the terms you’re willing / not willing to accept as far as rolling reserves, funding delays etc. In sum, it’s a lot more comprehensive of a review. They’re trying to figure out the likelihood that you’re not going to pay your bill to the merchant account provider, the chances that you’re not going to fulfill orders and will thus run into a big cash crunch, etc.
What is a low credit score for the purposes of obtaining a bad credit merchant account?
This is where the rubber meets the road, what’s the magic score. For a low risk processor, the score is around 600. It varies from processor to processor. For a high risk processor the score is less of a hard line and more of a sliding scale, insofar as the worse your credit score is the worse your terms will be (but ultimately you’ll probably still get approved). But in general, you won’t have problems getting approved (at least with us) if your credit score is around 475. Below that, and you can probably expect to have some additional restrictions placed on your account such as a rolling reserve, funding delay, or lower monthly cap then you’d ideally like for the first 3 months until you build up some successful processing history.
Return to Table of Contents
Frequently Asked Questions
How do I get a higher processing volume limit?
Most companies, particularly startups, are in growth mode. But because a merchant account for bad credit score businesses usually come with a relatively low monthly processing cap, typically growing companies run out of credit card processing volume before they run out of monthly sales, effectively meaning they have to either increase their cap or slow the growth of their business. Since no business owner wants to cap a growing business, the obvious answer is to seek out a higher processing volume cap. There are two primary ways this is achieved:
- Time: A merchant account is a line of credit from the credit card processor (and their sponsor bank) to you the business, due to the disparity in when the merchant gets paid (sooner) and when the bank gets paid for the transaction (later), as well as because of the ongoing chargeback liability assumed by the credit card processor. For a bad credit merchant account in particular, that means that a track-record of successful credit card processing enables you to obtain a larger line of credit. In practice, that means that if you can process credit cards with your bad credit merchant account successfully for 3 months, (successful here is defined as maintaining a sub-2% chargeback ratio, keeping relatively steady volume, maintain predictable transaction sizes, and just generally don’t do anything crazy) you can request to have your monthly credit card processing limit substantially raised.
What is an underwriter looking for when reviewing my bad credit merchant account application?
The underwriter’s job at a credit card processor is to make sure that the company is a good risk for the credit card processor to take on. That starts with a criminal background check, and a quick credit check. Many bad credit merchants are looking for a no credit check merchant account, but put simply, it doesn’t exist outside of PayPal and a few other companies that do their underwriting after approval and lead to frozen funds and getting shut down without notice. Given that by definition bad credit merchant accounts have owners with poor credit, a low FICO score, etc. the underwriters is looking for other signals that the business is likely to pay its bills on time and operate in a legal and responsible manner.
Some positive signs might be, a functioning website that clearly explains the goods or services offered, a clear business plan, a fully licensed business or business owner (to the extent licensing exists in this industry), and a business checking account with a regularly maintained positive balance. Obviously in the high risk merchant account space, and particularly with merchant accounts for bad credit businesses the expectations are not as high as with a low risk merchant account. But the more you’re able to present your business as legitimate, stable, and with significant enough resources to cover any losses, the better your chances.
Return to Table of Contents
Question? Ask Away. We’re Ready to Help.
If you’ve got a question about a CRM, payment gateway, chargeback tool, bad credit merchant account or anything else related to accepting payments in a business, and want some advice, email me your question directly: AdamCarlson@soarpay.com.
Ready to Get Started?
Ready to start accepting payments at your company, Click here to begin a free online application.
Everything a Bad Credit Merchant Needs to Know About Chargebacks
All merchants have to be aware of their chargeback ratio, but that’s even more true for businesses with a poor credit rating, or whose owners have a poor credit score, because, generally their merchant account is on a shorter leash than most, and excessive chargebacks are what cost the vast majority of bad credit merchant accounts to be shut down.
What is a chargeback, and why should I care?
A chargeback, put simply, is when a customer of yours who paid via credit card, calls their issuing bank (aka the phone number on the back of their credit card) and “disputes the charge”. The issuing bank then initiates a dispute, and your credit card processor (and their sponsor bank) request documents from you to make sure the charge was legit. It’s a little more complicated than that, but that’s the general gist.
The important thing to note, however, is the fact that the customer called their issuing bank to dispute the charge is the important factor, not whether the customer or you actually won the dispute. The mere fact that the customer reached out to their bank, complained about the charge, is, for the purposes of calculating your chargeback ratio, a chargeback. And if you can’t keep the percentage of your customers that do that under 2%, you’re going to consistently get your merchant accounts shut down due to excessive chargebacks.
How do I calculate my chargeback ratio?
Before you can manage your chargeback ratio, you need to know how to calculate it, which is different that you might intuitively think.
A businesses’ chargeback ratio is, roughly, the total number of chargebacks per month divided by the total number of monthly transactions. Notice: The dollar amount of the chargeback is irrelevant, as is whether or not you win, lose, or don’t fight the chargeback. Once a chargeback has been initiated it counts as a chargeback. So, if your business has 100 transactions in a month, and 3 of your past customers have initiated a chargeback dispute in that month, you have a 3% chargeback ratio for that month. Again note, that’s regardless of whether or not you win, lose, fight, don’t fight those chargeback disputes.
Why do businesses get lots of chargebacks?
Some businesses, and this is true of bad credit merchant accounts, are particularly prone to high chargebacks, (and thus categorized as high risk credit card processing) for a few reasons,
- Many small business’ customers are unsophisticated and do not know to call the customer service number listed on their credit card statement,
- Many customers of small businesses may not remember what company they received service from weeks or months later when reviewing their credit card statement,
- Customers of service businesses in particular do not receive something tangible for their purchase as opposed to a goods provider, leading some customers to not feel like they got good value for their money days or months after the transaction is concluded,
- Businesses with high ticket goods, particularly those costing hundreds of dollars, are often a target for “friendly chargebacks” which is a form of a scam in which merchants use chargebacks as a means to free up cash flow,
- Most small businesses do not have a strong brand name. Thus, dissatisfied customers may not be presented with all of the refund opportunities they would from a larger company, nor have the name recognition of their service provider prompting the customer to contact the merchant directly,
- Many small business owners do not understand that a chargeback, regardless of whether won or lost, contributes to their chargeback ratio, thus they do not immediately grant refunds or otherwise use all of the tools available to minimize chargebacks.
Why did my merchant account get held / frozen / dropped / terminated due to chargebacks?
If you were dropped (aka “account held”, frozen, or terminated) from your credit card processor due to chargebacks and the only notice you received was an email or or phone call, then first thing, you probably have either a low risk credit card processor or a high risk processor with pretty crummy customer service. In any case, you’re probably wondering why you were dropped. The answer is pretty simple, credit card processors are extremely sensitive to high levels of chargebacks.
The reason, is that high chargeback rates (generally anything above 2%) is a sign that your business isn’t running a sustainable or effective business model, and further problems are ahead. The reason that’s of particular concern to the merchant account provider, is that they’re on the hook for any chargebacks that you are unable (or unwilling) to fund yourself. And the second reason, is that the credit card processor faces potential fines from Visa / MasterCard and the other card brands for allowing a merchant with a high chargeback ratio to continue processing.Now, the mere fact that you had a lot of chargebacks doesn’t necessarily mean that your business model is unsustainable or not solid, nor that more chargebacks are necessarily on the way. Unfortunately, if you were at a low risk processor, you can’t really explain that to anyone who will listen, because the risk analyst is working off of strict rules and doesn’t have any room for variance (unless you’re processing over $1M per month). If you were at a high risk processor, frankly, they should have called you and talked to you about your chargeback ratio ahead of time and offered you some solutions (that you should’ve taken them up on). If they didn’t, well, I’m sorry, but you should then shop around for a high risk bad credit credit card processor that will help you manage your chargebacks (hint, hint, we do).
How do I keep my chargeback ratio below 2%
First… the easy (but incomplete) answer, is to provide a good service, at a fair price, make sure the cost is fully transparent to the customer, make sure you follow up with the customer to ensure that they’re happy, and just generally be amazing. But if you’re reading this, you’ve already tried that and it’s not enough. So, let’s talk about what else you can do, here’s a few ideas that our bad credit merchants use…
- Disclose and Inform: If you bought something on Amazon.com and didn’t get a detailed payment receipt that stated the amount you paid, what you bought, who you bought it from, and who to contact with problems, you’d probably be concerned something was wrong with your order. And that’s from a trusted brand like Amazon. Unfortunately, you don’t own Amazon.com, so you need to be even better in terms of informing and disclosing information to the buyer. And yet, many merchants are not. So, make sure you send detailed payment receipts, make sure you offer a live customer service phone number (if you don’t have one, your high risk processor might offer such a service – we do), and be as transparent as your business model permits.
- Stay in front of the customer: Most customers initiate a chargeback within 48 hours of their order. So, treat the 48 hours after a customer orders as the most crucial period to stay in front of them. Use any devices at your disposal to achieve this. That means a detailed payment receipt, a follow up phone call to confirm the order from a manager or customer service rep, and a separate customer service email 24 hours after the order. The goal here is to give the customer multiple opportunities to complain directly to you (instead of their issuing bank) about the charge, and give you the opportunity to do something about it. Again, if you don’t have the tools to send out customer surveys after the order, your high risk merchant account provider may offer something like this for you to use. (We do, it costs $9 per month).
- Receive Chargeback Alerts: Chargeback alerts, (aka customer dispute alerts) are what they sound like, an alert to you, the merchant that one of your customers has initiated a chargeback with their issuing bank. You then have 72 hours (typically) to act on that alert. You can either ignore it, and let the chargeback happen, or you can issue a full refund to the customer and avoid the chargeback altogether. There are a number of services that enable you to receive chargeback alerts, and most high risk credit card processors will provide you with this service (we do. It costs $9 per month plus a per alert fee). These alerts don’t catch every chargeback, usually between 20-45% depending on your customer’s card mix. The way these alerts work, is based on the issuing bank’s participation. So if you’ve got a lot of customers using Chase or Wells Fargo cards, for example, you’ll see more of these alerts than if you have a lot of Bank of America issued credit card customers (because BoA doesn’t participate yet in the program). In sum, this isn’t a perfect solution, but if you’re willing to give refunds to avoid chargebacks, you can cut your rate through this alone by 25%-ish on average.