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It is difficult to keep a small business running if you don't have a way to accept card payments. That means you need a merchant account. Before approving your application, the bank checks your credit score. This leaves many wondering if they can sign up for a merchant account, even with poor credit.
Your Credit and Your Rate
Your credit rating is tied to your discount rate, which is the fee the merchant account provider charges whenever your business completes a card transaction. You pay this fee any time a customer uses a credit or debit card and, if you have poor credit, you might pay a higher rate (at least at first).
Bad credit merchant accounts are essentially treated as high-risk merchant accounts, which means they can be subject to increased processing fees or cash reserve policies. This increased cost means less profit, which in turn means the entire method is less profitable over time. It is recommended that you carefully consider all of your options to avoid partnering with a merchant account provider who charges exorbitant fees. However, your rates can be lowered if you prove yourself to be a valuable customer.
Fees and Rates on High Risk Merchant Accounts
A high-risk merchant account costs more, both in processing charges and account fees. High-risk accounts also tend to have longer contracts. Non-high-risk businesses generally have at least some ability to negotiate the length of the contract, with industry averages around three years for the initial term, often with an automatic renewal clause that extends the contract for another year.
However, high-risk businesses have little to no negotiating power, which often means a contract of three to five years, plus a renewal clause. High-risk merchant contracts usually include an early termination fee for ending the agreement early, or even a liquidated damages clause that raises costs even further. If you have a high-risk merchant contract, expect to pay more for your recurring fees.
Processing costs are also increased for high-risk accounts, with the majority having to use a tiered pricing plan. While it is true that rates vary from provider to provider based on your specific credit score, you can expect to spend nearly twice as much on processing fees if you are high-risk. If the provider you are considering has rates higher than that, it is best to keep looking for providers.
In addition, you have to consider the cost of a rolling reserve. A rolling reserve is occasionally imposed on non-high-risk businesses (typically ones that are just starting), but are almost always imposed on high-risk businesses. Rolling reserves are funds set aside from your sales to cover unexpected expenses, such as chargebacks. A rolling reserve diminishes over time (or completely, depending on the success of your business) but can cause short-term cash flow problems if not managed properly.
As with any other type of agreement or contract, it is important that you thoroughly review and understand your contract before signing. Be sure to pay attention to the fine print and make sure you understand all of the clauses and fees.
How to Obtain a Merchant Account with Bad Credit
People often wonder if they can even get a merchant account with poor credit, but there are methods to help you obtain a merchant account, such as:
- Cosigners: A cosigner with good credit is one of the easiest ways to obtain a merchant account if you have bad credit. When the provider knows there is another party on file with a good credit history, they are more likely to approve your application.
- Rolling reserves: Though a rolling reserve can cause monetary issues when improperly handled, offering to leave a provider with a rolling reserve often makes providers feel more comfortable approving your application. It is a sign that you are willing to cover any charges in the event of a default. However, this is only applicable if you have the funds to afford it.
- Specialists: There are some merchant account providers that accept businesses whether they have good credit or bad. These providers often work with high-risk businesses (some exclusively) and typically offer lower fees. Specialists work to help build your business up, often working to save you as much money as possible.
- Third-party providers: Alternative services such as Paypal offer payment processing that is handled entirely by the provider. In many cases, third-party providers don't even do a credit check.
How Much Does a High-Risk Merchant Account Cost?
The cost of a high-risk merchant account depends almost entirely on your business and credit score. The following general pricing guide details average costs for non-high-risk businesses to provide an idea of what you can expect to spend for a high-risk merchant account.
- Most providers charge a monthly statement fee, which has an average cost of $10 per month.
- If you do not have a high enough volume of card transactions, there is also a minimum fee, which has an average cost of $25 per month.
- There is also the discount rate, essentially a commission earned by the merchant account provider, on every card transaction. The average cost of a discount rate is between 2 and 4 percent of the transaction.
- There are typically additional fees per transaction that average between $0.20 and $0.70. These fees are static, regardless of the price point.
- Refunds processed through cards have an average chargeback fee between $10 and $20. Remember that these prices are for non-high-risk accounts. For a high-risk merchant account, expect to pay almost double the rates.