High-risk businesses face numerous struggles to access credit card processing solutions, business loans, and business insurance. The fact is correct for eCommerce entrepreneurs that depend on debit and credit card transactions to get paid. Banks, insurance companies, and credit card processors determine high-risk businesses based on multiple factors. This article will let you know about the high-risk business in Canada in detail.
What Is A High-Risk Business In Canada?
High-risk businesses are generally merchants at a higher risk of financial failure. Not only do merchants get hurt due to the failure, but acquirers and payment processors get affected as well. Credit card companies will term a business as a high risk depending on the industry, the merchant involved, and other factors. Some of such factors include the number of chargebacks that occurred, the age of the business, and credit history.
High-risk businesses can still admit credit card transactions, but banks may demand a reserve on credit card processing or charge for a higher processing rate. Some merchants can also be called high-risk because of their industry or if they deliver items frequently to foreign customers.
Multiple factors are responsible for determining a high-risk business. While a high-risk business can be identified depending on its nature, they also put on themselves under this label with poor business activities. Canadian high-risk merchant account providers help the merchants set up a bank account just for their business. However, financial institutions assess risk from 4 main factors: Company, industry, processing volume, and billing model.
Banks check the processing history of the company that involves several chargebacks/refunds, amount of fraud, etc. If a merchant is new to the business, his industry’s average provides banks with a baseline for the amount of risk they can expect from the merchant processing through them.
Whether the merchant operates in his vertical or any other, the financial institution will have a look at the merchant. After all, the merchant, not the business entity, has undersigned the merchant account. Banks will check the merchant’s current business position: burn rate, debt to equity, overall profitability, etc.
The banks also desire to know the types of transactions the merchants will be processing. Card-not-present transactions are at higher risk than card-present transactions. Recurring billing or subscriptions are some of the higher-risk transactions. Merchants need to pay particular interest to the bank in case of annual billing. Suppose a merchant has sold a package in January and stepped out with the business in March. The bank will require a contingency to limit its liability.
Banks and card associations desire to know how much processing the merchant will do. They have made a sliding scale of risk depending on the number of annual transactions sent by the merchant:
- Level 1: More than 6 million transactions (highest risk)
- Level 2: Between 1 million to 6 million transactions
- Level 3: Between 20,000 to 1 million transactions
- Level 4: Below 20,000 transactions (lowest risk)
Moreover, like the financials, the banks will check all the businesses combined.
Low credit score
Payment processors and bank owners will place the business into a high-risk category when the company has a poor credit history.
High average ticket sales
The business will be at higher risk if it accepts high-cost purchases through credit card transactions. This factor generally affects merchants that process a larger volume of B2B transactions.
Services or products of questionable legality
Services or products of questionable legality like drug paraphernalia and pornography may prove that the merchant has unstable revenue. It also indicates that merchants are associated with doubtful market and sales practices.
Other factors that label a business as high-risk
- Businesses with less or without credit card processing history
- A company or business that lost previous merchant accounts due to excess chargebacks
- A business that operates abroad or with countries having high chargeback risks
- Multi-currency businesses
What are high-risk products?
The services and products that a business provides are the necessary factors that can place a merchant in a high-risk category:
- Telemarketing, calling cards, VOIP
- Computer software and hardware
- Online gaming, gambling, casinos
- Online pharmaceuticals, medical services, or drug stores
- Online dating services, adult entertainment products
- Timeshares and e-cigarettes
- Travel packages, hotel booking, flight, train, & cab tickets
- Foreign exchange trading or cryptocurrencies
Finding business services for any business is not easy. But it is much more difficult for high-risk merchants. While they need to pay higher processing rates and fees, the merchants need not settle for subpar customer support and service. Thankfully, numerous providers in the market provide top-notch services and affordable pricing to the high-risk community. As a high-risk business, a good opportunity exists to maintain the business via eCommerce sales.
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