Whether your business is viewed as high-risk or low-risk can have a major impact on your merchant account options, and bad credit can make your business high-risk.  While it’s true that getting a bad credit merchant can be challenging: yes, you can get a high-risk merchant account with bad credit.

Knowing how credit impacts merchant accounts and understanding your options can help you make the best decision for your business. Here, we’ll explain the ins and outs of merchant accounts for businesses with bad credit.

Bad credit merchant account: Defining “bad credit”

So, what exactly makes credit “bad”? Underwriters will consider multiple factors when determining whether to approve your merchant account application or not, but credit scores are a great way to help answer that question. In addition to your business credit score, in some cases your personal credit score is used by underwriters too. Here are some common types of credit scores and the point they’d be considered bad.

• FICO score: 579 or lower. A FICO score is a common consumer credit rating. 579 and lower is a “Poor” FICO score.
• VantageScore: 649 or lower. VantageScore is another popular consumer credit rating. It was created by Equifax, Experian, and TransUnion. With VantageScore’s consumer rating, “Poor” starts at 649.
• FICO SBSS: 154 or lower. FICO Small Business Scoring Service is a common credit score for small businesses. Currently, you’d need a score of 155 for SBA (Small Business Administration) pre-screen checks, but banks and underwriters may want an even higher score.
• PAYDEX: 49 or lower. PAYDEX is a business credit score from Dun and Bradstreet (D&B) based on analyzing bill payment history. PAYDEX scores range from 1-100, and the “Bad” range starts at 49.
• Intelliscore Plus: 25 or lower. Intelliscore Plus is a business credit rating from Experian. The rating ranges from 1-100 and the “High-Medium” risk category starts at 25.

What about “no credit”?

If your business has very limited credit history or “no credit”, you may face many of the same challenges as a business with bad credit.  Therefore, many of the points and tips we discuss in the next sections can help you too!

Bad credit merchant account: How credit affects merchant accounts

There are many factors underwriters consider in merchant account applications. For your business, one of the most important items is whether or not you are considered high-risk. Higher risk means your business may be charged higher rates, required to keep reserve funds in your account, or rejected altogether.

We cover the characteristics of high-risk merchant accounts in our What is a high-risk merchant account? article. In short, some of the key factors are the industry you’re in, your sales model, frequency of chargebacks, and whether or not you have a bad credit. If you have bad credit, underwriters are likely to label you as high-risk. If you’re high-risk, merchant account fees and rates will likely be higher or you may not be approved at all.

Bad credit merchant account: The impact of chargebacks

In addition to bad credit, your chargeback ratio is another important factor that can impact your merchant account. Chargeback ratio is simply the percentage of chargebacks to overall charges processed. A chargeback occurs when a customer disputes a charge on their credit card statement. Note that it doesn’t matter if the dispute is won, the fact the dispute was made can impact your merchant account.

If your chargeback ratio is too high — usually about 2% —  payment processors may charge you additional fees. This is because handling disputes costs processors money. If your business has too many, it’s no longer profitable for them to process payments for you. Therefore, you can see why a bad credit merchant account customer would be more likely to get dropped by a processor. Often, processors will drop merchant accounts with chargeback ratios of 2% or higher.

💡Pro-tip: Partner with a payment processor that offers quality chargeback mitigation services. Chargeback mitigation helps protect your company’s reputation and bottom line. 

Bad credit merchant account: What to expect

As you might expect, an application with bad credit is more likely to be rejected than a merchant account application with good credit. However, even if you’re approved, a bad credit merchant account application will often result in an account that has requirements or restrictions not imposed on traditional merchant accounts. For example, in many cases high-risk merchant accounts bad credit have these characteristics:

• Higher rates. Payment processors view bad credit as higher risk. They look to offset this risk in the form of higher fees. 💡Pro-tip: With rates starting at 2.6% + $0.15 per transaction, TailoredPay offers high-risk businesses the best rates in the industry. 
• Longer contract terms. By locking high-risk businesses into long-term contracts, processors can collect those higher rates for longer. From the processor’s perspective, this makes business sense: offset risk by collecting higher fees for a long time. From the perspective of the high-risk business: this limits your flexibility and locks you into expensive contracts. That’s why it’s important to pick the right processor the first time. However, if you find yourself facing expensive early termination fees to get out of a bad merchant services contract, check out our How to get out of a merchant services contract article.
• Reserve requirements. In many cases, processors will keep a percentage (usually 5-10%) of a high-risk merchant’s revenues in a reserve account. This can be a tough requirement for many businesses, but makes sense from the processor’s perspective. Having funds in the account makes it less risky.

Bad credit merchant account: Tips to improve your chances of approval

You know bad credit makes your merchant account high-risk. You also know chargebacks can make things worse. You may have been rejected for a merchant services account before, so you’re familiar with the application process. But what can you do to maximize your chances for approval and find the best payment processing solution for your business? Here are some tips:

• Partner with an expert. There’s no such thing as a guaranteed approval for a bad credit merchant account. However, partnering with a provider that specializes in high-risk merchant accounts — like TailoredPay — can greatly improve your chances. While traditional providers may shy away from high-risk businesses, providers that focus on high-risk industries will work to get you approved.
• Keep your chargeback ratio down. This one can be tough depending on your business model, but do what you can to keep your chargeback rate low. That means transparent pricing, simple refund policies, and good customer service. Additionally, quality chargeback mitigation services can reduce your chargeback ratio up to 20% or more.
• Stay away from processors that promise guaranteed or instant approval for high-risk merchant accounts. While it is possible to use a 3rd party payment processor like Square or Stripe without a credit check, a real merchant account will have an application process and credit check. This is simply a reality of doing business today. Be wary of vendors that suggest otherwise.

Why not use a 3rd party processor? 

Given that it is possible to use 3rd party payment processors without a credit check, why shouldn’t you just do that? In some cases, a 3rd party processor may be the right answer. However, for businesses in high-risk industries, being approved by a 3rd party provider can be a challenge. Additionally, for businesses that have a significant amount of monthly sales — over $20,000 a month for example — 3rd party processors often lack the reliability, support, and cost-effectiveness of a merchant account.

Bottom line: If you have bad credit, aren’t in a high-risk industry, and have sales under $20,000 a month, a 3rd party payment processor might make sense. Otherwise, it’s usually a better business decision to partner with a high-risk payment processor like TailoredPay.

Next steps: Getting your bad credit merchant account

At TailoredPay, we specialize in getting approvals for high-risk merchants, including those with bad credit. Our relationships with banks and experience in the industry enable us to provide our customers with access to reliable payment processing solutions even if their credit history isn’t the best. If you’ve been rejected by other providers, we may still be able to get you approved.

So, how can you get started?

Just fill out our simple online merchant account application, it takes less than 10 minutes. From there, one of our payment processing experts will contact you within 24 hours.