Bad credit does not automatically disqualify you for payment processing, but it certainly shifts the approval burden entirely onto the fundamentals of your business and the risk mitigation techniques used by the payment processor. It is important for you to know that payment processors really clear about credit score when you are a startup with no transaction history. In such a situation, your credit actually becomes a proxy for reliability.
But once your business has proven transaction history and documented revenue as well as a history of low chargebacks, then credit actually becomes less relevant. The realistic path over here would be to start with a payment processor that is open to accepting bad credit applications or those that support high-risk merchants. We are basically talking about such processors that support merchants that are rejected by Stripe, PayPal, or Shopify payments.
You should build three to six months of clean transaction history, and then you will be able to graduate to better rates.
Know that your bad credit is not a permanent qualification, and you must be fully aware about it. It is basically a starting point that requires you to prove your business’s stability through operational metrics rather than just financial metrics. Payment processors, they use credit score as a shorthand for assessing personal financial responsibility and bankruptcy risk. If your personal credit score is poorer, then they will think that you may mismanage money and you might also mismanage your merchant account, which includes spending reserve funds, ignoring compliance requirements, or sometimes even disappearing when disputes arise.
Sometimes this kind of logic can be flawed for a few merchants because bad credit often reflects medical debts or past business failure and may not actually reflect the character of the individual. Many processors apply the bad credit discrimination mechanically. The workaround is very simple. All you have to do is shift the conversation away from your credit and towards your business metrics.
You should talk about your Monthly revenue, control on chargeback percentage, customer retention ratio, and business registration legitimacy. A merchant that has got about 550 credit with over $50,000 of monthly clean revenue with zero chargebacks can sometimes be of a lower risk than a merchant with 720 credit with no processing history and the risk of high chargeback.
High-risk payment processors, they generally understand this distinction in a much better way when compared to mainstream payment processors.
Now let us discuss about some actionable steps that you can take.
First, you should apply with a payment processor that explicitly states that they accept bad credit or no credit merchants. This includes niche high-risk specialists. We are not going to name any company here, but you should focus on those payment processors that support industries such as supplements, gaming, astrology, or other regulated verticals. You can also explore ACH-first payment processors.
Talk to the payment processor first before sending the entire application. Let them know about your current credit score and ask them if they are comfortable in evaluating your business based on your performance and not specifically on credit score. You should make sure you front load the business legitimacy. Always provide the article of incorporation, business tax ID, three to six months of bank statement that shows clear consistent revenue. Also present a powerful and highly accurate business plan. If your credit is truly bad, that means below 600, then you may have to consider a personal guarantee or allowing yourself to accept a rolling reserve.
All of these signals are very strong to help reduce processor’s perceived risk. Once you are approved, then you can execute your graduation strategy. That means you must maintain spotless chargeback history and meet the compliance metrics for at least six months then you can approach another processor that may offer you slightly better rates. After 12 months of billing history, then you can potentially qualify for a standard high-risk term, even with bad personal credit score, because at that time your processing history will speak louder than your credit score.
The label Bad credit merchant is a trap in which you accept terrible terms permanently. Some payment processors will quote you pricing such as 5 to 7%, plus they will ask for $500 of monthly account maintenance fee, plus they may also ask for 50% rolling reserve terms and many merchants say yes because they know that bad credit merchants have limited alternatives. But you should not do this.
Use your first payment processor as a stepping stone, not as a permanent home. Always track your metrics. If you have had six-month history with less than 0.5% chargeback, with zero compliance issues, and consistent regular monthly volume, then you have earned the right to shop for much aggressive rates.
Some merchants stay with their first payment processors for years, and they actually pay three times of what market rate actually is. This is because they assume that their credit score is bad and it is a permanent exclusion from the club of low-transaction-fees-paying merchants. Your leverage starts when you start processing consistently and keep your chargeback ratio low. Additionally, if your bad credit is due to the past business failure or personal hardship, then you should consider addressing it with the payment processor at the underwriting stage.
A one-paragraph explanation such as, I had a medical event in 2019 that actually tanked my credit score, and I have recovered and have been clean from that particular time. This actually many reduce the processor’s skepticism. Remember, everybody has a heart, and if you are genuine and if you write it clearly with the payment processor, then they might take it from a human perspective also.
Finally, you should always separate your personal finance from business financial structure. You should open a dedicated business bank account, use your business tax ID exclusively for business and you should always avoid blending personal and business transactions. This will signal to the payment processor that you are a professional business owner and also help the payment processor reduce the concern about the misuse of the merchant account fund.
If you are currently struggling to get a merchant account, then you might want to explore our bad credit merchant account solution. Feel free to contact us and one of our representatives will assist you.