Bad Credit Merchant Accounts: Insider’s Guide
A bad credit merchant account is a specialized payment processing solution designed for businesses with less-than-perfect credit scores. It enables such businesses to accept credit and debit card payments. However, they may have to pay slightly higher fees than regular merchant accounts and also adhere to strict conditions, such as rolling reserves and delayed settlements. By implementing strict risk mitigation measures, bad credit merchant accounts can provide a reliable transaction processing solution for businesses facing financial challenges.
Why Is Having Poor Credit Considered High Risk?
A credit score is one of the most important factors influencing underwriters’ decisions. A merchant with strong financial standing and an excellent credit score is generally a low-risk choice for payment processors. However, any merchant with solid financial reserves but a bad credit score can potentially expose the processors to a high-risk situation. A low credit score often signals late payments or bankruptcies, raising concerns about financial stability. For the credit card processing industry, a bad credit score is a negative indicator.
Various credit reporting agencies like Dun & Bradstreet, Experian, Equifax, and Creditsafe maintain the credit reports and scores of businesses. These credit reporting agencies receive regular updates from various financial institutions about the activities of individuals and businesses. They also collect inputs from lenders and public records.
Credit rating agencies consider various factors while determining the credit score of an individual and business. These factors generally include payment history, credit utilization, length of credit history, and public records such as bankruptcy and liens. After thoroughly analyzing these matrices, the credit rating agencies assign a credit score to the company and individuals. A negative credit score can severely impact the overall functioning of any business, as the company may struggle to obtain financing or even secure contracts with suppliers.
How Bad Credit Merchant Accounts Differ from Traditional Merchant Accounts
Traditional merchant accounts, also called low-risk merchant accounts, are generally offered to businesses that have excellent credit scores. On the other hand, a bad credit merchant account is more suitable for those businesses whose owners have lower-than-average credit scores. Merchants operating in various high-risk industries also prefer bad credit merchant processing solutions. The underwriting process and risk assessment for a bad credit merchant account are more extensive than for a traditional merchant account.
Key Features of Bad Credit Merchant Accounts
Bad credit merchant accounts offer unique features that cater to a specific group of merchants. Below are the most significant ones.
- The ability to process transactions is a crucial feature. This is the most important feature because if such accounts are not available, then a large number of merchants cannot accept digital payments. Such accounts come at a high cost that includes setup fees, transaction fees, and above-normal monthly fees. Still, merchants get the ability to stay in the competition and offer the product and services just like any regular merchant would do.
- Chargeback Protection & Fraud Prevention. Offering merchant accounts to businesses with less than average credit scores is not an effortless task, and that is why these payment solution providers implement a variety of tools to reduce risk. This includes implementing chargeback protection and fraud prevention tools.
- Multiple Payment Options. Merchants get the ability to accept payment from the customers through various payment methods; these include credit cards, debit cards, and other alternative payment methods. When it comes to functionalities, these accounts are pretty much on par with low-risk accounts.
- Recurring Billing Support: Merchants can automate billing on a weekly, monthly, or annual basis, depending on their agreement with customers. Subscription billing reduces manual intervention and ensures a steady revenue stream.
- Fast Integration. Pre-built plugins simplify integration, making setup quick and smooth. For businesses that require custom integration, an API document is also provided.
Bad Credit Merchant Account Application Process
To get approved for a merchant account, an applicant must have a registered business. Along with that, the company should also have a business bank account to receive settlements. Merchants who want to accept online payments must have an active website. Upon meeting these requirements, the merchant can initiate the application process.
KYC For Bad Credit Merchant Account
The merchant must submit a completed application form outlining their business structure. Along with that, the merchant is also required to submit additional documents related to the business and sector.
The business’s legal documents help the merchant account provider identify the legal status of the company. For this, the merchant can provide the certificate of incorporation or any similar document. Additional documents related to business registration that can be shared with the underwriting team include the articles of association, memorandum of association, share distribution information, organizational chart, EIN, or any other tax number.
The payment processing company will also need the national ID and address proof of all the directors who are part of the company. For this, merchants can provide the utility bill of the directors and a copy of their driver’s license or passport.
The funds collected from the credit card transactions can only be settled in the business bank account of the merchant. It is the acquirer’s responsibility to ensure the validity of this bank account. For this, the payment processor will need the merchant’s bank account information. This can be provided through a letter of good standing or a voided check.
If the merchant plans to use an online payment gateway, they need to provide the domain registration receipt. This document confirms the ownership of the domain.
If the merchant is applying for a retail credit card processing terminal, the payment processor will ask for pictures of the store.
The business plan is one of the most crucial documents for a merchant with a poor credit score. Merchants must spend enough time and create a compelling business plan, as it can have a significant impact on the decisions of the underwriters.
Some merchants may have previous instances of financial challenges, including bankruptcies; however, in such a scenario, it is important for sellers to keep clear communication with the underwriters. Explaining the true reasons and circumstances behind the bankruptcy can help, along with the concrete steps taken by the merchant to improve the situation, which should also be conveyed to the underwriters.
Website Compliance for Bad Credit Merchant Accounts
It is important for merchants with bad credit to be aware of some important website compliance requirements. The credit card processing company will thoroughly evaluate your website to make a decision about your account approval. These simple suggestions will help you meet the expectations of the underwriter.
Credit card processing companies that offer merchant accounts to businesses or individuals with bad credit understand that they are taking on a little risk on the credit rating front. However, they will not be interested in working with merchants who are not serious about their business website.
The underwriting team at any merchant processing company will check the overall appearance of the website. They will also assess the historical organic and inorganic traffic of your site. Therefore, it is important for your website to look professional and traffic-friendly.
The next thing you need to ensure is that your website must display the logos of credit card brands. You can download these logos from the official websites of the credit card companies. Along with that, it is important to ensure that links to terms and conditions, privacy policy, refund policy, and shipping policy are displayed prominently throughout your website.
To reduce the risk of refunds and chargebacks, you must prominently display the company’s contact information on the site. A smart way to do this is by adding the company name, address, phone number, and email to the site-wide footer.
Your website must use the HTTPS protocol, and for that, your website should have a valid SSL certificate.
Keeping these factors in mind and modifying your website accordingly will definitely increase your chances of approval.
Timeline for Poor Credit Merchant Account Approval
The time frame required for the approval of a bad credit merchant account generally ranges between 1 to 2 weeks; having said that, there are some high-risk processors that also offer approvals within 24 to 72 hours. The exact time will depend on the business type, the level of risk involved, and the completeness of the application. To reduce the time and get faster approval, merchants must ensure that they have complete documentation ready. This can reduce delays.
Additionally, the merchant must provide accurate business and financial data to the underwriters. Giving incorrect information will result in necessary questioning and delays. If the business model of the merchant has a history of attracting high chargebacks, then the underwriting process may be a bit longer. Some industries, such as tobacco, online dating, social gaming, and gambling, all take 3–4 weeks for approval.
Bad Credit Merchant Account Services FAQ
What to Look for When Searching for Bad Credit Merchant Account Providers?
When searching for a poor credit payment processor, it is important for merchants to compare the fees. Merchants should work with the provider that offers services at the lowest cost without compromising quality. Along with that, it is also necessary to check the contract terms and the kind of support channels available.
The reputation of the payment service provider also plays a critical role. Merchants should check for online reviews, especially on platforms like Better Business Bureau and Trustpilot. You should be careful with providers that have reviews and complaints related to hidden fees and poor customer service.
The pricing offer should be transparent and should not have any hidden fees. The provider should share a detailed term sheet with the merchant for review before signing the agreement. Any fees like termination charges and gateway fees should be listed on the term sheet.
The provider should not limit merchants to only credit card processing. The payment provider that you choose must allow you to accept a variety of payment instruments, including e-check, ACH, Interac, and bank transfer.
What is a no-credit-check merchant account?
A no-credit merchant account is a payment processing solution that is offered to the merchant without performing any credit check. Such accounts are generally offered by alternative payment processors. These solution providers generally offer payment methods such as e-check and crypto. Although a no-credit-check merchant account may not allow merchants to accept card payments, it can still provide the merchant the ability to accept some sort of payment instrument, which will at least help the merchant stay in business.
What type of business use bad credit merchant accounts?
Bad credit merchant accounts share similarities with high-risk merchant accounts. Such solutions are suitable for businesses operating in industries like CBD, travel, adult entertainment, vape, and online gaming. Mainstream processors generally ignore merchants from these industries due to the risk of high chargebacks and disputes. However, for such businesses, the specialized bad credit merchant account solution can be a lifeline.
Poor Credit Merchant Account: Final Thoughts
Poor credit merchant accounts come with high fees and strict terms, but they offer payment processing solutions to those merchants that are generally rejected by traditional payment processors. The right payment service provider can make a significant difference in the way you accept digital payments. While choosing the payment service providers, make sure that you evaluate the provider on various parameters. It will help you choose an affordable but high-quality provider. If you have any further questions regarding bad credit merchant accounts, then feel free to email us at [email protected].
