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In today’s marketplace, where plastic is more prevalent than paper when it comes to money, businesses need to offer customers the option to pay with credit cards. Companies whose operations are primarily online, offshore, or via mail order have no choice: They rely almost entirely on credit card payments only to stay in business.
If you’re in an industry that is less than stable, and you need a merchant account for high-risk business, it’s critical that you avoid making a mistake when choosing a company to handle your credit card payments. Unscrupulous processors are looking to take advantage of merchants who may be too eager to rack up credit card sales. When you shop for a high-risk merchant account, it’s important that you take steps to protect yourself and avoid making mistakes that could cost you money.
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Cynics have a saying: If your mom says she loves you, check it out. In other words, don’t take anyone at his or her word. When you’re shopping for a processor that offers high-risk merchant account services, be picky and do research. Limit your field to processors that provide references from reputable companies. Likewise, endorsements from third parties elevate the credibility of a processor. For example, a processor that has a high rating from the Better Business Bureau is likely to be more trustworthy than ones that don’t.
Another factor to consider is longevity. Unscrupulous processors don’t stay in business very long. If you find a processor that has been in business for a decade or more, you can feel good about that company’s track record. It’s not a fly-by-night operation that’s looking to make a quick buck.
Image via Flickr by John “Pathfinder” Lester
Before you sign with a processor for a high-risk merchant account, read the entire processing agreement. Because it amounts to a legally binding contract, you should have an attorney review it as well. Ask the lawyer to look for all penalties and fees and advise you on what they are. You only want to sign the agreement after you have a firm grasp on all the terms, conditions, and potential costs.
In the United States, it’s common for agreements between a processor and business owner to span anywhere from three to five years. Because it’s expensive for processors to open a new high-risk merchant account, they want a minimum commitment from business owners. At the same time, this gives you the assurance that you have a means of processing credit card payments for several years.
Because of problems arise that may require you to cancel your agreement with the processor, it’s important to understand what the penalties are. Any fee that’s less than or equal to the remaining monthly fees required in your contract is reasonable: You’re essentially buying out your contract. However, signing a contract with cancellation penalties exceeding the cost of buying out your contract is not a good business decision.
It would be a mistake for business owners to sign an agreement for a high-risk merchant account if they can’t meet volume commitments laid out in the contract. Many credit card processors that specialize in servicing high-risk industries expect their clients to process a minimum number of payments each month. After all, this is one way that the processor makes money. Some processors put a clause in their agreement indicating that the business will pay a penalty, or that the discount rate will go higher if it fails to meet a minimum threshold each month.
If you’re a small business or startup, you may not know how many payments your business will need to process in a given month. In this case, it’s wise to negotiate with the high-risk merchant account provider to eliminate any volume commitments in your agreement.
A good processor wants to see you meet volume targets because it makes money when you make a credit card sale. The volume commitment, when applied, is designed to ensure that the processor remains viable. It only becomes problematic when it’s applied to companies that can’t accurately predict whether they will meet specific targets. It only becomes problematic when it’s used to companies that can’t accurately predict whether they will meet specific objectives.
When considering whether to sign an agreement, don’t make the mistake of assuming there aren’t hidden fees. Some processors have costs that change depending on the type of card being processed. For example, they may charge more to process a foreign-issued or premium card. This is one way for the processor to pass along to you the varying costs from card issuers such as Visa and MasterCard. These interchange costs can drive up your expenses, so check what your agreement says about these higher-cost transactions.
If you have offers on the table from more than one reputable processor that is willing to give you a high-risk merchant account, vet any rates and terms that seem too good to be true. You can even ask one company to weigh in on the offer made by another company — just be careful not to violate any privacy laws by sharing paperwork from one processor with its competitor.
It’s safe to discuss verbal offers, asking whether your preferred processor can meet or exceed the attractive offer you’ve received. You may learn that the particular offer you’re considering employs questionable pricing strategies used by bad actors within the industry.
One way to test the credibility of a processor is to ask questions. Do you get direct answers? If you don’t, consider this to be a possible sign that the processor isn’t straightforward in how it’s structuring its fees and penalties.
By completely understanding an agreement before you sign it, you can reduce the chances that you’ll make a mistake when selecting a credit card processor. Signing a contract with hidden fees could cost you thousands of dollars if you violate the terms. So be proactive in understanding the entire scope of an agreement with a high-risk merchant account provider. You’re looking for a partner that wants you and your business to succeed. Finally, if an offer sounds too good to be true, listen to your instincts: Walk away from the deal.