In this digital age, it has become almost impossible to make it big as a business owner without e-commerce. And for transacting business online, a trustworthy and reliable merchant bank account is indispensable. Unfortunately, while you doubtlessly have total trust in your own business, financial bodies may not share that same confidence. This can make your journey much harder than it strictly needs to be. Thankfully, however, all is not lost. Read on to find out how to create a merchant account for a high-risk business.
What is a Merchant Account?
A merchant account is a particular type of bank account opened with a merchant ‘acquiring bank’ by businesses looking to process electronic commercial transactions. These accounts are opened by drafting detailed agreements on a case-by-case basis that lay down the custom-made terms of the dealings between the parties. These ‘merchant account agreements’ include important parameters like payment methods to be supported, service fees and tariffs, additional services, and network coverage.
Operational guidelines like employee training, fraud prevention, KYC requirements, and legal jurisdiction are also laid down. The bank provides monetary facilities like an account, clearing and loan facilities, and other functions and has tie-ups with specialized electronic processing companies that handle front-end payment gateways. These firms often focus on particular geographic regions, payment methods, or business types; the best acquiring banks understand a diverse basket of processors to provide a range of services to customers.
The business, in turn, maintains a ‘terminal’ with the bank through which transaction data is transmitted. After receiving this information, the bank decides which processor is best placed to handle the payments and forwards the request for settlement. After authenticating the transaction, the processor sends a confirmation to the bank, which handles the actual transfer of funds. In the day of paper-based banking, these transactions could have taken hours or even days, but modern digital systems handle them in seconds. Fees often take the form of a flat or floating-rate transaction tax levied by the processor and the bank, as well as an account maintenance fee and minimum balance requirement.
What should a Merchant Agreement Contain?
Merchant banks execute agreements with businesses only after much deliberation and investigation, as they take quite a substantial risk in handling their accounts and processing transactions. More trustworthy customers may get relaxations in fees, interest rates, and additional amenities, while dubious ones may be charged excessive and punitive rates or even denied outright. Formally, these are called ‘high risk’ businesses, and merchant banks will only work with them after a lot of thought.
Some of the things that can render your business high-risk are:
Volatile and uncertain trades, such as stock brokerage, debt collection, or credit evaluation.
Morally dubious activities like gambling, prostitution, adult films, and literature, or weapons trade.
Young company or startup.
Bad credit score or market reputation.
Disreputable persons involved in management.
Poor financial status or business track record.
Primary operations in politically or economically unstable regions.
Whatever be the reasons, banks may often flat-out refuse to work with you or offer completely unreasonable terms if you are involved in any such business. Fortunately, there is hope if you are willing to go looking for it.
Steps to Open a Merchant Account for Your High-Risk Business
Determine If Your Business is High-Risk
The first step is to find out if your business would be unpalatable to merchant banks. Look at where you operate and what goods or services you deal in. Scrutinize your accounts and management structure. Check if you have any outstanding bad debt or loans. Is your market niche well-worn or wholly new and unexplored? How is your previous performance in business? Put yourself in the bank’s shoes and ask yourself if, looking from the outside in, yours is a company that would be safe to invest in. Be fair and truthful to yourself in this analysis, and ask for second opinions if necessary.
If your local banks are no good (and they are likely to be; otherwise, you wouldn’t be reading this), it’s time to set out on a hunt. Check outside your state and national borders. In a modern, digitized world, business backends no longer need to be physically close. Look for financially and politically stable places with solid corporate and financial privacy norms, low taxes, and ease of doing business. A jurisdiction where your kind of business is legal and, ideally, widely acceptable is generally more likely to accept you too.
Many such places worldwide are well-known in the corporate world, such as the Cayman Islands, Singapore, and Switzerland. Many service providers, including merchant banks and processors, have set up shops in these places expressly to serve high-risk businesses like yours, including (and probably especially) legally dubious ones. Another advantage of setting up in these places is that other financial services like accounting, debt collection, credit guarantee, and wealth management are also guaranteed to be close at hand, often under the umbrella of the same conglomerate that handles your merchant account.
Learn to Sell Yourself
Even in the friendliest of places, you aren’t likely to get a warm welcome if your business looks like it will keel over and die any minute now. Think of it as preparing for an interview. It would hardly do you any favors to show up looking and smelling like a heap of trash. Ensure that your business idea is solid, relevant, and has good growth potential. Put your finances in order and prune any leakage. Invest in a professional website, brochure, and business cards. Prepare easily digestible information about your goods and services in advance. Show up well-dressed and speak with confidence. Ninety percent of the deal will be decided by whether they are impressed with you.
Thus, you can open a high-quality merchant account even for high-risk businesses as long as there is a will. It certainly won’t be easy; in fact, it can demand a fair bit of effort and even a few rejections. However, with perseverance and proper research, you are bound to succeed. A functioning arrangement with a merchant acquiring bank will catapult your business to the next level, and undoubtedly you now have a good idea of how to bring this evolution about.