Unless you’re thriving off cash transactions, you need a merchant account to make it as a business in 2021. It flips the switch for processing credit cards, the increasingly preferred method of payment for customers. So, you know credit is important or at least useful, but can you get a merchant account with bad credit? And does your personal credit score affect your approval for an account? The answers are yes and yes.
There are ways to increase the odds of obtaining a bad credit merchant account. Just like with personal credit cards for those with bad credit history, there’s a catch. Here are some tips to help you along the way.
The Ins and Outs of Credit and Merchant Accounts for Businesses
Let’s get to the bottom of credit—bad or good—and how it can affect your business you can be more informed about the payment processor you choose to work with later. Credit is one of the top reasons for being denied a merchant account by payment processing companies and financial institutions.
What is a bad credit score?
Credit runs on a scale and scores are a bit skewed, meaning you have way more chance to meet the low end than the high. This is true for both personal and business credit, which we’ll explain next.
An exceptional credit score is between 800 and 850. People with a score in this range should expect to be approved for any merchant account.
740-799 is very good, which means you’ll more than likely get the thumbs up by debit card and credit card processors and acquiring banks with your merchant account application.
670-739 is good. This is the area that starts to get iffy. If you have a score in this range, the merchant services provider will likely factor in which direction your score is headed based on the trend from previous months.
580-669 is a fair credit score, which means you’re on the lower end of the spectrum even if you’re still above the halfway point on the numbers scale.
300-579 is very poor. Anything in this range is considered bad credit, no exceptions. Luckily, scores don’t go below 300.
These numbers are based on FICO credit scoring by Experian. There are two other credit bureaus: TransUnion and Equifax. The scale changes slightly between the three, but the basic concept for the scale’s breakdown is the same. The takeaway is you should aim to have a credit score above 670. Anything below 600 is poor credit and low credit scores are unattractive to underwriters.
What credit score is needed for a merchant account?
There’s no straight answer. You should be in good standing at the very least if you want a regular or low-risk merchant account, especially if you need a high-risk merchant account. Other factors come into play when going over your application, like previous processing history and co-signers.
Why is there a credit check when applying for a merchant account?
Credit is an important factor when getting approved for a merchant account. It tells issuers how financially dependable you are and the level of trust they should put in you and your business. This is why at least good credit is necessary for approval, unless you apply for a bad cred merchant account.
Why do some people have to have a co-signer for a merchant account?
One of the most common reasons for having a co-signer when applying for a merchant account is due to bad credit from the business owner Having a co-signer greatly improves the chances of being approved because liability is placed on both signers.
Factoring in Bad Credit When Applying for a Merchant Account
Multiple factors come into play when applying for a merchant account. Depending on the provider, some of those factors can improve your decrease your chances of approval.
Starting a new business is already risky. Startups are considered high-risk businesses, which comes with its own set of hurdles already. On top of that, approval odds plummet further if the applicant has a bad credit report. Applying specifically for a bad credit merchant account is a good option here.
Previous Business Owners
A lot of businesses fail on the first go-around. And with that failure comes bad credit. However, because you have previous processing history as a business owner, your chances of approval are higher. Credit, in general, is less important if there’s processing history to look at. Typically, 3 months of processing history is provided during the application process. If you can provide 3 months of good credit card transaction processing, whether it’s from your previous business or another one you’re running now, bad credit can be ignored.
Business credit is directly linked with the business owner’s personal credit score through their social security number. That means if you personally have bad credit, then so does your business. There are ways to improve your odds of approval if you have bad personal credit, like getting a co-signer or providing transaction history.
The Catch for Bad Credit Merchant Accounts
There’s always a catch. If you’ve applied for a couple merchant accounts and got denied or you’re positive you would get denied if you applied, then a bad credit merchant account is a good way to move forward. You don’t want too many denials on your record because that can lead to getting on a list that’s passed around to providers and banks.
You’ll Likely Have a Reserve on the Account
The credit card payment processor will more than likely require a rolling reserve of around 10% (possibly more). A rolling reserve is a pool of funds where a percentage of each transaction is deposited and held. It’s meant as a backup for if things go south for your business and the processor or bank needs cash to dip into.
Imposing a reserve gives the payment processor more confidence in supporting your business. With more and more successful months of debit and credit card processing without mishaps, you could eventually negotiate out of having the reserve (or at least get paid back).
Allow the Provider to Impose ACH Delays
Processors imposing an ACH delay is a method of lowering risk associated with your account. The delay is a temporary hold of funds from the acquiring bank to your deposit bank account. You want to be as low of a risk as possible, and that could mean allowing ACH delays for a few months to a year.
Bad credit merchant accounts always come with a catch. It’s part of the process for rebuilding your credit and trust with payment processors and banks. Until that time comes, you’ll have to deal with a few not-so-nice conditions.
You May Face Higher Fees, Rates, and Pricing
Bad personal credit doesn’t necessarily mean you’ll pay higher processing fees, but it’s likely. The most impacted fee is called the discount rate, which is what you pay each time a customer swipes their card. The higher the discount rate, the less money you make from the transaction. Other rates and fees might increase as well, but this is one that affects every purchase, no matter the location or card network (e.g., Visa).
It’s best if you can negotiate your way out of a higher discount rate. If you request a reserve be placed on your account or ACH delays, then provider might accept those terms instead. Otherwise, if you get stuck with higher rates, you can adjust the rate after you’ve built a strong relationship with the provider.
Ways to Improve Approval Odds for a Bad Credit Merchant Account
Here are a few tips to make your application more appealing to merchant account providers. They could also make your contract less stringent, depending on the path you take forward.
Get Someone to Co-Sign with You
A co-signer is a great way to improve your odds of approval if you’re suffering from bad credit without too many stipulations on the contract. This is especially true if the cosigner has excellent credit. You need someone trustworthy to back up your business and provide the send of trust that acquiring banks need. The co-signer is just as responsible as you are for the account, which also puts some pressure on you to become more financially stable. You not only have a business to keep in the black but also another person to factor in.
Have Some Investment in the Business
If the business appears valuable to you, then it will appear valuable to the acquirer and card processor. Have some type of investment in the business you’re trying to get a merchant account for to prove how valuable it is. In the underwriting process, investments will prove to be of great value to those processing the application for your small business.
Submit a Clear Business Model
Having a clear e-commerce business model shows payment processors what to expect from your business. It shows the direction you’re headed, the effort you’ve taken to create the business, the value of the business, and how well-organized it is. Better organization can be a sigh of relief for processors because it acts as proof that you’ve covered every inch of ground. Less risk, better approval.