Starting a business has numerous financial complexities. It can feel like a bit of a minefield, meaning that most new business owners choose to approach their existing bank for funding, business bank accounts, and card processing. But where do you start if they decline your application?

Here we’ll take a look at what to expect when working in ‘high risk’ industries and how to make sure you apply to the most suited bank for your requirements.

Firstly, let me introduce myself — Libby James, Co-founder of Merchant Advice Service, we specialize in helping business owners when they have been terminated or declined card processing both of which can be common when starting up a company. Having successfully secured alternative card payment facilities for high-risk businesses, I’m keen to share my tips.

Card Processing Explained

The growth of Merchant Services in recent years has been huge, with a wide variety of businesses now accepting card payments from retailers and service providers to hospitality businesses. Card processing can be split into two categories — face to face payments and customer not present transactions.

Face to face transactions requires a Chip and Pin Terminal and Merchant Account to work alongside it. The Merchant Account is the bank that authorizes payments and moves funds from customer bank account to the business. 

Customer not present transactions include telephone payments and eCommerce sales. Both work using a Merchant Account to authorize payments and a Payment Gateway, which encrypts customer card data ensuring transactions remain secure. 

Getting accepted for payment processing doesn’t always come easy — here we take a look at what to do if you’ve been declined a Merchant Account or Payment Gateway.

Why has my card payments application been declined?

When applying for card processing, as with any type of financial agreement, your application can be declined for many reasons. It’s important to establish why the bank you approached doesn’t want your business before looking for alternatives so here are some possible reasons;

Adverse credit

Although the business you are starting is completely new,  previous companies and personal credit will be taken into account when reviewing a new card processing application.

High-risk industry types

These can include; travel agents, furniture distributors, pharmacies, tech companies. There’s quite a list — and some you might be surprised at.

No processing history 

Now, this is a tricky one for start-ups however some banks will want you to have a solid processing history if you plan to operate in a higher risk sector before they will consider an application.

Business plan/documents

With new companies it’s important to have a firm business plan in place, accompanied by relevant paperwork such as terms and conditions, etc. Without these, the bank’s underwriting team will struggle to accept a new application.

Why is my new company deemed high risk?

The most common cause for applications being declined is falling outside of the banks’ acceptance criteria, meaning it’s too risky to onboard your new business. Your company could fall into the high-risk category due to a number of factors, but the main one is historic chargebacks and fraud within the sector. 

A chargeback is where the customer raises a complaint against the business and is refunded, it’s then up to you to contest the issue in order to obtain the funds, a prime example of this is customers not receiving delivery of goods. This is why terms and conditions as well as complaints procedure feature heavily in the application process for new businesses.

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I’ve been declined, can I get an account elsewhere?

Being terminated or declined card processing can come as a nasty shock for new business owners. But just because you’ve been rejected by one bank doesn’t mean another won’t want to onboard your company.

As previously mentioned, it’s important to establish why your application was declined. That way you can look at approaching alternative card processors. For example, if your credit caused the application to be denied it’s important to disclose your credit history in detail on the next application. 

Each bank has a set of individual criteria, which changes regularly, some will be willing to onboard higher risk companies and others won’t. For the banks, it’s all about balance and ensuring their portfolio of customers falls within their risk appetite. 

When looking for alternative card processing it’s worthwhile using an unbiased Broker. They should be up to date with the most recent criteria for the panel of banks they use and therefore be able to establish where your company would best sit.   

Terminated accounts for new business

Challenger banks such as PayPal will offer a quick turnaround time when it comes to setting up payment processing. The downside to this is that they will often onboard new or smaller businesses then terminate them after a short period of time. 

Your notice period will depend on the existing bank you use; however, this can sometimes occur with immediate effect, which can cause additional headaches for new companies. This highlights the need for both cost-effective and suitable card processing.

What to expect when using an alternative payment processor

When it comes to money, most will want to use a bank they have heard of with a reputable history, however depending on the industry your new business is targeting, high street options may be out of the question. 

As well as the obvious, checking out reviews, it’s important to do your research in terms of service levels especially when trading online. Ensuring your preferred bank and payment gateway are not only secure but assist you with keeping chargebacks and the risk of fraudulent transactions as low as possible. 

Alternative providers who will accept applications from higher-risk businesses which are also start-ups may require additional paperwork to support your application. For example, they may also request a rolling reserve is put onto your account, among other eligibility requirements. 

What’s a rolling reserve? 

A rolling reserve is a deposit that will sit on your new account, it helps counterbalance the risk involved in processing payments. The bank will offer terms and a rolling reserve percentage of processed funds will remain on your account for a stated period of time, ordinarily a few months. 

For new businesses this can feel like a bit of a blow, having funds withheld from you in the first few months can be tough. It’s important to remember that a rolling reserve is protection for you as a business as well as the bank. Think of a rolling reserve as your safety net.

Cost of card payments with alternative processors

Despite being declined by your existing bank or preferred provider the cost of processing with a higher risk bank may not be as extortionate as you might think. When approaching banks it’s always worthwhile to have a copy of your quoted costs (even though you’ve been declined) Setting the level of expectation with your new bank will help lower their comparative quote.

When approaching new providers bear in mind what we’ve covered in this piece, plus the reason your previous applications were declined in the first place. Understanding the potential issues which some banks may have with your application and counterbalancing those as part of the new application is vital, for example:

  • Business plans and strong financial projections in place for new companies
  • Be sure your business fits within risk appetite — this can be done with a quick qualification call
  • Have proof of your chargeback procedure and Terms and Conditions for high-risk businesses
  • Be willing to accept terms such as Rolling Reserve or longer settlement times

Taking the time to present your application in the best possible light will increase your chances of passing underwriting checks and therefore finding a suitable bank to onboard you. Prepare all of the necessary paperwork, do your research and don’t be afraid to look for alternatives if you’re denied.

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AvatarLibby James

Libby James Co-Founded Merchant Advice Service with the aim to provide free of charge, non-biased advice to business owners helping them to make informed decisions when it come to card payments and business finance. Specialising in alternative card processing, she is well equipped to answer any tricky industry questions.