Any business wishing to process customer transactions made by payment card will require a merchant account. These specialised accounts, sometimes referred to as merchant IDs, offer customers the freedom to pay for purchases by credit, debit, or some other form of store card.
To establish a merchant account, an agreement must be made between the merchant and a merchant acquiring bank. A merchant acquiring bank is integral, as it is through this that attempted transactions made by payment card will be processed and authorised (or rejected depending upon various factors, such as lack of funds).
With an estimated ability to generate 30-70% additional customer traffic, and their effect on the speed of processing customer transactions, merchant accounts are understandably appealing to modern merchants.
Read our guide to merchant accounts for more detail.
What exactly is bad credit?
Bad credit refers to a negative record of an individual, or business’s, credit history. Credit reports will reveal details concerning past borrowing and repayments, constructing a credit score based on various factors including past levels of debt and any late or missed repayments.
Figures released by the UK Insolvency Service reported that the instances of businesses going into administration hit a seven year low between July and September 2012, with just 548 being registered.
However, a spokesperson for Price Waterhouse Coopers cautioned that UK traders were not out of the woods yet as there were estimated to be in excess of 146,000 so-called zombie companies still trading. These are businesses who are still in the position to manage the interest on their debt but have no extra reserves left to keep their services running profitably and drive growth until the economy takes an up-swing.
What is the impact?
A credit check will be run by the acquiring bank. Businesses with poor credit ratings will be viewed as a risk to financial service providers, owing to the lack of evidence that payments can be consistently made.
Indeed, just as a bad credit rating can hamper access to financial services, such as credit card and mortgage applications, so too can it reduce the likelihood of securing a merchant account.
In comparison to those deemed to be of low-risk, merchants with a poor credit history may be subject to significantly higher fees when obtaining a merchant account. Alternatively, providers may simply reject the merchant’s application.
For those traders who have unfortunately run into difficulties and have subsequently received a low credit rating or are now considered to be a bad risk by financial providers, what are the possibilities of securing a merchant account to allow them to continue operating and delivering a service to their customers?
Help for Getting Back on Track
There are a number of merchant account providers who specialise in helping those with ongoing credit issues or who may have come out of insolvency, but most will wish to carry out a risk assessment on the applicant before agreeing.
This will include the number of defaults the individual or company has, how old they are, how far apart, how much they were for and if they have been settled or not. For those with more than one CCJ (County Court judgement) or IVA (individual voluntary arrangement) in place, the options become more limited but there may still be opportunities for merchant account provision available.
Factors such as the number of defaults and the level of debt still owed will vary from merchant to merchant, and providers will take these factors into consideration when deciding whether or not to approve a merchant account. Consequently, the available options are no guarantee of merchant account approval.
Getting It Right
Many traders with credit issues will automatically assume that they will have to pay more for the provision of their merchant account than more favoured applicants; this is not always the case. Each provider will have their own set of criteria for acceptance and it may well be possible to locate one who will be prepared to offer you an account with reasonable charges and conditions.
Begin by asking each provider for a list of their requirements and be perfectly honest with them about your financial circumstances; some may ask for a co-signee who will act as a guarantor on behalf of your business and take responsibility for any debt you may accrue. Obviously this is a high risk strategy and you will need to discuss the responsibilities and implications that such an arrangement would have on both parties.
Once you have a list of those who would be willing to offer a merchant account to a high risk business, investigate them thoroughly and delete any which have a poor reputation of extortionately high charges or unacceptable terms and conditions. Whatever your circumstances, the agreement still has to be viable and provide you with the opportunity to conduct your business in a profitable manner. Having the ability to trade and accept card payments will be of no consequence if all of your profits are spent on servicing the charges set by your merchant account provider.
When you have your final list of potential providers, compare them based on their individual fees, charges and conditions. For example, if you will be processing a high volume of transactions, it would be advisable to opt for a provider who may have a higher set up fee but offers a lower charge per sale. A smaller business with less complex requirements could choose a no frills account which will provide the same level of processing systems but will exclude add-ons such as a repeat billing facility and a virtual terminal.
More information about about fees can be found in our article on UK merchant account fees.
There are a number of third party institutions who will be able to arrange merchant account facilities with certain banks that specialise in provision for high risk traders. With a network of acquiring banks on the books, each with their own set of criteria, it is possible for them to find solutions for virtually every eventuality.
Companies such as ACG (Accept Cards Guaranteed) offer potential applicants benefits including instant approval (within 24 – 48 hours), no set up or cancellation fees and no long term contracts or leases. For those traders on the TMF (Terminated Merchant File) they can provide an off shore account, returning the facility to domestic provision within 3 months of the trader affirming a good trading and credit history.
The High Risk Merchant Account and Payment Gateway provided by Web Merchant is offered under a month by month contract. This has a *£200 set up fee, a *£25 monthly charge and a 4.4% credit and debit card transaction fee. Settlements are paid weekly (7 days in arrears) and the rolling reserve amount will be dependent on the specific circumstances of the applicant.
Two more mainstream providers are CardSave (part of the WorldPay Group) and Nochex. Both have a positive reputation for providing merchant accounts for those businesses with bad credit issues (dependent on circumstances) with Nonchex offering options with a *£50 set up charge and a 2.9% +20p per transaction charge and CardSave delivering simple application, low set up rates and very competitive charges.
* All prices and information correct as of February 2014.