Not all businesses have a perfect credit history. After all, we’re living in economically challenging times, and this has taken its toll on many small businesses in particular. If you’re struggling with finding a merchant account because you have a bad credit history, there’s no need to worry unnecessarily. There are avenues available to you; it’s simply a case of understanding the process and maximizing your chances of successful application. That’s exactly what we’re going to talk about in this guide.
It’s also important to realize that you’re not alone in this situation. A 2023 Goldman Sachs report states that 33% of small businesses applied for a new loan or credit in the previous year, with 65% of those applicants struggling to access affordable options. Understanding how to get a merchant account with bad credit requires careful moves, but a PayCompass we’re on hand to help. Our bad credit merchant accounts have successfully helped many businesses get back on track, processing more than $3 billion worldwide across more than 170 countries.
As you can see, all is not lost. Let’s explore how to open a merchant account with bad credit and get you back on the road to success.
TL;DR
- Bad credit merchant accounts are for businesses with low credit scores or high-risk profiles.
- Improve approval chances by organizing financial documents, reducing outstanding debts, and preparing a clear business plan.
- Consider providers offering no credit check options, though they may come with higher fees or stricter terms.
- Establish long-term processing stability by maintaining consistent sales, avoiding chargebacks, and building trust with your provider.
- Ensure your payment system is compatible with the processor’s tech requirements and supports secure, scalable transactions.
- Tailor your approach based on your industry. Some high-risk sectors have unique expectations or preferred providers.
- Carefully review contracts to understand fees, reserve policies, and termination clauses to avoid legal or financial pitfalls.
- Focus on improving your credit, customer service, and transaction history to transition to better terms over time.
- PayCompass offers bad credit merchant accounts to help you access payment processing services.
Understanding Bad Credit Merchant Accounts
When learning how to get a merchant account with bad credit, it’s first important to understand that the situation isn’t set in stone. Bad credit doesn’t necessarily disqualify you from obtaining a merchant account, it may simply make the process a little more challenging. Traditional banks may reject your application, but there are specialized payment processors who do access businesses with less than perfect credit. At PayCompass, we have developed specialized bad credit merchant accounts for this exact purpose.
Having a clear view of the entire bad credit landscape empowers you to increase your chances of a successful application.
In general, a credit score below 600 is considered poor or bad, however many specialized providers often accept businesses with scores around 500. In most cases, there is a tiered approval system, and scores often correlate with processing limitations and reserve requirements. However, some processors also use alternative approval methods, such as business performance metrics and industry risk classification.
Of course, this means if you’re a business with bad credit and you fall into the high-risk industry category, your chances of success from many processors reduces. Yet, that isn’t the case with PayCompass. We look at each application on its own merit and offer fast approval. If your application isn’t accepted on that particular occasion, we’ll guide you with advice on how to improve your chances the next time you apply.
The Reality of Credit Checks in Merchant Processing
Traditional banks will carry out a credit check, and many payment processors also follow this practice. These are a standard part of applying for a merchant account. However, as we just mentioned, many payment processors now look before simple credit scores and assess other parts of your business, including risk and past performance history. This flexible approach makes it easier to gain acceptance by a quality payment processor, without going down the route of a costly no credit check merchant account, which often comes with extremely high fees.
Standard merchant account applications usually conduct a “soft pull” credit inquiry that looks at both your personal and business credit reports. This looks at payment history, credit utilization, and the length of your credit history in particular. Alternative methods include looking at your bank statements, processing history reviews, and your overall business model. These offset many credit concerns.
Why Traditional Banks Reject Bad Credit Applicants
Many traditional banks refuse high-risk businesses from the start, due to a higher risk of fraud and increased regulatory oversight. Additionally, banks often see bad credit as a red flag, indicating potential risk and financial instability. In this case, chargebacks, fraud, and business failure are all major concerns, due to their rigid underwriting models that automatically reject applications below a specific threshold – usually 600. In this case, it doesn’t matter if your business is strong in other areas, the application will automatically be rejected.
The Hidden Costs of "Guaranteed Approval" Solutions
When looking to open a merchant account with bad credit, be very wary of advertising campaigns that offer “guaranteed approval.” This is usually done without a credit check, and although it sounds attractive, it usually comes with extremely high fees, restrictive terms, and large rolling reserves. All of this will make it extremely difficult to run your business and your profit margins will suffer as a result.
Before you sign on the dotted line and commit to a payment processor, understanding the full terms of the contract and your merchant rights is vital. Many of these no credit check merchant accounts are simply too good to be true, as the table below outlines:
| Feature | Standard Merchant Account | “Guaranteed Approval” Account |
| Processing Rate | 2-3% | 4-7% |
| Rolling Reserve | 0-5% | 10-20% |
| Contract Length | Month-to-month or 1-2 years | 3-5 years with auto-renewal |
| Early Termination Fee | $0-300 | $500-1,000 + liquidated damages |
| Monthly Fees | $10-30 | $30-100 |
| Processing Limits | Flexible | Strict caps |
Strategic Preparation for Your Application
Learning how to get a merchant account with bad credit involves lowering your risk level and demonstrating a strong case.
Source: unsplash.com
The next step in understanding how to get a merchant account with bad credit is preparing to apply. Spending time at this stage gives you a much better chance of approval, and includes a clear view of what processors are looking for, emphasizing your strong points, and addressing any issues beforehand.
Creating a Compelling Business Case
Presenting a compelling business case is a vital step when looking to open a merchant account with bad credit. It’s vital that you show processors that even though you have credit issues, your business manages risk appropriately.
Include quantifiable performance metrics in your application, such as revenue growth rates, market position data, and customer retention percentages. Also add risk-to-reward calculations that focus on your projected processing volume and profit potential, weighed up against any potential risk factors. This will show that you’re actively managing any risk and moving toward growth.
Developing a Credit Explanation Letter
A key part of your application is a credit explanation letter. Rather than ignoring any past credit issues, it’s best to proactively address them and explain everything on your terms.
Within this, you should emphasize the steps you’ve taken to improve your overall financial management. By doing this, you’re showing accountability, and that you’re a responsible business owner, which goes a long way to reducing risk. Include any specific circumstances that led to your credit problems and how you’ve addressed those since.
A good format to follow includes a clear acknowledgement of the problem, a clear explanation with plenty of context, the actions you’ve taken to correct it, and your current financial situation, including stability evidence.
Showcasing Business Strengths to Offset Credit Weaknesses
Just as you would focus on your strengths rather than your weaknesses in a job interview, you should approach applying for a bad credit merchant account in much the same way. It’s important to focus on aspects of your business that showcase your stability.
This means demonstrating a strong cash flow and consistent revenue growth. You could also provide information about your established customer base, your industry expertise, and any value business assets. These all help the processor understand your overall situation and builds confidence in your overall viability.
Financial Documentation Strategies
Much of learning how to get a merchant account with bad credit relies on documentation. You must back up everything you say with solid evidence. Preparing these ahead of time will ensure you don’t miss anything and can impact on how underwriters perceive your overall stability.
Bank Statement Preparation Techniques
From an application standpoint, your bank statement is the most important document. This showcases your businesses finances beyond your credit score, and it’s your chance to show that you have financial stability and a solid cash flow.
Before you submit your bank statement, look at it carefully to ensure that you have solid average daily balances, a consistent pattern of deposits, and a minimal overdraft. It’s a good idea to apply after a period with strong financial gains, however some businesses choose to open a new business account and use it for three to six months before applying. Of course, during this time, make sure you run that account perfectly to showcase the highest standard of financial stability.
The checklist below will help you in submitting the strongest possible bank statement:
Bank Statement Optimization Checklist
- [ ] Maintain average daily balance exceeding 50% of monthly processing volume
- [ ] Establish consistent deposit patterns (frequency and amounts)
- [ ] Eliminate NSF incidents and overdrafts for at least 90 days
- [ ] Separate business and personal finances completely
- [ ] Demonstrate regular payment of business expenses
- [ ] Maintain sufficient end-of-month balances
- [ ] Reduce large cash withdrawals
- [ ] Document any unusual large deposits or withdrawals
- [ ] Ensure statements cover at least 3 consecutive months
- [ ] Consider including statements from multiple accounts if applicable
Creating a Risk Mitigation Plan
To financial institutions of any kind, bad credit automatically translates as high risk. And if you’re a high risk business in terms of payment processing categorization, that just adds to the burden. However, you can show that you’re proactively addressing any concerns with a strong risk mitigation plan.
Within this, outline how you minimize chargeback instances, prevent different types of fraud, and maintain your overall financial picture. The table below gives some suggested actions to include in your risk management plan:
| Risk Factor | Mitigation Strategy | Implementation Tools | Monitoring Method |
| Chargebacks | Clear product descriptions | Updated website content | Monthly review of product pages |
| Pre-fulfillment confirmation | Automated email system | Open rate tracking | |
| Post-purchase satisfaction | Follow-up survey | Response rate analysis | |
| Fraud | Address Verification (AVS) | Payment gateway settings | Daily transaction review |
| Card Verification Value (CVV) | Required field at checkout | Decline rate monitoring | |
| Velocity checks | Transaction monitoring software | Alert threshold adjustment | |
| Cash Flow | Reserve account | Dedicated savings account | Weekly balance review |
| Expense reduction plan | Accounting software | Monthly variance analysis | |
| Alternative revenue streams | Product/service diversification | Quarterly revenue mix review |
Financial Documentation Strategies
Building strong business partnerships can help you open a merchant account with bad credit.
Source: unsplash.com
Validation from external sources can also increase your chances of approval, particularly when your credit score is troublesome. Written recommendations from suppliers, business partners, and respected vendors can boost your chance of success by showcasing your reliability and industry standing.
Leveraging Industry Relationships
When using written recommendations, remember to include specific details of your payment history, including average days-to-pay and your maximum historical balance. It’s even more beneficial if industry relationships exceed a year, as this shows long-term stability.
Additionally, try to include any supply chain documentation that shows a consistent pattern of ordering and paying on time.
Building Long-Term Processing Stability
Understanding how to open a merchant account with bad credit is just the start, and it’s important to have a clear plan for building processing stability. Over time, this will help you move to favorable terms that benefit your business growth strategy.
Building Credibility Through Processing History
We’ve mentioned that merchant account no credit check options tend to have restrictive terms and can impact on your financial health, so it’s better to opt for a reputable processor with a forward-thinking approach. In this case, you’ll move away from bad credit terms as you build your processing relationship and demonstrate your reliability and stability.
However, how you manage your merchant account is key, requiring strategic volume management and reducing chargebacks. All of our merchant accounts have built-in chargeback prevention, which takes the worry away from high chargeback fees and disputes. However, not all payment processors have this feature, so you’ll need a plan regarding how you’ll manage them.
Strategic Volume Management
One of the key metrics in building a strong processing relationship is strategic volume management. It’s a good idea to start with a conservative processing volume and then slowly increase it as your history builds. Your processor may trigger an alert if you have a large transaction out of the blue, or if you volume spikes without warning. For these reasons, working closely with your account manager allows you to develop a strategic growth plan that aligns with your needs while also building the level of confidence required to access better terms.
Chargeback Prevention as a Credit Rebuilding Strategy
We briefly mentioned chargebacks, and these are one of the biggest issues for high-risk businesses, and when you explore chargeback statistics, you’ll understand how common they are.
Maintaining a low chargeback level is a strong way to show your reliability. You can do this by having clearly communicated refund policies without any confusing terminology, clear billing descriptors, and product or service quality controls. Also ensure your customer support is high-quality as this will help customers feel they can contact you first, rather than simply filing a chargeback dispute.
Technical Integration Considerations
Another important part of understanding how to get a merchant account with bad credit is looking at technical integration too. For instance, choosing the right payment gateway can impact your processing capabilities, and some offer extra security features that can go a long way to offsetting credit worries.
It’s also important to conduct a technical compatibility assessment that looks at your current business systems and compares them with potential processing options. That way, you can quickly identify any integration issues ahead of time and be proactive.
Gateway Selection for Credit-Compromised Businesses
The right payment gateway can boost your chances when looking to open a merchant account with bad credit.
Source: unsplash.com
Choosing the right payment gateway for your needs is important for all businesses, but if you have bad credit, it’s even more crucial. As we mentioned, some gateways have extra security features and these can reduce risk by a significant amount, boosting your security profile.
Gateways with PCI-DSS level 1, and SOC 2 can strengthen your application because they show a commitment to overall security for your business and customers. Look for routing capabilities that enable transactions to be moved through more than one processor to ensure operational continuity. Additionally, tokenization shows your commitment to the highest level of security.
Industry-Specific Strategies
Many industries have specific challenges to face when looking to open a merchant account with bad credit. Although opting for a no credit check merchant account can over reduce these challenges, remember that the pay off usually comes in the form of restrictive terms and high fees. Instead, look at how you can overcome your industry’s challenges to secure better terms with a payment processor.
E-Commerce and Digital Product Nuances
Businesses selling digital goods online fall into the high-risk category. This is because there is a high chance of chargebacks and fraud, which many payment platforms, such as PayPal, won’t accept. PayCompass’ e-commerce merchant services help you overcome these issues, but understanding the reasons behind such challenges is important.
Another reason for the high-risk label is because of difficulty in verifying delivery, which affects underwriting, especially for businesses with bad credit. Implementing solid fraud protection tools can help offset these concerns by reducing your overall exposure to fraud.
Subscription Billing Risk Mitigation
Continuity subscription merchants also face payment processing challenges due to regulatory scrutiny, worsened when you factor in bad credit issues. To overcome these hurdles, it’s important to have very clear subscription terms and proactive renewal notifications. This ensures that your customers have no confusion in terms of their subscription payment dates, amount, and when it renews, either automatically or manually. It’s also a good idea to have a grace period for failed payments to help reduce chargebacks and show that you’re committed to responsible billing.
Retail and Service Industry Approaches
A retail business with a physical store has a slight advantage in terms of securing a bad credit merchant account, however there are still challenges to overcome.
The reason is because physical business locations are an asset that can help to relieve concerns in underwriting evaluation. It’s also true that in-person transactions are far less likely to be fraudulent compared to online and card-not-present payments.
Point-of-Sale Selection Strategy
It’s vital that retail businesses choose the best POS system because this can help with detailed reporting and transaction transparency. Look at systems that have integrated inventory management features to streamline your business operations, along with solid reporting capabilities.
Legal and Contractual Safeguards
We’ve explored the fact that businesses with bad credit often face less favorable terms, especially if you go down the route of a no credit check merchant account. However, learning how to negotiate and manage agreements can help you protect your business and move toward more advantageous terms in the future.
Contract Term Navigation Strategies
Many merchants with bad credit end up with longer contracts with strict terms. Assessing these before making a choice is key, allowing you to negotiate and potentially modify some of the more concerning aspects.
Identifying and Addressing Problematic Clauses
Look closely at contract termination terms, reserve requirements and fee adjustment provisions. These are the most important aspects that could affect your operations over the long-term. Unilateral change clauses are a red flag, as these allow a processor to change the terms without any notice.
Once you’re clear on what your contract contains, ask for clear criteria for reserve adjustments and caps on how much they’re allowed to hold. If possible, negotiate graduated reserve reductions based on payment processing performance, usually set in milestones.
Performance-Based Term Improvement Pathways
As you demonstrate that you can maintain your merchant account without issues, it’s important to negotiate performance criteria that could lead to term improvements. To do this, ask for clarity on when and how terms will improve based on volume consistency, chargeback ratios, and your overall processing history. This needs to be crystal clear at the start so you can formulate a plan to work toward.
In most cases, performance criteria involve clear metrics such as chargebacks maintained at a specific percentage, or authorization rates above a certain amount, e.g., 90%.
Navigating Processor Compliance Requirements
Most payment processors impose strict compliance monitoring on businesses with bad credit, so it’s vital that you understand what is expected of you from the start. This will help you avoid any unexpected restrictions or terminations due to non-compliance.
Often, compliance monitoring involves transaction pattern analysis and periodic financial updates. It’s vital that you demonstrate robust record-keeping, as documentation requirements are usually a lot more extensive for businesses with bad credit. It’s possible that you may need to report more often, e.g. with monthly financial statements, along with immediate notification of any changes to your business.
Learning Recap
We’ve covered a lot of ground in this guide to how to get a merchant account with bad credit, and one key takeaway is that while it’s challenging, it’s not impossible.
If you have a credit score of 600 or below, you are likely to find it difficult to access a merchant account through a bank or standard payment processor. However, that isn’t the end of the story. There are many specialized payment processors that offer bad credit merchant accounts, including PayCompass. These focus on other aspects besides credit ratings, such as financial reliability and fraud risk reduction.
Many businesses go down the route of a merchant account with no credit check but it’s important to be cautious. These accounts often have strict terms, high fees, and considerable reserve requirements. Instead, look to develop a robust application that highlights your strengths and your financial stability, while addressing any credit issues proactively.
At PayCompass, we don’t believe that poor credit should be a barrier to you running a business, and we offer bad credit merchant accounts with fast approval. If you aren’t approved, we will give you as much information as possible to increase your chances the second time. We also understand the challenges of high-risk payment processing and design our products to help you overcome these issues.
Keen to learn more? Reach out to us today.
