Way to Go! You found your calling and you're ready to run the exciting race that is entrepreneurship. Starting a business can be thrilling and fulfilling, but certain ventures are riskier than others, especially those deemed “high-risk”. A high-risk business is a type of business that faces a higher chance of financial challenges or potential losses as a result of high fraud potential, chargeback probability, and other regulatory restrictions that would prevent them from obtaining a merchant account & repel investors. While all businesses entail risk, specific signs can point to a high-risk venture. Identifying these signs early on enables informed decisions and strategies to minimize potential pitfalls. In this article, we'll explore key indicators for recognizing high-risk businesses and how to maneuver around them.

Industry Type Uncertainty

Certain industries are deemed high-risk by financial institutions for various reasons. Industries subject to increased government oversight, such as firearms, tobacco, and alcohol, face regulatory restrictions that classify them as high-risk. Industries that have recently experienced reduced regulation, and industries with higher average transaction amounts, like jewelry, are considered high risk. Similarly, seasonal industries such as agriculture, construction, and accounting can fall into this category due to their inconsistent revenue streams.

Complex Regulatory Environment

Operating in a highly regulated industry or jurisdiction amplifies business risks. Understand the legal landscape governing your industry before diving into a high-risk venture. Identify hurdles, licensing requirements, and compliance costs. Non-compliance can result in penalties, lawsuits, or business closure.

Lack of Established Demand

Launching a business without an established demand for your product or service significantly increases the risk factor. Before venturing into a high-risk business, it's crucial to validate your concept by conducting market surveys, focus groups, and analyzing customer behavior. Determine if there is a genuine need for your offering and assess whether you can create a sustainable demand that can withstand market dynamics.

Chargeback History

Excessive chargebacks are a major red flag in the eyes of financial institutions. A chargeback occurs when a cardholder requests the reversal of a charge. Tier-one banks typically allow a maximum chargeback ratio of one percent per month, while high-risk merchant account providers may set a higher threshold, up to three percent. A high chargeback ratio indicates poor operational practices, potential merchant fraud, or susceptibility to fraudsters, which financial institutions actively seek to avoid. Consequently, they deny their services to businesses with high chargeback ratios. Chargebacks are not only undesirable but also costly. When a chargeback occurs, the business loses the transaction funds, expenses incurred during the sale, and incurs a chargeback fee. If the merchant account or reserve account lacks sufficient funds, the responsibility for these costs may fall on the acquirer or processor. Hence, financial institutions prefer to work with merchants that maintain low chargeback ratios to mitigate such situations.

Processing History

Your business's processing history provides a diagnostic assessment of its financial health. Processors analyze factors like chargeback ratio, scaling speed, and other elements to gauge future performance. Additionally, processing history reveals the types of payment methods accepted, such as international or domestic cards, debit or credit cards, and other methods, with international cards considered riskier.

Limited Experience or Expertise

Embarking on a high-risk business venture without industry expertise is risky. Insufficient knowledge of the market intricacies, operational challenges, and industry nuances raises failure chances. Minimize risks by partnering with experts, hiring consultants, or acquiring relevant skills and knowledge.

Starting a high-risk business requires careful evaluation and strategic planning. Despite industry type, recognizing the signs and characteristics of high-risk businesses is crucial for entrepreneurs and investors alike. Industries subject to regulatory restrictions, unpredictable revenue streams, or higher chargeback ratios are often deemed high-risk by financial institutions. Understanding the complex regulatory environment, establishing a demand for your product or service, and assessing chargeback history is essential to mitigating risks. Furthermore, analyzing your business's processing history and seeking industry expertise can contribute to informed decision-making and successful navigation of high-risk ventures. By identifying these indicators early on and implementing strategies to address potential pitfalls, entrepreneurs can increase their chances of success in the dynamic and challenging world of high-risk business.

Looking to embark on a high-risk business venture?

At TCB Pay, we specialize in supporting small independent business owners operating in high-risk markets, taking one less worry off their backs. Our services encompass various aspects, including payment processing, business consultancy, and dedicated customer support, and support a wide array of high-risk businesses in markets that range from CBD/Vape/Hemp to Pharma/Nutra. We take pride in offering dependable resources that empower these businesses to compete effectively. 

Visit our website to learn more about how TCB Pay can help with your high-risk business. Contact us at support@tcbpay.com or call/text at 866-444-8585 to learn more.