Posted: by Bronte
What Is a High Risk Business?
The term “high risk business” may seem pretty intimidating to new, or even seasoned business owners. However, the term has less to do with success potential than you might think. A high risk business is any business that operates within an industry that is considered risky or unsafe, and/or any a business that has a higher than average risk of financial failure. Either one, or occasionally both, definition(s) may apply to any single business, depending on factors like location, industry type, local culture, and the age of the business.
What Makes a Business High Risk?
As a business owner, it might surprise you to find out what makes your business or industry risky. Several factors can make a business high risk, which may be both specific to your business and pertain to the overall industry in which your business operates. High risk classifications break up in two ways:
The Red Zone
The “red zone” refers to businesses that are considered risky independent of their business’s individual history. Factors that can put businesses into the red zone are:
- High industry average of employee turnover.
- Higher risk of chargebacks.
- High volume sales.
- Service-only or intangible goods.
- Adult-oriented services (this includes services such as gambling, tobacco, weapons, alcohol).
- High employee injury or harm rates.
- Non-compliance with industry security regulations.
The Grey Zone
The “grey zone” refers to businesses that are considered risky because of their previous business history. Grey zone factors include:
- Poor or no business credit score.
- High chargeback frequency.
- International merchants/accepting international currency.
Common Examples of High Risk Industries
Each of the industries listed below are in the red zone, or are high risk based on their industry, for a variety of reasons. These examples should provide you with some practical reasons why your industry or business may fall into the high risk category:
- Accounting & Tax Prep: Experiences seasonal influx, strict compliance guidelines, and is a service-only industry.
- Adult: Deals in sensitive content with reputation considerations.
- Bail Bonds: Serves a vulnerable population at high volumes.
- CBD & Hemp: Requires strict compliance guidelines and reputation considerations.
- Cigars & Tobacco: Requires strict compliance guidelines and is considered a bodily harm/health risk.
- Clothing & Apparel: Serves high volumes of customers, often internationally or through e-commerce.
- Continuity & Subscription: Deals largely in services with international currency.
- Credit Repair: Sells a service to populations with poor credit.
- Debt Consolidation: Sells a service to populations with poor credit or vulnerable populations.
- Digital Downloads: Deals in high volumes sales with intangible goods.
- Document preparation: Sells a service.
- Drop Shipping: Deals with international merchants and international currency.
- Electronics: Sales occur at high volumes with some chargeback risk.
- Guns & Firearms: Requires strict compliance guidelines and considered is considered a bodily harm risk.
- High Volume: Works with international merchants and currency with Increased chargeback risk.
- Hunting & Outdoor Equipment: Requires strict compliance guidelines and can be a bodily harm risk.
- Jet Charter: Works with international merchants and currency with high-volume sales.
- MLM Credit Card Processing: Processes high volume and can be service-only or intangible goods (like downloads).
- Nonprofit: Requires strict compliance guidelines and works with international merchants and currency.
- Nutraceuticals & Supplement: Requires strict compliance guidelines.
- Property Management: Deals with high employee (tennant) turnover rates.
- Saas Companies: Deals in service-only and intangible products.
- Self Defense, Tasers & Stun Guns: Requires strict compliance guidelines and can be viewed as a bodily harm risk.
- SEO & SEM Services: Deals with service-only and intangible products.
- Smoking Accessories: Requires strict compliance guidelines and considered a bodily harm/health risk.
- Tech Support: Deals with service-only sales.
- Vape & E-Cig: Requires strict compliance guidelines and is viewed as a bodily harm/health risk.
- Web Design Services: Deals in service-only and intangible products.
The Consequences of Being a High Risk Business
High risk businesses may experience more consequences and difficulties from e-commerce payment processors and financial institutions. As a high risk business, you may experience:
Stricter Application Processes
When applying for financing for your business or searching for the right payment processing solution for your goods and services, being a high risk business may make your application process harder. Most financial institutions are looking to take on accounts that pose minimal risk, so higher-risk customers will often experience a more involved application process. This could include needing more supporting evidence about your business’s finances, or having a required reserve amount in your account — often based on a certain percentage of your sales — for payment processing platforms.
As a high risk business or industry, you may also have more strict health and safety compliance requirements, or be under more frequent investigation. This can be specifically true for e-commerce sites that are vulnerable to online retail fraud, or industries that score high on the U.S. Health and Human Services Risk Index. To mitigate these increased risks, you’ll need to be properly following all PCI compliance measures if you’re an online business, and any OSHA requirements if your industry poses any health or bodily risk to your employees.
High Risk Merchant Account
Many high risk businesses need a high risk merchant account to be able to accept non-cash payments. A high risk merchant account is an account through which your business will process customer credit cards. These types of accounts vary from the traditional low risk merchant accounts because they are able to support industries that many others cannot. This limits the choices of processors and will come with higher fees than your low risk counterparts. Because of this, it can be difficult to find the best partner, and may require shopping around for a merchant account. Having a high risk merchant account is a necessity for many red zone businesses in order to mitigate risk and still run your business effectively.
High risk businesses, especially businesses dealing with high volumes of online sales, are vulnerable to chargebacks. Chargebacks are when a customer disputes a charge they made with your business due to factors such as attempted fraud on a customer’s account, or a fault on the e-commerce merchant’s side. If a chargeback results in a refund to the customer by your payment platform, your business hasn’t compensated any loss. Chargebacks cost some high risk businesses thousands of dollars in revenue, which is why so many high risk businesses invest in chargeback prevention and protection.
It’s not impossible to find great success when starting or operating a higher risk business. The key is having awareness of what being a high risk business means for you. Being able to anticipate some of the difficulties you might face along the way, including chargebacks and increased compliance measures, as well as utilizing some of the solutions that are available to help you and your business succeed.