What Are High-Risk Businesses & Products?
It doesn’t matter the type of business that you operate, the products that you sell or the industry that you are in. There are always going to be risks associated with operating a business. But, some businesses and products are considered to be high-risk.
Usually, a business can get labeled as high-risk if they meet the criteria for two conditions. The first is that they operate within a high-risk industry. The second is that they show a significant financial risk with the potential to fail.
A business could meet both conditions or just one. But they get used to addressing health and safety concerns and the profitability of your business.
Let’s take a deeper look into what makes some businesses and products high-risk.
Here’s What We’ll Cover:
What Are High-Risk Businesses?
One of the first things that investors look for in a business is its ability to generate revenue and profitability. When they look into these details, they want to see that the business will stay profitable and won’t run into financial problems.
High-risk merchants basically have a much higher possibility of financial failure. And since investors want to get the best return on their investment they might avoid investing in a business that is seen as risky.
Trying to determine a business’s risk level takes into account multiple factors. Think about this example:
A low-risk business might average less than $20,000 per month in sales volume and less than $500 per month in credit card transactions. They only accept one single currency, don’t offer recurring payment options and are not located in a high-risk country. The business focuses on selling things like books, clothing and office supplies.
A high-risk business might average over $20,000 per month in sales volume and over $500 per month in credit card transactions. They accept multiple different currencies and also offer recurring payment options. The business also has excessive chargeback rates and is located in a high-risk region. They sell things like digital technologies and other software.
An investor might look into both of those companies and make the determination that one is more high-risk compared to the other. They would come to this conclusion based on the details about how the business operates.
What Are High-Risk Products?
A product might get considered to be high-risk depending on the industry that it gets sold to. To figure out if an industry is high-risk, several factors get considered. A high-risk category could be instances of fraud, total returns or debit card chargebacks.
Total sales volume and credit card chargebacks are also used to help classify certain business types. Some of the most common products with risk factors include:
- Prepaid debit cards
- Casinos and online gaming
- Pharmaceuticals and drug providers
- Telemarketing sales
- Adult entertainment and dating services
- Airlines, ticketing agents and travel agencies
- Subscription services like magazines
- Computer hardware and software
- E-cigarettes, tobacco and cannabis
One thing to remember is that the products and services that you offer are the most important factors in determining your risk category. Even if you operate in a low-risk industry, you might get flagged as high-risk by processors depending on the products and services that you sell.
There can be some major implications for your business if you are considered to be high-risk. For example, if you submit an application for a high-risk loan and you have a bad credit card history, you will pay a much higher loan rate and down payment. Some businesses face certain expenditures for compliance reasons and credit history can play a role.
Plus, if you are considered a high-risk business then your insurer could charge you much higher premiums. It’s also important to remember you could face fines or lawsuits if you don’t comply with certain federal, state and local requirements.
The good news is that there are steps that you can take to help keep your business from turning into high-risk. Some of the best things that you can do are to follow business best practices and ensure you provide excellent customer service. You could also put a strategy in place to avoid chargebacks whenever possible.
The chargeback risk can contribute to your business getting labeled as high-risk. Plus, excessive chargebacks negatively affect your own operations, as well. You lose profits from the sale and you can get charged restocking or shipping fees.
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