Difference Between High Risk and Low Risk Industries
You must have heard of the term high risk and low risk industry. These are the two types of risks associated with a business or industry. Various factors determine whether a business belongs to a high risk or a low risk industry. These factors include the duration of your business’s existence, reputation, financial health, industry, and the type of risk you are assessing. Other factors can also be considered to help determine the level of risk your business is in.
While high-risk industries have a high percentage chance of loss of capital or underperformance, low-risk industries come with a relatively low percentage of a devastating loss. What are high risk and low risk industries? Let us find out.
What are High Risk Industries?
Based on the history of all industries, there are specific industries that are automatically deemed high-risk. Those industries are called high risk industries. They are more at risk of financial collapse. This category can also include individual merchants based on multiple factors such as an account that has been closed, poor credit card processing, high chargeback rates, and history of merchant termination.
Which Businesses Are at the Highest Risk?
Though it’s difficult to determine all the businesses and put them into a tiny list, some MCCs ( Merchant Category Codes) pose elevated risks that include gaming, prepaid debit cards, pharmaceuticals, tobacco, E-cigarettes, cannabis products, and ticketing events.
How can Business Owners be Seen as High Risk Merchants?
Various factors can drive a business into a high risk category. A business is considered a high risk if:
- It is located in countries where there is a high risk of chargebacks.
- It is in an industry that has a high volume of chargebacks.
- It offers subscription-based services or products;
- A new business that has very few or no credit card processing records.
- Multi-currency businesses.
- It sells high-dollar products and services.
- It has lost its merchant account due to the high volume of chargebacks.
- The company has a bad credit history.
Though you have little control over the risk associated with your industry area, you can take some steps to lower the risk associated with your business. You can:
- Reduce your chargebacks by shipping all your orders on time and ensure that the delivery is on time.
- Promises that you cannot keep are not worth keeping. While you want to impress your customer with great promises, if they don’t get what they wish for or the product doesn’t live up to their expectations, they won’t be willing to pay for it. So, make sures your customers are satisfied.
- You should monitor your e-commerce activity. It would be best if you were cautious about your internet transactions as fraud is common. Also, be suspicious if the billing address and shipping address are not correct before you place an order. It is always wise to verify or ask for confirmation.
Now that you have about high risk industries, let us talk about low risk industries.
What are Low Risk Industries?
It takes very little capital to start a low risk industry or business. Small business ideas often require little investment. Many people don’t understand these ideas or how they might fit into their plans. In a low risk or low capital industry you don’t need to invest a lot of money as the small business ideas are simple to implement. These ideas, if executed well, can ensure that the business prospers and is financially profitable.
Low risk doesn’t necessarily mean that a company is less likely to be sued by a payment processor. A low-risk merchant category includes any business that does not fit the criteria of the high-risk counterpart. So, if you are looking to secure your future, you can go for a low risk business like consulting, tutoring, direct sales, virtual assistant, dropshipping, freelance services, affiliate marketing dropshipping, etc. These small scale industries with low risks are surely becoming the favourite among the masses.
How can Business Owners be Seen as Low Risk Merchants?
A business owner will be seen as a low risk merchant if it:
- Brings less than $20,000 a month in revenue aspect
- Have a very low or at times zero chargeback ratio
- Operates as a corporation in a low-risk state.
- Operates in a shallow risk environment
- Have an average ticket size below $50.
- Has good financial stability i.e., it generates stable streams of revenue.
- As an owner, you have a good credit score and good credit card processing records.
- Sells low-dollar products and services.
Businesses tend to make some mistakes, and some of them can cost them huge expenses. However, with the right amount of planning, funding, and flexibility, businesses operating in high-risk or low-risk environments have a better chance of succeeding.
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