In a perfect world, everything about running your business would be smooth. Step one, sell stuff. Step two, make money. Step three, repeat.

In reality, there are all kinds of potential snags—like chargebacks and credit disputes.

When customers dispute charges, your financial standing can take a significant hit. Lenders and payment processors will begin to see you as a risk rather than an asset. That means you could have trouble getting funding for future capital expenses and business growth.

While there’s no way to avoid every chargeback, there is some good news. You can prepare for chargebacks and even create a strategy to reduce the overall number of disputes your business experiences. To avoid a low business credit rating, protect yourself from a chargeback ratio of higher than 1% by following these steps.

First, let’s take a closer look at why chargebacks happen.

How chargebacks work

A chargeback happens when a customer seeks to get their money back by going directly to the financial institution that issued their credit or debit card rather than seeking a refund from the business where the purchase was made. It’s called a “chargeback” because the previous charge is then reversed.

Chargebacks exist for good reason. They’re intended to protect credit card users from fraud. Chargebacks give customers a quick, easy process for disputing questionable charges.

But the same thing that makes chargebacks good for customers can also make them challenging for businesses. The process is easy. So easy that sometimes customers request a chargeback when fraud hasn’t occurred.

There are all kinds of possible scenarios. Maybe they didn’t like your product. Perhaps they thought something was misrepresented online. It could even be that they just didn’t recognize the charge on their credit card statement. There are a lot of potential explanations and not all of them are shady.

Once a chargeback occurs, there’s a process for appeal. Your business will have to prove you provided the product or service in question. This can take months to resolve.

In fact, the process of appealing a chargeback can cost more than the original product or service was even worth.

RELATED: Small Business Credit Cards vs. Small Business Loans

Why it’s important to avoid chargebacks

The obvious downside of chargebacks is painfully pragmatic. They cost money.

If you dispute a chargeback and don’t win, you’re out the money the customer originally paid for your product or service. Not only that, but there may be additional fees from your merchant services vendor to cover the extra work required to investigate and resolve the issue.

Lance Eubanks, the owner of Greenway Express Carwash, explains that chargebacks can cause even more damage in some specific situations.

“Chargebacks can be worse when they happen on a subscription charge,” Eubanks said. “I sell monthly packages, and when a customer disputes the charge and refuses to pay, I don’t just lose the money I would have made from that one transaction. I lose monthly revenue that I had anticipated from that subscription.”

It’s a frustrating one-two punch.

In addition to the lost profit, many credit disputes can also damage your business reputation. Your chargeback rate is a key metric financial services companies monitor. It plays a significant role in the decision to lend funds or handle payment processing.

Your chargeback rate is a measure of the percentage of your total transactions that have triggered a chargeback. The standard threshold of acceptability is 1%.

If your chargeback rate is higher than 1%, your financial service providers might terminate your account. That would force you to open new accounts which would then be more difficult given the damage to your reputation.

It can become a vicious cycle.

RELATED: Applying for Small Business Grants and Loans

Ways to avoid chargebacks

On the bright side, there are precautions you can take to reduce your risk and make chargebacks less likely.

Below are 9 specific things you can do to limit the number of chargebacks your business experiences.

1. Have a clear return policy.

Post it in your store and online to help customers understand their options.

2. Provide an email address and phone number with your contact information.

If customers can reach out to you directly, they’ll be more likely to do that before filing a dispute.

3. Include detailed product descriptions on your website.

The goal is to make sure products are represented clearly and accurately.

4. Avoid keying in credit card numbers whenever possible.

Transactions that are swiped or make use of EMV chips are much more difficult to dispute. Plus, your processing rates will typically be lower for these more secure payment methods.

5. Always get a customer signature for card-present transactions.

A signature is just one more way for you to show the charge was legit and intentional.

6. Use address verification services (AVS) like zip code and CVV codes for card-not-present transactions.

Continuing the theme of super-secure transactions, these additional bits of information make your charges that much more solid.

7. Make sure your merchant account has an accurate payment descriptor.

Be sure it includes your business name and phone number, for example. Customers should recognize your business name on their credit card bill.

8. Use shipping insurance or shipping confirmation to help you track the receipt of products.

That way you can prove shipped goods were delivered.

9. Mystery shop your own website to see first-hand how transactions appear on a credit card statement.

Make sure it’s easy for customers to recognize your business and contact you with questions.

Even more protection

If you want custom advice on how to set up your merchant account to reduce chargeback risk, talk to your payment processor.

Your payment processor should be able to enhance your payment security in ways that fit your business like a glove. Not only that, but they should be able to help with other processing features that can make your day-to-day transactions easier to manage.

And if your payment processor doesn’t go above and beyond to make sure you’re protected, maybe it’s time to shop for a new one.

KEEP READING: The Advantages of EMV Processing Terminals

Want to Build a Better Business?

Stay up to date on the latest business news & insights when you subscribe to the Talus blog.

Ready to Start Growing Your Business?

Connect with a consultant for your free quote or apply today in under three minutes! Just click below.