7 Setting Up & Applying For a Merchant Account

Setting Up & Applying For a Merchant Account

There is a lot to learn before you should apply for a merchant account. This guide is a great place to start if you have never looked into credit card processing before, or even if you are currently accepting card for your business. Whatever your situation may be, you should learn about merchant accounts and credit card processing if you have not yet explored the subject. The knowledge that you gain from this guide will translate directly to the amount of money that you will be able to save by properly setting up and using your merchant account. You will also be able to avoid costly and possibly business-threatening problems before they occur.

7-1 Personal Credit & Merchant Accounts

When applying for a merchant account, the personal credit of the business owner is a huge contributing factor to whether the merchant account will be approved or declined. Before you are able to understand why personal credit is even a factor, you must first understand what a merchant account truly is. Once you understand what a merchant account is you will also be able to avoid other common but deadly mistakes in the credit card processing world.

A merchant account is essentially an open line of credit that is issued to a merchant by an acquiring bank. Like a credit line, a merchant account has limits, variable rates, and other restrictive provisions that govern its use. Third-party processors (commonly referred to as "credit card processors ") are really the middlemen in the processing equation. They only keep a small percentage of the rates and fees that are charge to your merchant account. The bulk of the charges are paid to the issuing bank and to VISA and MasterCard. This leaves the processors and the acquiring banks in a precarious position for a number of reasons.

When a merchant runs a credit card transaction, funds are removed from a customer's credit account at their issuing bank , and are deposited in to the merchant's bank account under the assumption that the merchant delivered the products or services that they said they did. If a customer ever issues a chargeback against a merchant, the processor must remove the funds from the merchant's bank account and reapply the funds to the customer's credit account at their issuing bank.

If there are not enough funds in the merchant's bank account to cover the chargeback and other associated fees, the processor/acquiring bank must reimburse the customer out of their own pocket and then hope that the merchant pays them back. Hence, personal credit of the owner becomes an issue. Will the processor, or will the processor not see their money again? Of course, our example uses a single instance of a chargeback. Some instances of fraud can leave a processor/acquiring bank out hundreds of thousands of dollars. The basic reasons described above are why a processor gives a person's personal credit so much weight when making the decision to approve or deny their application for a merchant account.

How Good Does Your Credit Have to Be?
Applying for a merchant account is not like applying for a mortgage. An inquiry from a processing bank on your credit report does not look bad and it will not adversely affect your credit ranking. Your credit does not have to be perfect to get a merchant account. How good your credit needs to be depends directly on the type of merchant account that you are applying for, the amount of processing volume you are requesting, and the average ticket amount that you are declaring.

The processor will take into account all of these factors, among others, when making a final decision. Even if your credit is not perfect, there are a few things that a processor can do to lower the risk associated with your account so that they are able to approve it regardless of personal credit. We will talk about these things later in this section.

There are a few things about personal credit that will cause a merchant account application to be declined by most processors without question.

Bankruptcy - If you are in active bankruptcy a processor will almost always decline your application. If you have had a bankruptcy in the past and but have since had the bankruptcy discharged, there is a chance that you will be able to obtain a merchant account assuming that you have re-established your credit after the bankruptcy, and that it is in good standing.

Collection Accounts - If you have any past due debt that has gone to collections a processor will almost always deny your application for a merchant account. Not until the collection reports are reconciled, and the notifications have fallen off of your credit will you be able to acquire a merchant account.

Lack of Credit History - As we had said earlier, applying for a merchant account is not like applying for a mortgage. A processor does not need to see multiple satisfactory lines of credit or a ten-year credit history in order to approve your merchant account application. However, they do need something to base credit-worthiness on. If you do not have any credit history a processor will deny your application for a merchant account.

The moral of the story is that if you know your credit has one of the above stoppers on it do not apply for a merchant account in the hopes that a processor will not notice - they always notice. Instead, research ways that you can clean up your credit, or obtain a merchant account through other channels like utilizing the stronger personal credit of a business partner or co-signor.

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