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Ask About Merchant Accounts

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By | May 20, 2012

Dear Toolkit,

My little carry-out restaurant is really taking off and I want to be able to accept credit cards from my customers. Can you tell me how to go about doing this?


Moveable Feast

Dear Moveable Feast,

What you need to do is establish a "merchant" account with your bank. Your customers will then be able to charge the meals they buy from you. You will then transmit the records of those sales to your bank, usually via a card scanner/modem arrangement. The bank will deposit the proceeds of that sale to your business checking account, minus a small commission of anywhere from two to five percent. It is then the bank's responsibility to collect from the customer.

Sounds simple, right? It is, once you get the account set up. But for a small business, it can be a hassle to clear that first hurdle. Banks are not eager to take on the increased risks of a small growing business. If you can show them via your financial statements (business and personal) that you are creditworthy and will soon do a substantial volume of business, either in transaction numbers or average transaction size in dollars, they will take a chance on you.

And it's not as cheap as it would appear at first glance either. Not only will you pay the bank a commission....a percent of each sale sometimes called the discount rate....but you will also likely have to pay them a transaction fee of .25 to .50 cents each, depending on the volume you do. And you may be required to pay a flat monthly fee of $15 or $20 on top of a stiff initial set up fee. And that's not all... remember you need fancy equipment to process those transactions. A card swiper contraption can cost anywhere from $30 to $80 a month to lease.

Negotiation is the name of the game when setting up a merchant account. Assuming you are creditworthy and your business passes muster as being not too high risk or too fraud prone, be sure to shop around and get quotes from several banks. All discount rates are not created equal. For a more detailed description of the numbers negotiation game, check out our credit cards information.

Remember that discount rates differ among credit card companies. Visa and MasterCard are usually the same but American Express is generally higher. Discover can sometimes be arranged for through your bank, along with Visa and MasterCard.

If you're really just starting out, are in a high risk category such as mail order, or if you've had some credit problems in the past, you may have to go to an Independent Service Organization (ISO) until you've established a good track record. There are over 1400 ISOs in existence today, none of which are regulated. Hence, you will use extreme caution in dealing with any ISO. Make sure you are not being used and abused when it comes to outrageous equipment rental rates or long term leases, not to mention commissions.

You can find an ISO by letting your fingers do the walking through your local Yellow Pages under the category called Credit Cards. Or, better yet, ask the bank that declines you a merchant account to recommend an ISO to you. These organizations represent many, many banks and will shop around to get one that will take a chance on you as long as the ISO is the middleman.

Despite all these drawbacks, a merchant account can help your business to grow dramatically and be well worth any costs and effort involved in establishing one. Anything that makes it easy for your customers to do business with you is a plus. And not having to deal with collecting bad accounts or tracking large amounts of cash is bound to save you money in the long run. These benefits alone can make a merchant account a good investment at any price.

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