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Accepting Credit Cards at Your Business

Filed under Finance.

In the ideal world, at least from the small business owner's perspective, all customer transactions would be paid up front and in cash. For certain types of businesses, such as newsstands and fast food outlets, transactions are actually paid in cash.

But most businesses are forced to accept one or more of the three major types of credit: credit cards, checks and credit terms. Credit cards are the least risky, but will cost you between 2.5 percent and 5.5 percent of your sales.

From the business owner's standpoint, the advantage to accepting credit cards is that your bank account will be credited with the amount of the sale by the end of the business day. The credit card company bears the troubles of billing and collection from customers and the risk that the customer will pay later or not at all.

Getting started. If you want to accept credit cards, the first step is to open a credit card merchant account with a bank. If you have an established business reputation or a long-standing relationship with your banker, you probably won't have any trouble opening up an account.

If, however, you're just starting out, you have a mail-order business, or you work out of your home, you may have some trouble. The reason is that banks and credit card companies are scared to death of fraud, and so they've become much more cautious in recent years about opening up new accounts. In fact, some larger banks won't even deal with you unless you have a storefront.

If you operate a home or mail-order business, your best bet may be to start with a medium- or small-sized bank. If possible, find out from other home or mail-order businesses where they have their merchant account.

When you go to your lender to open up a credit card account, you'll need to make a full financial disclosure in the same way that you would if you were asking for a loan. (Or even more so: We know of one small business owner who was asked to submit to an FBI check before being granted a merchant account!)

The likelihood of obtaining a merchant account from a bank will depend upon the following factors:

  • Your type of business -- Certain types of businesses are considered higher credit risks than others. For example, a home business or a mail-order company will have a more difficult time opening a merchant account than will a company with a traditional storefront.
  • The length of time in business -- If you're just starting out, you'll have more difficulty opening a merchant account than will an established business.
  • Your general creditworthiness -- Banks will want to know whether you've ever declared bankruptcy or if you have any judgments or liens against you. If you do, your chances of getting a credit card account are not good. If you're just starting out, the banks will want to look at your personal credit history.
  • Your previous merchant account status -- Banks will want to know if you've ever had a merchant account before because it's a good indication of your creditworthiness.

You should be prepared to submit all of the financial information you can gather about your business, as well as information about your personal credit history. That would include information about how your business is financed, how it is organized, and how you plan to run it.

Also, you should take this opportunity to request a credit report on yourself. You can obtain one by contacting a credit bureau, such as TRW or Dun & Bradstreet. If anything on the report is wrong, notify the credit reporting company in writing, and keep following up until it is changed. It's important that your report be accurate because the bank may be using it to determine whether to let you open a merchant account.

ISOs. If your bank won't let you open up a merchant account, consider using an Independent Service Organization. You can contract with the ISO to open a merchant account, and the ISO will contract with the bank. The ISO, in effect, bears the risk of doing business with you.

But pay attention to the terms of the deal. Although there are more than 1,400 ISOs in the U.S., they are not regulated. Make sure that you understand all the extra charges before you enter into an agreement. Sometimes you can be overcharged for the equipment that the ISO provides you, and there may other hidden charges.

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