The list of tasks that need to be completed in order to open your new business is virtually endless. No doubt, one of the items on your list is obtaining a merchant account. Before you throw up your hands in overwhelmed panic or jump to sign up with the first merchant services provider you find online, you’d do well to take some time to learn more about merchant accounts.
What is a merchant account?
These days, accepting your customers’ credit cards is a must. In fact, refusing to take plastic can quickly put you out of business since most people don’t carry large amounts of cash or checkbooks with them anymore.
When a customer buys your goods or services with their credit card, a merchant account is there to give you fast access to the money the buyer spends — long before they actually pay off the bill for the credit card on which it was charged. Of course, this service is not without its own costs; you do need to pay a few fees to the merchant services provider.
How do merchant accounts work?
Immediately after someone buys something from you using their credit card, the credit card processor will forward all of the transaction details to the card issuer. It is then the issuer’s job to confirm whether or not there are sufficient funds available. That “yes” or “no” answer is then sent back down the chain from issuer to processor. If all is well and the transaction is approved, the proceeds of the purchase will be deposited in your bank account — minus fees, of course.
More about fees.
The process of accepting credit cards at your business involves paying a few fees. The following fees are sometimes charged, depending on your merchant account provider:
Setup fee. This is charged to initiate your account and its amount can depend on your sales volume. If you are also buying point-of-sale (POS) hardware, you may pay for setting that up as well.
- Monthly account fee. As the name suggests, this fee is charged every month and can vary. You pay it as long as your account is open.
- Transaction fees. These are charged every time a customer makes a payment. They can be flat-rate (the same rate for each type of card you process depending on how you conduct the transaction), interchange-plus-transaction (the cost of processing the payment plus the markup fees), or tiered transaction (card transactions are categorized into three different classifications according to the amount of risk).
Why do you need a merchant account for your business?
When you go into business for yourself, there are some risks you cannot avoid but must do your best to minimize. For example, you cannot control whether your store goes up in flames due to a lightning strike. You can’t know years in advance that your neighborhood will change and that your loyal customers will move away. The most you can do is to buy solid insurance to protect against such events and do the most comprehensive research you can on marketing trends.
The same goes for the risks you take when accepting payments from customers. That’s where your merchant account comes in. It provides a security buffer between you and your customer. Having it ensures that you will still get your money and do so in a timely manner, even if your customer does not live up to their end of the bargain by failing to pay or paying their bill very late. The only downside is that this reassurance comes at a cost in the form of credit card processing fees. Many business owners come to the conclusion that these are the unavoidable costs of remaining competitive in today’s marketplace.
Finding the right merchant account.
If you ultimately decide to go with a merchant account, take time to choose the one that is best for you. After all, if you choose correctly, you’ll be partnering with this company for a long time, probably for years.
- Figure out what type of equipment you need. Are you looking for a POS system, a mobile card reader for your tablet, a payment gateway for your ecommerce site, or a combination of those?
- Use your list of requirements to come up with merchant account options that seem feasible, weeding out those that do not.
- Obtain price quotes from your top candidates.
- Gather your business credentials and data to present. Companies will be interested in your revenue, how long you have been in business, and your industry.
- Apply for your account.
- Set up your account once approved and begin accepting credit card payments!
As long as you take these steps one at a time, you can ultimately settle on the provider that is best for your business.
Now that you understand a good deal more about what merchant accounts are, how they work, and the fees associated with them, you probably have a much better idea of whether this is something you need for your business. Although it does involve fees that can seem daunting to a new business owner, having a merchant services account does a few important things. It allows you to accept all the ways today’s customers want to pay. Plus, it provides you with a layer of security that cushions you from the risks that inevitably accompany accepting payments. In short, a merchant services account lowers your chances of failure while raising the likelihood of success.