Merchant Account Underwriting
Editor’s Note: A version of this post was originally published in July 2011, it has been updated and revamped for accurateness and completeness.
If you are like many of the business owners we talk to that would like to open a merchant account for their business, you might feel overwhelmed by the idea of having to go through the underwriting process. Underwriting is the system that your processor or bank has in place to vet and decide whether or not to give a business a merchant account.
What will the bank or processor want to review?
Securing a merchant account is an important step for any business, particularly businesses that sell services. To help prepare you for the underwriting process, we’ve highlighted some of the key things that are reviewed, in order to get approved.
- Business type – Processors and underwriters tend to have the perspective that some business types are riskier to work with than others. Industries with ambiguous products or services are more highly scrutinized than those with concrete offerings. Certain applicants may be rejected during the process based on the business type alone, regardless of other factors on the application.
- Years in business – Long tenures go a long way in merchant account underwriting. Businesses that have been around for 5+ years often have a more stable cash flow and are more prepared to respond to something like a chargeback. It also speaks to the legitimacy of the business if they’ve been able to keep their doors open for a long period of time.
- Chargeback history – If you’ve had a merchant account in the past, underwriters may want to look at your chargeback history. A chargeback might be issued by the cardholder when they feel that a charge was made without their consent, or without the product or service being rendered as agreed. A business with a lot of chargebacks tied to their old merchant account will have more hurdles to jump through during underwriting.
- Billing policy – Does your business bill in advance or after products or services are rendered? In the eyes of the underwriter, businesses that bill too far in advance are at greater risk for a chargeback because situations can change.
- Example: If you sold tickets six months in advance of the event and something comes up and you cancel the event, you’ll need to reimburse your customers. If you don’t have the funds to do that, the processor and its partnering bank may be on the hook for those funds.
- Owner / signer credit score – The signer’s credit score plays a big role during merchant account underwriting. However, in the case of poor credit, some processors will review financial statements instead. Businesses with multiple partners can also try the application with a different signer, if the original signer’s credit score is insufficient.
- Requested volumes – Most of the above factors, aside from prohibited business types, are weighed against the processing volumes requested on the application. Sometimes new businesses have to start with smaller volumes and build a trustworthy relationship with the processor before increasing their processing volumes.
Pending applications can sometimes still be approved with special amendments:
- Upfront reserves – the processor holds an upfront, designated amount of money during the early stages of the merchant account to lessen their risk
- Holds – the processor holds a percentage of processed funds until a history is built with the merchant
- Daily processing fee withdrawal – processors usually debit their fees monthly, but in the case of new accounts, they may request to debit accounts more often to make sure they receive their funds
Merchant account underwriting may be stringent, but it’s not as restricted as it seems. Many businesses get approved quickly and easily and others can usually find a way to prove themselves to the processors over time and eventually get to the processing volumes that they need for their business. Often, the whole process can be completed in just a few hours. Click here for more information on merchant accounts with PaySimple, and check out this recent post on 10 things you should know about opening a merchant account to see what else to expect during the process.
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