If you’re a business owner, you’ve probably heard “merchant account” in relation to being able to accept credit cards. This post will cover what a merchant account is, and answer some of the top questions we hear small business owners asking about merchant accounts.

What is a merchant account?

A merchant account is a bank account that allows businesses to securely accept and process electronic payment transactions. In other words, if you want to accept credit card or debit card transactions, you’ll need access to a merchant account. 

How does a merchant account work?

A merchant account works by charging you a small fee in exchange for quick access to the funds from your business’s credit card transactions. They basically front you money for electronic transactions.

Think about it: when a customer uses their credit card, they’re not paying cash but instead creating a promise to pay within a period of time. However, they may not pay off their credit card for months or even years.

Merchant accounts work with credit card issuers (like Visa or Mastercard) and connects with a payment gateway to process payments. All of this happens in seconds so you can process your customer’s electronic payment.

Then, rather than waiting months for your customers to pay their credit card bills, the merchant account fronts you the money promised from your electronic transactions. The funds are first deposited into your merchant account and then into your business bank account, usually within a few days. 

What are merchant account fees?

Merchant account fees vary widely. A major component of merchant account fees is interchange fees which are paid to the card-issuing bank to cover handling costs, fraud, bad debt, and the overall risk associated with approving the payment. They generally involve a flat rate plus a percentage of total sales (including taxes).

For example, they can range from 0.5% to 5% of the total transaction cost, plus an additional $0.20 to $0.30 per transaction. 

 Other merchant account fees include, but aren’t limited to:

  • Setup: A one-time fee to set up the account.
  • Point of Sale: If you’re planning on getting a physical system to allow you to process credit card payments in person, there will likely be a fee for the hardware.
  • Monthly/Yearly: A recurring fee you pay for the benefit of using their service regardless of the number of transactions you have.
  • Statement: A fee for printing and mailing your monthly statement.
  • Chargeback: Fees from customers challenging credit card transactions from your business.
  • Cancellation: A fee you pay in the event that you need to cancel your contract early. 

Are there alternatives to a merchant account?

Payment service providers, including like Square, PayPal, and Stripe, are all merchant account alternatives. These providers aggregate all their customers’ transactions into one account and eventually transfer your transactions to your business bank account.

Depending on the size of your business, payment service providers may be a good first step. However, as your business grows, a merchant account can help you reduce fees, have more instant access to funds, avoid frozen accounts, and provide your business with better customer service and support. 

Pros and Cons of Merchant Accounts

Like any business feature, there are pros and cons to using merchant accounts.

Pros

  • Easily accept credit card payments which can help increase the number of sales in your business.
  • For larger transaction amounts and larger numbers of transactions, merchant accounts can help reduce fees.
  • Helps avoid frozen accounts or monthly maximums deposited to your business account.
  • Offers better customer support to your business.

Cons

  • Fees associated with the ability to accept credit cards and using a merchant account.
  • Required application process that can delay you ability to accept credit card payments.
  • Usually requires an ongoing, monthly fee which may not be ideal for small businesses that do not have consistent monthly transactions.

How do I open a merchant account?

If you’re ready to begin, here are some tips. 

Assess your needs

Think about your business’s needs related to the number of transactions you’ll have and the hardware you’ll need. For example, you’ll want to know how many transactions you plan on processing each month and how much you anticipate growing in the future. Next, you’ll want to know what kind of hardware you’ll want and how many terminals you’ll need. 

Do your research

Once you’ve assessed your needs, you should research various vendors. You want to choose a company with competitive rates and terms that provides excellent customer service. 

Apply

Once you’ve selected a company, it’s time to start an application. Be prepared with the following:

  • Bank account and routing information;
  • Financial statements;
  • Credit history;
  • Employer identification number (EIN); and
  • Business license.

Some vendors may also require your business plan, marketing materials, or shipping policies. 

Read the Fine Print 

Remember that many vendors charge a fee if you cancel your contract early. Read your contract carefully before signing and understand all the terms, conditions, and fees. The last thing you want is to sign a bad contract with a high cancellation fee.

Merchant accounts with PaySimple

Finding a great vendor, doing your research, and completing the application can be time-consuming and confusing. When you work with PaySimple, we manage the processors during the underwriting process to help you get the best rate and fit for your business.

Learn more about merchant accounts

Ready to learn more? Let our award-winning support team help you get started!

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