From the November 1997 issue of Startups

Picture this: Your business is up and running. Your product is selling well, so your advertising and marketing plans must be working. You happily prepare to ring up a sale, when a customer hands you a credit card.

Uh-oh. You don't accept credit cards, you say. The customer fumbles around in his wallet for enough cash to cover the purchase, but comes up short. Embarrassed, he leaves, promising to return later. But will he?

Chances are, he won't, says Robert Fazzini, president of commercial loans at Busey Bank in Bloomington, Illinois. Many people today simply prefer the convenience of paying by credit card. If you want their business, you must be able to accept their credit-card payments.


Johanna S. Billings explained how to shop for ergonomic office furniture in the September issue of Business Start-Ups.

Why Accept Credit Cards?

Obtaining merchant status, which allows you to accept credit-card payments, might seem like an unnecessary hassle--especially considering that most people can pay by cash or check. But by not accepting credit-card payments, you lose sales, says Larry Schwartz, president of the National Association of Credit Card Merchants in Boca Raton, Florida. This is especially true if yours is a mail order business.

"Up to 70 percent of people never mail the check," Schwartz says, so accepting credit cards is especially crucial for mail order companies. When the customer places an order, he's excited and eager to buy. Faced with the prospect of sending a check, waiting for it to clear and then awaiting shipment, his interest is likely to wane. In the meantime, you lose sales.

Reyne Hogan, owner of Reyne Hogan Antiques, a mail order antique shop run from her Cincinnati home, has accepted only 13 credit-card orders since obtaining merchant status six months ago. But she believes she made the right decision.

"The 13 people were thrilled that I could take credit cards so they could get their merchandise faster."

Because Hogan's business sells rare antique glass made by such well-known companies as Tiffany, Daum and Galle, she can sell a single antique for $30,000 or more. So, although 13 orders may not sound like much, they added up to a great deal of money for Hogan. Also, by taking credit cards, Hogan offers her customers an important convenience she hopes will keep them coming back.

The Basics of Merchant Status

In order to accept credit cards, you need to work with a bank that will transfer the money into your account within a day or two of the sale, and then collect the money from the customer. In return, you pay the bank a commission of 1.5 percent to 5 percent for each credit-card transaction; a set, per-transaction fee; and a setup fee. You will also have to pay monthly support or equipment-rental fees for a point-of-sale terminal--the machine used to swipe the card--depending on the contract. Hogan, for instance, pays 2.5 percent plus 30 cents per transaction and $15 per month. She also paid a $125 setup fee.

"The fee is based on two things," Fazzini says, "the average amount per transaction and the total volume for the year." Hogan's high average dollar amount per transaction helped lower her fees, but this was offset somewhat by her relatively low yearly volume.

When you apply for merchant status, the banks evaluate your business based on its sales track record, the type of business it is, your credit record, the business's credit record and your overall financial picture.

Fazzini advises applying for merchant status when you get your start-up financing. This accomplishes several things. First, it shows that you've thought ahead. "And you will probably have customers that you wouldn't have otherwise," he says. In fact, some people don't pay with anything but credit cards.

Second, you show you're taking steps to minimize the time and expense involved in recovering bad debts. If someone writes a bad check, for instance, it will cost you time and money to recover the loss. If you swipe a customer's credit card through a point-of-sale terminal, you can be sure you'll get paid. The machine contacts the issuing bank to authorize the transaction and runs the account numbers through a variety of fraud-protection procedures.

Overcoming Objections

If your business is homebased or has been in operation for less than two years, you're likely to face objections from the bank.

"Those are the ones we end up losing money on," Fazzini says. "We're really reluctant to take a homebased business unless we're loaning money to that business and we understand it."

If yours is a homebased or a brand-new company, be sure to meet with the banker to show your business plan, offer collateral and discuss your personal net worth. You are more likely to be able to overcome objections by being open and honest. Even if your bank turns you down, however, your ship hasn't necessarily sunk. You can always try other banks.

"Just because one bank says they're not going to do it doesn't mean you're not bankable," Fazzini says. "Everyone has different criteria." One bank, for instance, may make it a policy never to grant merchant status to a homebased business, whereas another might, if the business meets other criteria.

If you don't have any luck getting a bank to back you on your own, consider going through an Independent Sales Organization (ISO). These are field representatives from out-of-town banks who, for commission, help businesses find banks willing to grant them merchant status. Ask your bank to recommend an ISO, or look in the Yellow Pages under "credit cards."

The ISO may be able to help you simply because it represents dozens of banks, each with their own specialties and criteria. The ISO representative can match your needs with the needs of the banks he or she represents, without requiring you to go through the application process with all of them.

Steve and Shelly Bloom, owners of Crystal Collection, a glass art importer in Boca Raton, Florida, were turned down by their bank, because it doesn't grant merchant status to home-based businesses. So the Blooms worked with an ISO their bank recommended, and the ISO helped them get merchant status through another bank.

Of course, the Blooms pay higher fees because theirs is a homebased business, which presents more risks to the bank. They pay either 2.5 percent of their monthly credit transactions or $25, whichever is higher. They also pay a 20-cent-per-transaction handling fee, a $15 monthly fee and $32 per month to rent a point-of-sale terminal. If they operated a storefront rather than a homebased business, Shelly says, the bank would charge them only 1.5 percent in commission.

Which Credit Cards Should You Accept?

Once you've obtained merchant status, you can accept a variety of credit cards, depending on which are offered by your bank. Some banks issue their own cards, and others act as intermediaries between the credit-card companies and your business.

Different banks offer different cards. Most will likely offer Visa and MasterCard, because these are the cards most consumers have, Fazzini says. Many banks also offer Discover and American Express, but not all do.

Hogan accepts Visa and Master-Card; she doesn't accept others because they aren't offered by her bank.

The Blooms include Discover Card in their credit-card lineup because a customer requested it, Shelly says. All they had to do was ask their bank, which works with Discover; there was no extra cost.

Before you sign on with any bank, consider the costs carefully. If you don't anticipate many credit-card sales, it might not be worthwhile for you to pay the setup and monthly fees. If you're not sure the costs will benefit your business in the long run, call a few banks and find out what kinds of fees they charge. Be sure to call more than one, because fees vary and you won't have a set figure until you actually apply.

Accepting credit cards may not be for every business. But if yours is the kind of business where customers are likely to want the convenience, you're only cheating yourself if you don't give them what they want. Remember, your competition will.

Check It Out

If a lack of a business track record is what keeps you from getting merchant status, consider signing up with Checks By Phone. This service allows you to accept payment directly from a customer's checking or savings account.

Checks By Phone clients simply e-mail, fax or send by modem the customer's name and address, the amount of the sale and all the numbers listed across the bottom of your customer's check. These numbers, says Checks By Phone founder and president Larry Schwartz, include the bank routing number and the customer's account number. Checks By Phone uses these numbers to draft the appropriate account and pay your business. As a Checks By Phone client, you can request that your payment be sent by overnight shipment, resulting in your getting paid even before the draft has been completed.

"You build up a track record for the bank while accepting payments electronically," Schwartz says. "It's convenient for the customer, too, because he or she can pay right away rather than having to write and mail a check."

Becoming a Checks By Phone client requires a $349.95 sign-up charge and a 2-percent fee for each transaction of more than $100. The charge is $2 for transactions of less than $100, and there's a 35-cent data-entry charge for fax transmissions.

If you suspect a check might be bad, you can have Checks By Phone check it against its computer database, which includes identification information on banks and their branches in both the United States and Canada. This additional screening costs 50 cents per transaction.

Worth Reading and Taking

The Complete Guide to Getting and Keeping Your Visa/MasterCard Status, by Pearl Sax and Larry Schwartz (The National Association of Credit Card Merchants, $199.95, 561-737-8700), is a manual that covers everything from the merchant-status application process to handling chargebacks.

Visa U.S.A. conducts a merchant training seminar on fraud prevention techniques. Called "Doing It Right at the Point of Sale," the seminar is offered in 12 major cities across the country. For information, contact the bank that provides your Visa merchant status.

Contact Sourcecs

American Bankers Association, 1120Connecticut Ave. N.W., Washington, DC 20036, (800) 338-0626

Checks By Phone, 301 E. Yamato Rd., #2160, Boca Raton, FL 33487, (561) 998-9020

Crystal Collection, 6016 Vista Linda Ln., Boca Raton, FL 33433, (561) 392-4446

National Association of Credit Card Merchants, 301 E. Yamato Rd., #2160, Boca Raton, FL 33487, (561) 998-9020

Reyne Hogan Antiques, (513) 559-1405, reyne@mindspring.com