Why should a small-business owner accept credit cards? There are dozens of reasons. First and foremost, research shows that credit cards increase the probability, speed and size of customer purchases. Many people prefer not to carry cash, especially when traveling. Others prefer to pay with credit cards because they know that it will be easier to return or exchange the merchandise.

Accepting credit cards has several advantages for business owners as well. It gives you the chance to increase sales by enabling customers to make impulse buys even when they don't have cash in their wallets or sufficient funds in their checking accounts. Accepting credit cards can improve your cash flow because in most cases you receive the money within a few days instead of waiting for a check to clear or an invoice to come due. Finally, credit cards provide a guarantee that you will be paid, without the risks involved in accepting personal checks.

To accept major credit cards from customers, your business must establish merchant status with each of the credit card companies whose cards you want to accept. You'll probably want to start by applying for merchant status with American Express or Discover. For these cards, all you need to do is contact American Express or Discover directly and fill out an application.

However, chances are you'll want to accept Visa and MasterCard, too, since these cards are used more frequently. You cannot apply directly to Visa or MasterCard; because they are simply bank associations, you have to establish a merchant account through one of several thousand banks that set up such accounts, called "acquiring banks."

The first thing you need to understand about accepting credit cards, there is a the real concern that if your company goes out of business before merchandise is shipped to customers, the bank will have to absorb losses.

While requirements vary among banks, in general a business does not have to be a minimum size in terms of sales. However, some banks do have minimum requirements for how long you should have been in business. This doesn't mean a start-up can't get merchant status; it simply means you may have to look a little harder to find a bank that will work with you.

While being considered a "risky business"-typically a start-up, mail order or homebased business-is one reason a bank may deny your merchant status request, the most common reason for denial is simply poor credit. Approaching a bank for a merchant account is like applying for a loan. You must be prepared with a solid presentation that will persuade the bank to open an account for you.

You will need to provide bank and trade references, estimate what kind of credit card volume you expect to have and what you think the average transaction size will be. Bring your business plan and financial statements, along with copies of advertisements, marketing pieces and your catalog if you have one. If possible, invite your banker to visit your store or operation.

Banks will evaluate your product or service to see if there might be potential for a lot of returns or customer disputes. Called "charge-backs," these refunds are very expensive for banks to process. They are more common among mail order companies and are one reason why these businesses typically have a hard time securing merchant status.

In your initial presentation, provide a reasonable estimate of how many charge-backs you will receive, then show your bank why you don't expect them to exceed your estimates. Testimonials from satisfied customers or product samples can help convince the bank your customers will be satisfied with their purchases. Another way to reduce the bank's fear is to demonstrate that your product is priced at a fair market value.

The best place to begin when trying to get merchant status is by approaching the bank that already holds your business accounts. If your bank turns you down, ask around for recommendations from other business owners who accept plastic. You could look in the Yellow Pages for other businesses in the same category as yours (homebased, retail, mail order). Call them to ask where they have their merchant accounts and whether they are satisfied with the way their accounts are handled. When approaching a bank with which you have no relationship, you may be able to sweeten the deal by offering to switch your other accounts to that bank as well.

If banks turn you down, another option is to consider independent credit card processing companies, which can be found in the Yellow Pages. While independents often give the best rates because they have lower overhead, their application process tends to be more time-consuming, and start-up fees are sometimes higher.

You can also go through an independent sales organization (ISO). These are field representatives from out-of-town banks who, for a commission, help businesses find banks willing to grant them merchant status. Your bank may be able to recommend an ISO, or look in the Yellow Pages under "Credit Cards." An ISO can match your needs with those of the banks he or she represents, without requiring you to go through the application process with all of them.

Enticing your bank with promising sales figures can also boost your case since the bank makes money when you do. Every time you accept a credit card for payment, the bank or card company deducts a percentage of the sale-called a "merchant discount fee"-and then credits your account with the rest of the sale amount.

Here are some other fees you can expect to pay. All of them are negotiable except for the discount fee:

  • Start-up fees of $50 to $200
  • Equipment costs of $250 to $1,000, depending on whether you decide to lease or purchase a handheld terminal or go electronic
  • Monthly statement fees of $4 to $20 u Transaction fees of 5 to 50 cents per purchase
  • The discount rate-the actual percentage you are charged per transaction based on projected card sales volume, the degree of risk and a few other factors (the percentage ranges from 1.5 percent to 3 percent; the higher your sales, the lower your rate)
  • Charge-back fees of up to $30 per return transaction
  • Miscellaneous fees, including a per-transaction communication cost of 5 to 12 cents for connection to the processor, a postage fee for sending statements, and a supply fee for charge slips

There may also be some charges from the telephone company to set up a phone line for the authorization and processing equipment. Before you sign on with any bank, consider the costs carefully to make sure the anticipated sales are worth the costs.

Getting Equipped
Once your business has been approved for credit, you will receive a start-up kit and personal instructions in how to use the system. You don't need fancy equipment to process credit card sales. You can start with a phone and a simple imprinter that costs less than $30. However, you'll get a better discount rate (and get your money credited to your account faster) if you process credit card sales electronically.

Although it's a little more expensive initially, purchasing or leasing a terminal that allows you to swipe the customer's card through for instant authorization of the sale (and immediate crediting of your merchant account) can save you money in the long run. Many cash registers can also be adapted to process credit cards. Also, using your personal computer as opposed to a terminal to obtain authorization can cut your cost per transaction even more.

Once you've got merchant account status, make the most of it. Both the credit card industries and individual banks hold seminars and users' conferences covering innovations in the industry, fraud detection techniques and other helpful subjects. Check with your credit card company's representatives for details . . . and keep on top of ways to get more from your customers' credit cards. Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press