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Accepting Credit Cards

Boost your sales by getting merchant status with credit card companies.

Opinions expressed by Entrepreneur contributors are their own.

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

Accepting credit cards has several advantages for businessowners as well. It gives you the chance to increase sales byenabling customers to make impulse buys even when they don'thave cash in their wallets or sufficient funds in their checkingaccounts. Accepting credit cards can improve your cash flow becausein most cases you receive the money within a few days instead ofwaiting for a check to clear or an invoice to come due. Finally,credit cards provide a guarantee that you will be paid, without therisks involved in accepting personal checks.

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

However, chances are you'll want to accept Visa andMasterCard, too, since these cards are used more frequently. Youcannot apply directly to Visa or MasterCard; because they aresimply bank associations, you have to establish a merchant accountthrough one of several thousand banks that set up such accounts,called "acquiring banks."

The first thing you need to understand about accepting creditcards, there is a the real concern that if your company goes out ofbusiness before merchandise is shipped to customers, the bank willhave to absorb losses.

While requirements vary among banks, in general a business doesnot have to be a minimum size in terms of sales. However, somebanks do have minimum requirements for how long you should havebeen in business. This doesn't mean a start-up can't getmerchant status; it simply means you may have to look a littleharder to find a bank that will work with you.

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

You will need to provide bank and trade references, estimatewhat kind of credit card volume you expect to have and what youthink the average transaction size will be. Bring your businessplan 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 theremight be potential for a lot of returns or customer disputes.Called "charge-backs," these refunds are very expensivefor banks to process. They are more common among mail ordercompanies and are one reason why these businesses typically have ahard time securing merchant status.

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

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

If banks turn you down, another option is to considerindependent credit card processing companies, which can be found inthe Yellow Pages. While independents often give the best ratesbecause they have lower overhead, their application process tendsto be more time-consuming, and start-up fees are sometimeshigher.

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

Enticing your bank with promising sales figures can also boostyour case since the bank makes money when you do. Every time youaccept a credit card for payment, the bank or card company deductsa percentage of the sale-called a "merchant discountfee"-and then credits your account with the rest of the saleamount.

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

  • Start-up fees of $50 to $200
  • Equipment costs of $250 to $1,000, depending on whether youdecide to lease or purchase a handheld terminal or goelectronic
  • Monthly statement fees of $4 to $20 u Transaction fees of 5 to50 cents per purchase
  • The discount rate-the actual percentage you are charged pertransaction based on projected card sales volume, the degree ofrisk and a few other factors (the percentage ranges from 1.5percent to 3 percent; the higher your sales, the lower yourrate)
  • Charge-back fees of up to $30 per return transaction
  • Miscellaneous fees, including a per-transaction communicationcost of 5 to 12 cents for connection to the processor, a postagefee for sending statements, and a supply fee for charge slips

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

Getting Equipped
Once your business has been approved for credit, you will receive astart-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 lessthan $30. However, you'll get a better discount rate (and getyour money credited to your account faster) if you process creditcard sales electronically.

Although it's a little more expensive initially, purchasingor leasing a terminal that allows you to swipe the customer'scard through for instant authorization of the sale (and immediatecrediting of your merchant account) can save you money in the longrun. Many cash registers can also be adapted to process creditcards. Also, using your personal computer as opposed to a terminalto obtain authorization can cut your cost per transaction evenmore.

Once you've got merchant account status, make the most ofit. Both the credit card industries and individual banks holdseminars and users' conferences covering innovations in theindustry, fraud detection techniques and other helpful subjects.Check with your credit card company's representatives fordetails . . . and keep on top of ways to get more from yourcustomers' credit cards. Excerpted from Start Your OwnBusiness: The Only Start-Up Book You'll Ever Need, by RievaLesonsky and the Staff of Entrepreneur Magazine, © 1998Entrepreneur Press

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