Modern consumers prefer to pay for their purchases with a credit or debit card. For merchants, this means having to open a merchant account. Without one, your business won’t be able to accept credit card payments.
Many business owners don’t realize that opening a merchant account isn’t as simple as filling out a form online. Your application must be approved and go through underwriting before you can open an account.
Here’s what you need to know about applying for a merchant account.
Merchant Account Underwriting: What You Need to Know
Opening a merchant account is very similar to taking out a business loan. The merchant account provider is essentially extending you a line of credit. Like with a loan or any line of credit, there are risks involved.
- When customers swipe their credit cards, your business gets paid in just a few days. However, the merchant account provider won’t be paid until the customer pays their bill.
- If you are unable to fulfill a customer’s order, they may issue a chargeback. If your business doesn’t have the funds to cover the chargeback, the payment processor may have to foot the bill.
Due to the risky nature of credit card payment processing, merchant account providers must go through the underwriting process for each application.
The underwriting process helps merchant account providers reduce risk by:
- First, thoroughly evaluating applicants to ensure their businesses are legal and generating sales (or have a solid plan to make the company profitable).
- Weeding out merchants who may only use their accounts for fraudulent purposes.
- Ensuring applicants can fulfill financial obligations.
The underwriting process allows the merchant account provider to perform their due diligence before approving an application.
During the underwriting process, the merchant account provider may look at:
- How long you have been in business
- Your business operations, such as how you handle billing, chargebacks, shipments, refunds, warranties, etc.
- Your practices and protocols for protecting sensitive data.
- Whether your business has a history of chargebacks.
- Whether your business practices could potentially harm the payments system.
If you’re running a legitimate business with steady sales, the underwriting process shouldn’t be of much concern.
What Do You Need to Open a Merchant Account?
As part of the application and underwriting process, you will need to provide certain documents and information when opening a merchant account, including but not limited to:
Business Bank Account and Address
When running a business, it is crucial to keep your business expenses separate from your personal expenses. A business bank account is the simplest way to accomplish this goal, but it will also be a requirement when applying for a merchant account.
Along with showing proof of a business bank account, you will also need to provide bank statements.
Choose your bank carefully, and make sure that it’s a good fit for your business. For example, if you anticipate needing a loan in the future, choose a bank that also offers small business loans. If you have employees, you may want a bank that provides payroll services.
In addition to a business bank account, you will need to provide a physical mailing address. Even if you run an e-commerce store, the merchant account provider will need an address to mail forms and other documents.
Employer Identification Number (EIN)
An EIN is, essentially, a social security number for your business. It’s used when you file your taxes, and it serves as a unique identifier for your business.
Unless you are operating as a sole proprietor, you will need an EIN when applying for a merchant account. If you don’t have one already, you can apply for one with the IRS.
Financial Statements
In some cases, you may be asked to provide financial statements to demonstrate the financial stability of your business. The payment processor may ask for the following:
- Balance sheet
- Income statement
These are two types of financial statements that you can prepare yourself, as they do not need to be audited by an accountant or bank. Typically, a cash flow statement is not required.
Business License
Depending on your business or location, you may need to provide proof of a business license when applying for a merchant account. This may be a general business license or a professional license.
Check with your payment processor and local regulations to determine what type of business license you need (if any).
Articles of Incorporation
Whether you’re operating as an LLC, corporation, partnership or some other business entity, you will need to your articles of incorporation when applying for a merchant account.
Your articles of incorporation serve as legal proof that your business is legitimate.
PCI Compliance
Merchant account providers typically have their own requirements for PCI compliance, and merchants must follow these rules. In addition, PCI compliance is intended to protect customer data through the use of specific security procedures.
Other Supporting Documents
Of course, the merchant account provider may also require other supporting documents, such as:
- A business plan
- A copy of your business policies, such as your procedures for returns and shipping
- Inventory reports
- Forecasts
Before applying for a merchant account, contact the provider to find out their specific requirements for supporting documents.
Why Do I Need an EIN Number?
If your business is operating as anything other than a sole proprietorship, it will need an EIN. You cannot file business tax returns, open a business bank account, or pay employees without an EIN. The IRS simply views you as an individual taxpayer.
When applying for a merchant account, an EIN serves as yet another form of proof that your business is legitimate and legal.
Other Things to Know About Applying for Merchant Accounts
You Can Typically Use the Same Merchant Account for Physical and Online Storefronts
If you have a brick-and-mortar store and an online shop, you can typically use the same merchant account for both operations. In addition, if your account is transferrable, you won’t have to go through another round of underwriting.
Some Industries Have a Harder Time Getting Approved for a Merchant Account
Certain industries have a higher risk of illegal activities, fraud or chargebacks, which can make it difficult or impossible to open a merchant account.
High-risk industries include but are not limited to:
- Online gambling
- Adult websites
- Membership clubs
- Supplements
- Multi-level marketing operations
Other industries may also be considered high risk.
A High Average Ticket Size Can Increase the Risk of Rejection
When applying for a merchant account, the merchant service provider will want to know your average ticket size. Therefore, you may assume that a higher ticket size would be a good thing.
However, larger transactions also mean a greater potential cost if there is a chargeback. High average ticket sizes increase the risk for merchant service providers.
The Importance of Having Good Credit
Merchant account providers typically perform a credit check when evaluating new merchant accounts. A credit check will help the provider assess risk. Great credit is a sign that you’re financially dependable, but poor credit may indicate that your business is a high-risk liability.
How To Build Business Credit With an EIN
Credit checks play an essential role in merchant account applications. Without good credit, you may find it challenging to get approved for an account.
Building your credit will take time, but it’s worth the effort. Along with making it easier to get a merchant account, good business credit will also help you obtain business loans or lines of credit when needed.
Here are some tips on how to build your business credit.
Open and Use Your Business Bank Account
Remember – you’ll need a business bank account to open a merchant account. Using your business’s bank account is a simple way to start building credit.
Your account statements can provide key data that lenders or merchant account providers will want to see when reviewing your application.
Establish Credit with Suppliers or Vendors Who Report to Credit Reporting Agencies
A straightforward way to start building credit is to apply for net terms with suppliers and vendors who report to credit reporting agencies.
When you purchase inventory or supplies on credit and pay for those purchases on-time, they will be reported to business credit bureaus.
Once you have a few trade lines reporting, your business credit score will be generated.
Apply for a Business Credit Card or Line of Credit
At some point, most businesses will need a credit card or line of credit to fund their growth or operation. Credit cards and lines of credit are also great ways to build your business credit and further separate your personal and business expenses.
As you charge purchases and make payments on time, you’ll establish or improve your business credit.
Make Sure Your Information is Up to Date with Credit Bureaus
Like with personal credit, business credit bureaus collect data from different sources (lenders, suppliers, etc.). These sources may also provide different kinds of data.
It’s essential to keep an eye on your credit reports and monitor the information that’s reported. Errors can negatively impact your credit and should be reported immediately. Additionally, you also want to ensure that each bureau has the most up-to-date information about your business.
Pay Your Bills on Time
It should go without saying that your business should be paying its bills on time. On-time payments will improve your business credit score and serve as proof of your financial responsibility.
The Takeaway
Applying for a merchant account is an important step in establishing a successful business. Today, consumers pay primarily with credit or debit cards. If you don’t have a merchant account, you won’t be able to accept credit card payments.
While the application process sounds complicated and lengthy, it is possible to have your account up and running in just a few days if you’re quick and efficient about supplying your supporting documents.
