How to Open a Merchant Account
When your business starts to grow, you’ll eventually get tired of issuing paper invoices and relying on slow land mail to collect them.
And at some point, every merchant is going to want to start accepting credit cards.
Before you start what can be a long process, it’s a good idea to know what to expect.
Here are some things to know when you’re first applying for a merchant account.
Preparing to Set Up a Merchant Account
Before you start setting up your first merchant account, a few things need to happen. We’ll talk about each of these in turn.
You’ll need to:
- Get a business license
- Get a dedicated business bank account
- Learn about the underwriting process
Setting Up Your Merchant Account: Business License
When setting up your merchant account, you’ll need to get a business license.
A business license is a permit issued by a local governmental authority, allowing a company or an individual to do business within the jurisdiction of that authority.
This license can take many forms, from actual articles of incorporation all the way to a simple DBA statement (Doing Business As).
For example, in Texas, these licenses are issued by the Texas Secretary of State.
Different states perform this function through different venues; check this list if you’re not in Texas.
A single location frequently requires multiple licenses to be issued by several different agencies and departments.
For instance, it is likely you will need a State-level license, as well as a City or County-level one.
Usually, the physical location (or address) of the business will determine which licenses are required to operate fully within the law.
We’ll look at underwriting later on in this article. For now, know that merchant account underwriters will often want to review your business license (and file a copy of it) in order to validate the good standing of your business.
Not every merchant account provider will require you to have a business license.
However, you will often need this license for reasons beyond simply opening a merchant account, so it’s a good idea to get this basic step out of the way as soon as possible.
Setting Up Your Merchant Account: Business Bank Account
The next thing you’ll need to do before setting up a merchant account is get a business bank account.
This is a dedicated account that is separate from your personal bank account, and it is the account your business’ money will flow into.
You’ll need one of these accounts even if you’re a sole proprietorship.
A business bank account can be opened in a few short minutes by going to a branch of your local bank.
They will need to see your business license (as above) and an Employer Identification Number.
If you’re in business by yourself (and have no employees other than yourself), you can use your existing Social Security Number. Or you can apply for an EIN on the IRS website.
This business bank account will be where your deposits are sent. It will also be the account your transaction fees will be debited from.
It is possible to transact debits and credits from separate accounts, but you have to request this; it’s not a default action.
It is crucial to keep a balance in this account. You’ll need to cover any processing fees, as well as any applicable monthly fees for the software you use.
Setting Up Your Merchant Account: Underwriting
When setting up a merchant account, there’s always an approval process involved. This is known as underwriting.
Underwriting is a process by which a merchant account provider assesses the risk they’re going to incur by doing business with you.
This is how merchant account providers are able to offer better rates than payment aggregators like Stripe, Square, and PayPal (which we’ll talk about later).
During the application process, any reputable processor will ask for a host of information including, but not limited to:
- The type of business you have
- The products or services you offer
- Typical sales information; at least a month, but a year is better
- Your last three months of processing statements
- Your articles of incorporation
- A voided check
Additionally, the business owner applying for the merchant account may be subject to a personal credit check upon approval.
Any merchant account provider is going to need this information. It’s especially important for online merchant accounts.
Knowing this information enables the merchant account provider not only to understand you and your business model, but also to get a grasp on the potential risks involved with doing business with you.
There’s something else you should be aware of beforehand about the underwriting process: The more money you are seeking to transact, the more documentation you’ll need to provide for your underwriter.
If you want to process only a few thousand dollars a month, you might only need to show them a voided check (proving you have a business bank account) and some marketing material to prove your business is active).
If you want to process larger amounts of money, you will need to provide more information.
This usually means the underwriter wants to look at several months of bank statements. You might also be asked to show them balance sheets, profit and loss statements, and up to two years worth of additional financial statements.
After your merchant account is approved, the processor will monitor the activity on your account.
When you’re estimating your processing volume, you’ll want to be as accurate as possible.
It’s not a good idea to regularly exceed your processing limits, especially with a new account.
More to Know Before You Set Up Your Merchant Account
There are a few more small things you’ll want to be aware of before you set up your merchant account.
Different Methods of Using Your Merchant Account
Merchant accounts are typically for accepting credit and debit cards.
If you want to accept ACH payments as well (direct bank transfers), you may need to go through a different underwriting procedure with a different processor.
This is because ACH and eCheck transactions usually take different routes through the money processing maze.
If you go through a software provider, however, or an ISO (an “Independent Sales Organization”), you probably won’t need to fill out a separate application.
You can usually just list all the types of payment you want to accept on one application.
When you let Easy Pay Direct assist you through the application process, we will take your voided check, compile it along with all other application information, and we’ll send each to its appropriate processor.
You will also want to read the Terms and Conditions included with your application. Details about each of the different parties involved in the processing of your account will be listed there.
Time Required to Set Up A Merchant Account
After you finish filling out your merchant account application, be sure to submit the required documentation as soon as possible.
Because you might be able to start using it in as little as one day!
And who knows? It might be a matter of mere hours.
Before you submit your application, though, remember that underwriters typically operate during normal banking hours.
If you submit later in the day, it might not be looked at until the next business day.
When Easy Pay Direct guides you through this process, we can sync up your software to your merchant account, so you can start processing transactions right after you are approved by the underwriters.
Merchant Accounts: Retail and Online
One benefit merchant accounts have is that they are usable by both your online storefront and your brick-and-mortar store.
If you are seeking to open an online store, and already have a physical location up and running, you should be able to use the same account in both places.
The same thing is true if you have an online-only sales presence, and are wanting to open a traditional physical store.
In other words, if you already have a merchant account, then ask the person helping you with your application. They’ll know if it’s transferable or not
Merchant Accounts: Funding Times and Processing Fees
The time it takes for you to get your money and the fees associated with that, will vary depending on the specific kinds of payments you’re processing.
For example, an ACH or eCheck processor might charge you a flat rate per transaction, up to a certain amount.
And the bank handling your credit cards will likely charge you a flat rate plus a percentage fee.
But this can all vary widely, depending on who is processing your transactions, and how much business you’re doing with them.
Credit card processing fees can also vary.
These fees can depend on the card itself, as well as on the method in which it’s used (card-not-present versus card-present, for example).
In order to get a good handle on these differences, be sure to study the Terms and Conditions that come with your application.
These various fees are even more relevant when you allow customers to pay using different options.
For instance, large transactions are better off processed by ACH, or direct bank transfer.
This is because ACH transfers incur a flat transaction rate, and not a flat-rate-plus-percentage, as with credit card processing.
That said, funding times can also vary depending on the payment type.
Credit card transactions typically appear in your account quickly (24-48 hours after the transaction), but ACH transfers can take up to five business days.
Merchant Accounts: Brands
You’ll need to decide what credit card brands you want to work with. This will depend largely on your intended target audience.
Generally speaking, you’re safe accepting either Visa or Mastercard (or both). Visa alone is accepted in over 200 countries worldwide.
For greater reach, you might consider accepting Discover and American Express as well.
Other countries and other markets, however, have their own “best choice” cards. JCB cards (an acronym for Japan Credit Bureau) are accepted in 190 countries. These cards are common in China, Taiwan, and Japan.
Merchant Accounts: Banks
Often the best bank to open a merchant account with is a local one.
And by “local” we mean a bank in the same jurisdiction that your business is registered in.
It’s also a good idea to apply for a merchant account at the same bank your business account is held.
The fact you’ve already been doing business with this bank increases the bank’s trust, and you will often be able to enjoy certain perks from having both accounts at the same financial institution.
If you have any questions at all about which bank to use, it’s a good idea to enlist the aid of a payment service provider like Easy Pay Direct.
Merchant Accounts: PCI-DSS Compliance is Crucial
The Payment Card Industry Data Security Standard is a set of regulations and rules created by credit card companies (like Visa, MasterCard, Discover, and American Express) that makes sure each merchant is processing their customer’s payments securely.
Before 2008, PCI-DSS Compliance was thought of as a pretty good idea. It was listed as a “best practice” for any business that had a merchant account. Since then, however, given the commonality of data breaches and thefts of otherwise secure information, it’s become the standard.
You won’t be required to prove your PCI-DSS compliance when you open your merchant account. But you will need to be in compliance soon afterward. So it’s a very good idea to start considering it now.
Before you kick off the underwriting process for your merchant account, examine your business environment closely. Make sure you’re working in a secure manner. We will discuss full PCI-DSS compliance in a different article, but you can take these steps now:
- Enforce policies that result in strong passwords
- Install anti-virus and anti-phishing software on all your computers
- Shred all documents which might contain any personally identifiable information, such as credit card numbers or Social Security numbers
People wanting to steal your data will typically go for the easiest targets. So these simple steps can be very effective against any potential security breaches.
Easy Pay Direct will be happy to walk you through the steps required to implement PCI-DSS compliance. All you have to do is ask!
These days, merchants have to be able to accept credit cards. It doesn’t matter whether you have an online business, operate out of a truck, or have a brick-and-mortar location. People aren’t paying with cash that much anymore, and paper checks are rare.
These days, everyone is using payment cards.
And in order to process these payment cards, you’ll need a merchant account. In other words, you’ll need a way to process those cards before any funds can be put into your business bank account.
Before you make a decision about which merchant account makes the most sense for you, do some shopping around. Examine two or three services. You might even talk to other business owners near you to see what services work best for them.
They might work well for you also.
And remember your friends at Easy Pay Direct — we’re here to help you navigate the maze of modern payment processing!