Personal Credit and Merchant Accounts
A merchant account is essentially a line of credit that enables you to accept credit cards. As the applicant for a merchant account, your personal credit is an important consideration during the application process, but it doesn't have the same effect as it would on a conventional line of credit or a loan application.
- Why does my personal credit matter?
- During the Application
- How good does my credit have to be?
- Does my personal credit affect my rates and fees?
- Can my existing merchant account be revoked if I have bad credit?
- How can I get a merchant account with poor credit?
Why does my personal credit matter?
When a business runs a credit card transaction, funds are removed from a customer's credit account and are deposited to the business' bank account under the assumption that the merchant has delivered the products or services that they said they did. If a customer issues a chargeback, the processor must remove the funds from the merchant's bank account and reapply the funds to the customer's credit account. If there are not enough funds in the business' bank account to cover the chargeback and associated fees, the processor or acquiring bank must reimburse the customer out of their own pocket and then recoup the fund from the business. Will the processor be able to get their money back? Hence, personal credit of the business owner or principal becomes an important factor.
Our example uses a single instance of a chargeback. Some instances of fraud can leave a processor or acquiring bank holding the bill for hundreds or even thousands of dollars. These are the basic reasons why banks review a business owner's personal credit standing when considering their merchant account application.
During the Application
When you apply for a merchant account, many factors are taken into account. Your personal credit standing will affect the application process in one of three ways:
- If your personal credit is very poor, the merchant account application will likely be declined.
- If your personal credit standing is marginal, the merchant account may be approved if you agree to stipulations such as a rolling reserve or an ACH delay.
- If your personal credit score is good, the account will likely be approved.
Personal credit mainly impacts a merchant account during the application process, where it's considered with other criteria to calculate the risk associated with a new merchant account. After the application process is complete, processing activity is used to measure risk associated with an account.
How good does my credit have to be?
Your credit doesn’t have to be perfect to get a merchant account. Applying for a merchant account is not like applying for a mortgage. How strong your credit needs to be depends on the type of merchant account that you are applying for, the amount of processing volume you are requesting, and the average ticket amount that you are declaring. An inquiry from a processing bank on your credit report doesn’t look bad and will not adversely affect your credit rating.
Does my personal credit affect my rates and fees?
Personal credit does not affect the rates and fees of your merchant account. A merchant with outstanding credit could get an account with the same rates and fees as a merchant with weak credit, assuming that the merchant with weak credit is approved.
Even though personal credit doesn't directly impact the rates and fees of a merchant account, it can indirectly impact the overall cost and operation of the account if a rolling reserve or ACH delay is required. If the principal signer on a merchant account has weak credit, a processor may require an ACH delay or rolling reserve in order to mitigate the higher perceived risk of the account.
Can my existing merchant account be revoked if I have bad credit?
Personal credit standing will not cause you to lose a merchant account that you already have. Once you get a merchant account and start accepting credit cards, processors use your processing history as a benchmark, not your personal credit status.
How can I get a merchant account with poor credit?
The following circumstances involving personal credit will cause most banks to deny a merchant account application.
Bankruptcy - If you are in active bankruptcy a processor will likely decline your application. If you've had a bankruptcy that has discharged you should be able to obtain a merchant account assuming that you have re-established your credit.
Collection Accounts - If you have debt that has gone to collections a processor will likely deny your application for a merchant account. You should be able to get an account after the collection reports are reconciled and the notifications have fallen off of your credit.
Lack of Credit History - A processing bank does not need to see multiple satisfactory lines of credit or a ten-year credit history to approve a merchant account application. However, they do need something on which to base credit-worthiness. If you don't have any credit history whatsoever a processor will likely deny your application for a merchant account.
If you fall into one of the categories above, don't give up. Some processors specialize in helping merchants with less than perfect credit. The most important thing is to be honest about your credit standing with processors.
If poor personal credit is stopping you from getting a merchant account, there are things that you can do to get around the credit hurdle.
Enlist a co-signer
The first and most popular way of getting a merchant account with poor credit is to have someone with better credit act as a co-signer on your merchant account. In this case, the processor will consider the personal credit of the co-signer on the merchant account application instead of your personal credit.
Allow ACH delays or rolling reserves
Another way to get a merchant account if you have less than perfect personal credit is to allow processors to impose ACH delays or rolling reserves on your account. Both of these stipulations can be removed after a satisfactory processing record has been established. Note that sometimes ACH delays and rolling reserves are not an option if personal credit is exceptionally poor or if tax liens or collections are an issue.
Processors have varying credit tolerances. Some will be able to work with merchants with less than perfect credit while some are more stringent about credit requirements. When you're researching processors and applying for a merchant account, be honest about your personal credit standing, even if you don't have the best score. Being upfront about your credit status will ensure that you don't waste time considering processors that may not be able to get you approved.