After conducting exhaustive research, you’re ready to sign on the dotted line with your selected merchant account provider. You may feel a twinge of nervousness as you’ve read about some problems that others have encountered with processors, but accepting credit cards is a necessity and despite any potential risks, you forge ahead. However, by reviewing the following points and understanding merchant account basics, you will mitigate many of the difficulties that often come to the surface when swimming in the (sometimes) murky waters of the merchant account field.

1. On the merchant account application, you will be asked to indicate your monthly volume, average ticket, and highest ticket amounts. Many business folks have trouble determining these figures — especially new businesses that don’t have any sales track record. Despite the fact that you may just be using pure conjecture, you must OVERestimate these amounts (within reason).

Consider this scenario: You indicate that your highest ticket is $500. Several months later, you receive notification that a hefty $1000 transaction went through. Regardless of processor, this transaction will red flag and funds will be held indefinitely. You’ll then have to work with the processor’s risk department who may ask you for a copy of the invoice, confirm the transaction with the customer’s card issuing bank, and/or require bank statements. At that point, the processor may or may not release funds. (Many processors hold funds up to 6 months, and even longer, but this is on a case by case basis. Indeed, your processor may be able to release funds within a couple of days — again, based on your unique set of circumstances.)

In order to avoid this scenario, OVERestimate this high ticket. Similarly, it is best to OVERestimate your projected monthly volume. Again, funds may be held if you go over the amount you specified on the application. You may argue, “Isn’t the processor penalizing me for my success?” No, you have to remember that processors do not want to take the risk that the unanticipated additional funds will be charged back. Processors are concerned that in the event the merchant’s bank account does not have ample funds to cover such chargebacks, they will be left holding the proverbial bag.

The primary negative in OVERestimating the monthly volume, average ticket, and highest ticket is that the higher these amounts, the more financial information you may have to provide. Moreover, the underwriter may approve your account but not for the amounts you indicate on the application. It’s then up to you to determine whether you want the account or not for the agreed upon limits. I just want to highlight the third rail of merchant accounts: Do NOT go over the processing figures you specify on the application.

2. You are responsible for ANY and ALL chargebacks. If a customer disputes a charge, you should receive notification about the dispute, and you must respond in a timely manner. If you fail to respond, you will automatically lose a chargeback.

Furthermore, when you close a merchant account, you must understand that you’re still responsible for any chargebacks that take place afterwards. This is why merchant account providers require merchants to keep their bank account open for a year or two after the merchant account is closed.

3. By signing an application, you are basically acknowledging that you’re responsible for any such chargebarks. Moreover, you are acknowledging that you’re responsible for any unpaid processing-related expenses. Indeed, you’re signing that you’re going to abide by the Terms and Conditions, and by providing your John Hancock in the Personal Guaranty section, declaring that you’re going to assume any responsibilities related to chargebacks or other processing-related fees.

Some processors may waive this Personal Guarantee requirement but only if the merchant is running a non-profit or charitable organization, or owns a long-standing business with extremely solid financials

4. Always ensure that you have ample funds in your merchant account bank account – an obvious merchant account basic. If you have a low or zero balance, and you’re assessed a processing fee, you won’t have enough money to cover the expense. You’ll be hit with an equivalent NSF fee, and worse, such rejects may give cause for the provider to close your account, and again, hold any funds indefinitely.

Another option that your processor has in handling frequent rejects (and chargebacks, for that matter) is to set up a reserve or rolling reserve. This is rarely done but it can happen. The processor may choose to hold back a certain percentage of your processing deposits each month, for example, until all past rejects/chargebacks are settled and they’re satisfied that you’re back on solid financial ground. This is why all merchant account terms and conditions include discussion about reserves. (Even an initial reserve may be set up as a condition for application approval. Again, this is not a common occurrence.)

5. Check the fee structure on the application to ensure that all the rates quoted match. Policies, such as no termination fee, if promised, should be explicitly written on the app. You should contact your agent if you notice any discrepancies.

6. Please abide by the terms and conditions. You not only have to be honest with the information that you provide on the merchant account application, you have to follow through by complying with the stipulations. For example, I’ve seen folks get in trouble by letting a friend use their merchant account even though the friend’s business is a total separate entity. (If the friend gets a chargeback, the processor will call YOU, and you’ll be held responsible. You can only process for the business that you indicate on the application.)

7. Here is another merchant account basic: Understand the importance of PCI Compliance — guidelines introduced by the Payment Card Industry (PCI), known as the Data Security Standard (DSS). All processors and merchants who process credit card transactions must provide adequate security to the credit card holders’ data, so that the data cannot be misused. Of course, all backend networks must also be secure to reduce or eliminate the chance of fraud.

All merchant should ensure their own compliance with these guidelines. At the very least, merchants are required to complete paper or online questionnaires, revealing how they store, manage, and transmit data. It is recommended that merchants call, or better yet write their processor, to ensure that they are compliant.

One final bonus: I thought that I was only going to list 7 merchant account basics, but I thought that I should make mention of the fact that you should always have a contingency plan in place. If your processor closes your account or if you decide to close the account, have another option or two ready to go so that the transition to a new processor will be quick and painless.

However, please remember that merchant account approval is never automatic.  An underwriter will evaluate your application based on several criteria, including your credit score, nature of business (some businesses are on the prohibitive list), anticipated processing volume, etc.  Your credit score is particularly important and poor credit may preclude your application from getting accepted.  (Your selected processor may provide the option for you to secure a cosigner with good credit which will increase the chance for application approval.)

The list above only highlights the most common problems in the merchant account field. It’s not an exhaustive list, so please review your processor’s terms and conditions – another bonus merchant account basic.

Well, these are the merchant account basics that I thought would prove helpful to any new merchant. While I’ve outlined some potential minefields, they’re much easier to avoid now that you know about them.