If you are starting a new company and seeking a merchant account to process your credit card payments, the last thing you want to do is to make strategic mistakes in communicating with your prospective supplier that result in a rejection.

If your company is rejected, they may not tell you exactly why, so you may not understand why you were rejected and then make the same mistakes again with your next application.

This article was written to give you the inside scoop on what you should do and not do when you approach merchant account providers.

Business Plan Advice

Some merchant card providers will ask you for your business plan. If you have one that was properly written, you will be in good shape.

A properly written business plan will:

• Demonstrate your company’s unique selling propositions.
• Quantify the investment and cash needed to run the business for the first two or three years.
• Show the sources of your working capital.

To learn more about what else should be included in your business plan, read the Business Plan chapter of our 250-page book, Start Here: The Guide To Building And Growing Your Direct Selling Company.

If you show your current assets as insufficient to operate the business, you will show everyone that your business is at risk of closing. You will be saying that you won’t have a financially stable company. Merchant account providers want to see that you will stay in business, so they need to see you will have enough cash to operate the business.

Your business will require more cash than just cash needed for business development, legal expenses, and consulting costs. These items are one-time costs.

What about monthly ongoing costs? A lack of detail regarding expected expenses over time will put your business at risk of closing from the point of view of a merchant account provider. Merchant account providers want to work with companies that are aware of and have the ability to cover all of their expected financial expenses from assets and revenues. They want to see from you a profit/loss financial statement with monthly columns for several years.

Merchant Account Provider Worries

From the viewpoint of a merchant provider, the merchant provider is fearful of two situations – inadequate funding of the business and too rapid growth. Their financial exposure is tied to the volume of transactions they will process and the percentage of these transactions that will be contested by purchasers who have up to 6 months to contest each credit card charge.

They want to see a financial forecast so they can

• quantify their financial risk
• determine and tell you the maximum total dollar value of transactions they will process monthly
• ask from you an adequate reserve (holdback) of funds processed to be used if/when a percentage of your purchasers demand their money back

The reserve is funded from transactions they process. Until the reserve is met, they will either not give you your money or give you only a proportion of your money.

Merchant account providers are also concerned about the legality of your compensation plan. If you have not had your compensation plan professionally reviewed to ensure all parts are legal, contact Sylvina Consulting.

What You Must Do

It is imperative that you include a proforma financial statement (profit/loss) preferably on a monthly basis with your application for a merchant account. The financial statement should show some revenue growth over time, but not too rapid growth, because rapid growth scares merchant account providers because it increases their financial risk from chargebacks.

It’s a funny thing. If you are presenting a business plan to investors, investors want to see rapid revenue growth. However, when presenting a business plan to a merchant account provider, merchant providers want to see flat revenues or revenues that climb slowly, because they are more worried about their financial risk than how large your business grows.

Most merchant account providers are wary of businesses that grow too quickly (too quickly according to them), because they want to minimize their financial risk. Those with little or no experience with MLM-type companies that grow quickly may view rapid growth or projected rapid growth as hallmarks of a criminal enterprise.

Because merchant account providers will cap the total dollar volume of transactions they will process for you monthly, and you cannot guarantee that you won’t process more total dollar transactions than you forecast, you absolutely need to have more than one merchant account provider. I recommend that you get two or three of them.

Merchant Account Agreement Considerations

Don’t sign any merchant account agreement that includes a clause that says you must process ALL of your transactions through them, because you can’t accept this condition if the merchant account provider has the option to cap the total dollar volume transactions per month.

Above I mentioned the “reserve.” It is common for merchant account providers to increase the reserve they require from you as your sales grow. They do this because as your sales grow, so does their exposure to risk from chargebacks. You need to account for the need for larger reserves in your cash-flow management projections.

Conclusion

Like a scout, be prepared when you contact merchant account providers to minimize the odds of rejection. Use this article as a guide to tell you what to do and not do.