As if there weren’t plenty of things to worry about already when you’re thinking about making the jump to running your own business, you might be asking yourself, “Does personal credit matter when opening a merchant account?”
Well, the answer is yes. And no.
Let’s take a look at what it is that we’re asking.
A merchant account is really just a line of credit that makes it possible for your business to accept payments by credit card. That means that when you apply for a merchant account for your business, it’s a lot like you’re applying for a credit card. Your credit score is one factor that’s considered, but not the only one. A variety of things are taken into consideration when a credit card issuer decides whether or not giving you a credit card is a good idea.
When you apply for a merchant account, your personal creditworthiness is part of the equation, but not as big of a part as it would be in an application for a credit card or a loan. It’s as if a line of credit were being extended to a combination of you and your business. The bank, etc., looks at things about you, things about the industry, and things about the business itself. So, your personal credit matters, but how much it matters can vary.
That means that the real question here is, “When my personal credit does matter in my application for a merchant account, why does it matter, and more importantly, what can I do about it?”
Understanding how credit card payments are processed can help clarify why your personal creditworthiness matters when you apply for a merchant account. First, after a credit card transaction is initiated, the payment amount is placed in the merchant’s bank account. The amount is recorded in the customer’s account as a debt. If the customer later initiates a chargeback, the bank has to take that amount out of the merchant’s account and subtract the amount from the customer’s debt balance.
Although it does cost both the merchant and the bank a certain amount of time and money, every business that accepts credit card payments has to deal with chargebacks to one degree or another. The problem, however, is that the merchant may not have enough money in its bank account to complete the refund. The risk of this increases the longer it has been since the credit card transaction was made.
If that happens, the bank has to use its own funds to reimburse the customer. It then must try to collect that amount from the merchant. If the merchant doesn’t have enough money in the bank to reimburse the customer in the first place, the bank is likely to have a difficult time recovering the amount.
The credit history, etc., of the person operating and making decisions for the business can be a good indicator of what can be expected from the business. If the bank believes that your credit history, etc., suggests that it is unlikely that the bank would be able to recover its funds, it is also unlikely that the bank will agree to take on that risk.
Three of the main things related to personal credit that will most likely make a traditional bank unwilling to provide your business with a merchant account are:
Insufficient or no credit history
The bank might not expect you to have a lot of credit history, but it needs something to judge your creditworthiness, so it will expect you to have some. The only thing that you can do about this is to establish a credit history. Unfortunately, that’s not something that you can do immediately, so it will take a certain amount of time.
Accounts, etc., in collections
Having debt that has been given to a collection agency will probably prevent you from getting a merchant account at a traditional bank. The good news is that if you pay off the debt it will eventually disappear from your credit report and no longer prevent you from getting a merchant account. The bad news is that it takes time.
Being in bankruptcy currently will probably be enough for a traditional bank to deny your application for a merchant account. Once you have discharged the bankruptcy and reestablished your credit, you should be able to get your application approved, but in this case as well, it takes time.
So, does personal credit matter when opening a merchant account? What can you do if waiting until you build up a substantial credit history, pay back debt that’s gone to collections, or have bankruptcy discharged is not an acceptable option? If you are operating a high-risk business to begin with, and have bad credit on top of it, are you simply out of luck?
Fortunately, you do have another option that can help you get your business up and running. A high-risk payment processor may be exactly what you need. A high-risk payment processor such as Zen Payments specializes in payment processing for high-risk industries, so it knows those industries better than a traditional banker would.
We have the ability to approve accounts for merchants who have bad personal credit. When reviewing applications for merchant accounts, we look more at the business itself than at the owner. There are a wide variety of reasons behind bad credit. We understand that, and in most cases, we are willing to give you a chance.
When choosing a high-risk payment processor, be sure to ask as many questions as necessary until you’re satisfied with the responses and clear on what you can expect and what will be expected of you. Our team at Zen Payments would be happy to speak with you and find ways to help your business prosper, so please don’t hesitate to contact us.