7 Things You'll Need to Open A Merchant Account
Getting started with accepting multiple payment methods
Running a small business is difficult. There’s a lot that business owners like you need to stay on top of, and one of the biggest challenges is accepting different forms of payment. This is especially true as companies develop payment technology that allows customers to pay with digital wallets. As cashless payments become the norm, it’s important that your small business is able to accept all forms of payment. One of the most essential pieces of payment processing is a merchant account. So, in this article, we’ll help you understand more about merchant accounts, including what they are and how to apply for one, as well as the seven things you’ll need to open a merchant account. First, we’ll give a brief overview of merchant accounts.
What is a merchant account?
A merchant account is a specific type of bank account opened by a business in order to accept funds from debit and credit card transactions. Merchants may also use this account to make payments as well.
When your business makes a sale, your company’s acquiring bank or payment processor receives funds as a result of that transaction. They then deposit the funds into your merchant account where they sit for 1-3 business days. After that, they're available for deposit in your business bank account.
Depending on your merchant account provider, they will take out a variety of fees before depositing into your account. These additional fees depend on the provider you’re working with and the price structure the provider offers. Keep in mind that there are different merchant account types based on the type of business you run – whether you’re a traditional brick and mortar store, run a mobile business and need to process mobile payments, or have an ecommerce store.
Each type of merchant account is specific to the type of business you have, although some providers offer support for all of these types of businesses. And when it comes to an online merchant account, it's important that it also has a payment gateway, which allows you to accept online payments. Now that you know about merchant accounts, let’s look at the general process to get one.
What is the process to get a merchant account?
Generally, you’ll go through your merchant services provider in order to establish a merchant account. This could be a member bank or an authorized agent of the member bank, such as an independent sales organization (ISO). When it comes to applying for a merchant account, there are a few steps you’ll need to complete. The four basic steps are as follows:
- Research and then complete an application – This involves researching providers that fit your business’s needs. Once you’ve narrowed down your search, you’ll need to apply for a merchant account. While this used to be cumbersome, many merchant services providers now offer online applications to streamline the process. During the application process, you’ll need to provide information about your business. We’ll discuss more on this later.
- Document submission – This step involves submitting a wide array of documents about your business. Each provider is different, and while many documents may be the same, it’s important to check with the specific provider to fully understand what documents your small business will need to submit.
- Underwriting process – If an acquiring bank or credit card processor accepts your business, they’ll perform underwriting to assess your business’s risk level. That’s because if there is a chargeback, the merchant services provider is typically responsible for refunding the customer before receiving funds from the merchant. So they’re simply ensuring that your business is lawful and stable.
- Setup – As you await acceptance, you may receive equipment and software from your merchant services provider. This equipment could include credit card readers, point of sale (POS) software, or mobile POS systems. For ecommerce, it may mean setting up your virtual terminal on your ecommerce site. Once you get approval from the financial institution, you’ll be able to accept credit card payments.
Now that you know the general process of applying for a merchant account, let’s look at the seven things you’ll need to open one.
What do you need to open a merchant account?
As you’ve seen, opening a merchant account can be a straightforward process. However, you’ll need to make sure you have all of the necessary information collected before you apply. Here are the seven things you need to open a merchant account.
Business bank account
One of the most important steps you can take as you’re growing your small business is to make sure you have a business bank account. Not only is it good practice to keep your business and personal accounts separated, but it’s also necessary to accept credit and debit cards. A business bank account is the first thing merchant account providers will look for. You’ll need to show proof of this business account, including business bank statements. Merchant service providers use these statements to assess the risk level of your business, so be sure your business account is in good financial shape and has sufficient funds in the account. Keep in mind that a low or negative balance in your business bank account often signals that you are a high-risk business.
This business bank account is also where the payment services provider will deposit funds from your business’s sales, as well as collect fees for providing their services to your business. These fees could include monthly fees, setup fees, transaction fees, credit card processing fees, and any equipment fees. Therefore, maintaining the health of this account is key.
Employer Identification Number (EIN)
When you file your personal taxes, you use your social security number. In the same way, when you file your business taxes, your business needs a unique identification number. That’s what an EIN is for. With the exception of sole proprietors, every business needs an EIN. You’ll use this EIN on other legal forms besides your taxes, too.
Articles of incorporation and business license
To ensure your business is legitimate, merchant services providers require articles of incorporation. Whether your business files as an LLC, sole proprietorship, partnership, corporation, or cooperative, articles of incorporation tell providers that your business is in good legal standing with your local jurisdiction. To get articles of incorporation for your business, you can typically visit your state’s website where you’ll find specific instructions. You'll typically also need to show your business license which is a document that demonstrates that you can operate your business in a specific city, county, or state.
Financial statements and tax returns
In addition to proving you have a business bank account, a provider will also ask to see your financial statements and tax returns. Usually, a merchant services provider will also need your business bank account information, such as your checking account and routing number. You may be asked to simply provide a voided check that contains all of this information. They’ll use this information to link your merchant account to your business bank account.
Depending on your provider, you may have to provide other financial documents such as balance sheets and cash flow statements. If you are currently accepting credit card payments and looking to switch providers, you’ll likely need to provide processing statements as well.
When it comes to accepting credit card payments, the credit card networks like Visa, Mastercard, American Express, and Discover want to ensure that your business is securely processing and protecting customer credit card data. That’s why they instituted PCI DSS, which stands for Payment Card Industry Data Security Standard. These rules and regulations help ensure the security of credit card data at checkout – whether virtually or in-person. While it’s not a federal standard, many merchant services providers require that your business meets PCI compliance.
Other supporting documentation
Because each payment service provider has their own set of standards, they may require additional or different documentation than we’ve already discussed. This documentation could also vary depending on what type of business you own or the industry you operate in. As always, it’s best to discuss the documentation with your potential merchant services provider. Here’s a brief list of what your business may need to procure:
- Marketing materials
- Contact information
- Business plan
- Inventory reports
- Estimated sales volumes
Refund and return/exchange policies
Finally, you should prepare to provide your business’s policies on refunds, returns, and exchanges. Merchant services providers may ask for this information in order to scrutinize them for potential chargeback risks. Loosely defined policies generally invite more chargebacks from customers, which increases your business’s risk. That’s why it’s important to have well-defined policies in place.
As you look to build your small business, a merchant account can play a pivotal role. That’s because cashless transactions are continuing to rise, and therefore businesses who don’t have the means to accept credit and debit card payments could be left behind. By understanding the process of opening a merchant account and what you’ll need to open one, you’re well-prepared to run your business in the modern age and keep it moving forward.
Ready to work with a payment processor who can help you accept credit card payments?h5
Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.