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Going plastic: here's how to gain merchant status for your small firm so you can accept major credit cards

Rosalind Resnick

Here's how to gain merchant status for your small firm so you can accept major credit cards.

When Natalie Stetz launched her continuing-education business last year, the former technical writer was the one who ended up getting an education.

Unaware of the difficulties small businesses often encounter in obtaining merchant status--the ability to accept credit cards from customers and clients--Stetz printed up thousands of catalogs encouraging customers to pay by Visa or MasterCard.

"I thought it was money coming in and the bank would be happy to collect it," says Stetz, owner of the South Florida Exchange, in Fort Lauderdale. "Then I called a broker [who helps small businesses get merchant status] at the recommendation of a friend, and he said not to waste my time because I'd never be approved."

The reason: Back then, Stetz operated her business from home rather than from an outside office, and she took orders for seats in continuing-education classes over the phone. That practice--combined with her lack of a business track record--made her, in many bankers' eyes, a high risk for credit-card status.

As a result, Stetz. says, she missed out on some sales because customers weren't offered the convenience of paying by credit card when they phoned to sign up for a course. "Somebody calls and wants to register and has the catalog in their hand," Stetz explains. "Then they put the catalog down and go on with their day and forget to send the check."

Stetz's problems are not unusual. Though it's not known exactly how many small businesses are turned down for merchant status, they clearly face long odds. In the view of many banks that issue Visa and MasterCard credit cards, small companies are more likely to present collection problems than are larger, better-established businesses. Banks often assume that orders that come into a home-based business will be placed by phone or mail, making it impossible for the merchant to verify the validity of customers' credit cards. Banks also fear that small companies are more likely to fail or resort to fraud.

David Strider, president of Banc One POS Services Co. in Columbus, Ohio, acknowledges that "it's probably tougher than it needs to be" for small businesses to win merchant status. "Our customer demographics are in the small- to middle-market arena, and if we can serve them, we do," he says, but "we have credit standards that we abide by."

Judy Hoffstein, American Express' vice president for inside sales and account management, puts it this way: "The main reason small businesses are scrutinized is because we, as a credit-card company, have to pay the merchant first, and then we have to wait for the customer to pay us.

"If the customer decides that he wants a refund or isn't satisfied with the product or the service provided," she continues, "we have to go back to the merchant. We need to be absolutely certain that merchant is going to be there the next week."

Although it can be difficult for a small firm to obtain merchant status, it's not impossible. Companies that take the time to document their creditworthiness can often win over skeptical bankers.

Even merchants who strike out with banks can frequently gain merchant status through brokers called independent sales organizations (ISOs), which act as middlemen in helping small firms obtain merchant status from banks.

In fact, banks typically work closely with ISOs, sometimes referring small businesses to such organizations and other times using ISOs to serve markets that the banks cannot reach profitably. "Banks and ISOs work hand in hand," says Strider, noting that every merchant recruited by an ISO still must be approved by a bank before it can accept credit cards.

Moreover, banks and credit-card companies are aware of the rapid growth in the number of small and home-based businesses. American Express, for one, now has a small-business outreach program.

"I'm not guaranteeing that every single home business or small business will qualify," Hoffstein says, "but we will take into consideration all aspects of a business. The fact it's a home business will be a factor in our decision-making process; it won't be the only factor."

Winning merchant status can be achieved in as little as a week, or it can take weeks--or even months, as it did for Stetz--if you run a home business and the bank's account executive needs to visit your house to confirm that you run a legitimate concern.

Once merchant status is approved, the credit-card issuer typically withholds a small percentage of each charged amount as a fee for the service. Bank fees for Visa and MasterCard transactions can range from under 2 percent to as much as 4.5 percent of sales plus 25 to 30 cents per transaction; there can also be monthly servicing fees of up to $10. Charge-card companies typically do not charge a monthly fee, but they take a larger percentage of sales--up to 5.5 percent, for example, at American Express.

Small businesses with relatively low sales typically pay higher percentages than large department stores or nationally known catalog merchants.

In addition, banks lease or sell to merchants the computer terminals and printers needed for processing credit-card charges. For example, Barnett Merchant Services Corp., in Jacksonville, Fla., an arm of Barnett Banks, will sell a terminal for $445 or lease it for $14.95 a month; an electronic printer sells for $250 or can be leased for $10 a month.

Here are ways to improve your chances of obtaining merchant status:

Tout Your Own Good Record

When your business is new, use your personal credit history and financial assets to help convince a bank or credit-card company that you would be an acceptable risk as a credit-card merchant. Your reputation in the community can also work in your favor.

"Act like you're going up for a bank loan," advises Hoffstein of American Express. "Have a well-developed business plan that takes into consideration your business viability for the short, medium, and long term. Your business credit is important to us, but so is your personal credit, too. Get a firm handle on your personal finances."

Lean On Your Own Bank

Typically, your application for merchant status will get a more sympathetic review from the local bank where you've done business for years than from a bank with which you have no prior personal or financial relationship.

Karl Denninger, president of MCSNet, an Internet access provider in Chicago, obtained merchant status by sending his bank a simple, straightforward letter that proved effective. He told the bank it could either grant him merchant status immediately or he would empty his account and take his money elsewhere. Of course, Denninger notes, this approach works only if "the account is a large number, the more zeros the better."

You can also leverage your relationships with the bank that holds your home mortgage or financed your car purchase.

Open An Office

When you tell a bank or credit-card company that you run your business from home, the bank typically assumes you're running a mail-order operation--even if you're not. Mail-order operations present a greater chance of credit-card fraud, according to some bankers, because the merchant can't inspect the card--can't verify the cardholder's signature, check it against other identification, or swipe the card through a machine that checks the data on the magnetic strip on the back.

Banks generally look more favorably upon firms with an office or storefront--even a small one. So, if you're considering opening an office anyway, do it before you apply for merchant status.

Seek Help From An ISO

If you can't get to first base with your local bank, you may get help from an independent sales organization, also called an ISO or a merchant-service provider. ISOs are registered agents that represent one or more card-issuing banks and can intervene with the banks on your behalf to help you obtain merchant status. The retailer then typically remains with the ISO, which serves as a link to the bank for the business, processing the firm's credit-card sales transactions and sometimes leasing the electronic terminals necessary for such sales.

Be aware, however, that a few ISOs have proved disreputable. Some ISO newcomers several years ago collected excessive application fees and equipment-leasing charges; a few then skipped town. Strider of Banc One advises confirming an ISO's status with a bank or banks.

The vast majority of ISOs are trustworthy, and many doing business today get rave reviews from companies that use them. Teleflora of Los Angeles obtains merchant status for retail florists and offers them credit-card-processing services. Litle & Co. of Salem, N.H., specializes in processing credit-card orders for catalog or direct-mail merchants. Litle recently introduced the Alliance Business Program for small-volume and start-up mail-order companies.

Chuck Burtzloff of Cardservice International, a Calabasas, Calif., ISO, says his company is eager to work with new businesses and accepts 95 percent of all applicants. "Let's say someone goes to a bank and doesn't fit the tight bank profile to get merchant status," he says. "We have deals with large institutions like First Union, California Federal, and Great Western in which they take that merchant and refer them over to us once they've been turned down by the bank officers. We say, 'Let us have a shot at servicing this customer.'"

Keep Cash Reserves High

Since credit-card customers may charge back purchases--that is, return the goods for a refund--up to six months after the date of sale, credit-card companies are theoretically on the hook for six times your monthly credit-card charges.

With that in mind, assure the bank you intend to keep your cash reserves high. If you have enough cash in the bank to cover six months worth of potential charge-backs, the bank will feel more comfortable granting you merchant status.

Try Nonbank Issuers

A nonbank charge-card company may be more willing than a bank to extend merchant status to a small firm, especially if the business provides a product or service the charge-card company believes will benefit its members.

What's more, you'll often have a better chance of ultimately gaining merchant status from a bank after establishing a successful track record with American Express or Discover. Note, however, that nonbank charge-card companies may charge a higher fee than banks do.

American Express takes 2.95 percent to 5.5 percent of each sale charged with its card; the rate the business pays depends on factors such as its industry, whether charges are submitted on paper or electronically, and the business's projected annual gross sales. Discover declines to disclose its rates.

Be Persistent

If one bank or credit-card company turns you down, try another--and another--until one of them says yes. Persistence is finally paying off for Natalie Stetz. After months of getting nowhere with the banks, Stetz recently obtained merchant status through Cardservice International, the California ISO, which does business nationwide.

"My advice to other business owners," she says, "is never take no for an answer."

Rosalind Resnick is a free-lance writer in Hollywood, Fla. She was assisted by researcher Tony Panacciol

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