How to Get a Merchant Account: A Step-by-Step Guide for Businesses

Merchant accounts allow businesses to accept various forms of payments from their customers. The account acts as a facilitator between the merchant (seller) and the customer (buyer). But how do you know if you need a merchant account, and how can you establish one for your business? What do you need to consider and is this the best option for your business? In this article we will show you how to set one up, and some of the benefits and alternatives available to you as a business owner.

Step 1: Understand the Basics about Merchant Accounts 

How Do Merchant Accounts Work?

Merchant accounts link the payment gateway, which your customer uses to make a purchase, to the business's checking account. They act as the facilitator of the transaction and pull funds from your customer and deposit the funds into the businesses checking.

What Types of Merchant Accounts Are There?

Depending on the type of business you are running, you may find yourself opening a different type of merchant account. Some common merchant accounts are retail, mobile, ecommerce, and mail order. While this all are different account types, the purpose they serve remains the same.

Why Do Businesses Need a Merchant Account?

A merchant account is important for accepting different payment types from your customers. While alternatives may be available they are the way businesses can accept payments. As an example,  if you are looking for a card reader to accept credit card payments in your store you would want to open a merchant account that supports the card swiping hardware. 

How Much Do Merchant Accounts Cost?

Merchant accounts are typically free to set up, however may come with fees. Each transaction may be changed a certain percentage of the transaction amount, or a fixed rate to utilize the merchant account each month.  Be sure to check the pricing if exploring opening a merchant account.

Step 2: Obtain a Valid Business License

The next step is to obtain a valid business license. Be sure that you are able to operate your business with all the proper approvals from local governing bodies, and federal if required to establish the legitimacy of your operation. A valid license may be a requirement for opening certain types of merchant accounts.

Step 3: Get a Business Bank Account

Your business should have a dedicated business checking account at a minimum if you plan on getting a merchant account. This is because money marked for your business needs to be deposited into an account which matches the name. Not only is it good practice to keep your business funds in a dedicated account, but opening a merchant account without one may be difficult.

Step 4: Evaluate Your Processing  Needs

How do you plan on accepting payments from customers? Do you need a digital invoicing capability, or accepting physical cards in a store, or even the ability to enter card information into your payment processing gateway? Determining the needs of your business and finding a merchant account that supports these needs is critical.

Step 5: Compare Merchant Account Providers

There are plenty of differentiators when looking across merchant providers, but a few key considerations may make your choice a bit easier.

What to Consider When Choosing a Merchant Account Provider

The big items to keep in mind are the fees, how much are you going to be paying with this merchant account, whether fixed, or ongoing based on the transaction amount. Also consider how well the merchant account integrates into your existing business and has the hardware if needed available. The final item to consider may be support; if something is wrong will it be easy to resolve with your candidate provider?

Step 6 Complete and Submit an Application

Once you have selected the provider you would like to go with you will begin an application process. You will start with basic information like business name and purpose for opening the merchant account. You may even be asked how many transactions you expect to process through the account.

Closer to the end of your application you will most likely be asked for things such as proof of the entity you are applying on behalf of, EIN documentation, valid identification, among other items. These items are critical for proving a valid business is requesting the account, and a real owner is behind the decision. Submit these items and complete the workflow to formally request your merchant account.

Step 7: Receive a Response to Your Application

A typical response may happen in as little as three days depending on complexity and potentially up to two weeks in a scenario where the business structure is complex. The response may ask for additional information, or approval of your merchant account. At this point the formal response will guide your next steps.

Step 8: Set Up the Merchant Equipment and Software

Once your merchant account is set up, you may have had hardware as a piece of your package, allowing you to accept physical credit cards. Be sure to set up this equipment with the instruction provided and run tests to ensure that the equipment is working properly.

Step 9: Start Accepting Payments

At this point you should be set up to accept payments in the normal course of business. As you begin accepting payments, you should see your merchant account capturing these amounts and holding them for deposit into your business checking account. Be sure to periodically reconcile to be sure all payments are being captured in your merchant account.

Step 10: The Benefits of Opening a Merchant Account

A merchant account is a great way to reduce fees from alternatives like a payment facilitator (Payfac), and consolidate all your transactions into one place for reporting. It may also give you access to hardware that is needed in your business and establish a more professional presence to customers. Your merchant account will also provide you tax documents at year end to help keep tax reporting simplified.

Top Providers of Merchant Accounts

Popular merchant accounts include PayPal, Square, Stripe, PaymentCloud, or Payment Depot. Each offers different fees, hardware capability and software integration, making finding one that fits your business perfectly worth the time researching.

Alternative Solutions to Merchant Accounts

Merchant Accounts vs. Payment Service Providers

• A Payfac is a service that will allow you to accept payments from customers and utilize the payfacs merchant account to process payments into your business checking. A merchant account is where a business would set up their own account to complete these transactions. This could be thought of as establishing your own merchant account or borrowing one as a service. 
• Payfacs typically have higher fees associated with them and may not be compatible with physical hardware for accepting payments

Merchant Accounts vs. Peer-to-Peer Payment Solutions

• Rather than utilizing a merchant account, you can accept payments directly from customers; think Venmo. While this is possible, there is a risk of not having documentation such as a receipt, or customers trying to stop payments on these platforms without recourse to the seller. Peer-to-peer may be a great solution if contracts are in place. 

Final Word

Determining which merchant account is right for your business, how it incorporates into your existing operations, and seamlessly accepting customer payments are all large steps in a businesses functionality and ease of running. The decision is not easy and the requirements to set up one are expensive, however; on the other side of the work to set up a merchant account, owners can enjoy the benefits such as reduced transaction fees, ease of reporting, and centralized transaction processing. Be sure to take your time when deciding and start enjoying the benefits.