Credit Card Processing Blog

As a business owner, you may have heard the term Merchant Cash Advances (MCA) thrown around and wondered whether you should take advantage of them.

For starters, Merchant Cash Advances allow merchants to get an advance on their future revenues. Essentially, you’re selling a portion of your future sales in order to get an advance on capital.

These kinds of cash advances work differently from traditional bank loans. In order to qualify for one, a merchant has to accept credit card payments and/or have other income streams that regularly fund the business. After applying, the credit card processing company will then determine risks based on a merchant’s credit card revenue. If it looks like a merchant will easily be able to pay back the advance in a reasonable time, they get approved for the MCA. The advance amount will then be deposited into their bank account.

Merchant cash advances are designed for merchants that may not be able to easily get a traditional business loan. However, with convenience comes a cost. The interest rates on Merchant Cash Advances are typically higher than a traditional business loan. Because of this, it’s important to understand all of the pros and cons, and how they may affect your business before you say yes to an MCA.

  1. The approval process is relatively simple.

Unlike a traditional business loan which typically requires an extensive approval process, your application and approval for a Merchant Cash Advance are based solely on your credit card revenue. Usually, the application process is one or two pages that require crucial information such as your business tax ID and social security number (among other things). Because approval is based on revenue, you will need to provide past payment history including bank statements and credit card transactions.

If your business regularly processes a high number of credit card transactions but has bad credit, an MCA can allow you to access capital quickly in a pinch.

  1. You can get approved quickly.

Perhaps you have an emergency (for example, a key piece of equipment needs to be replaced) or you have the opportunity to take advantage of an offer that will upgrade your entire business (for example, a great deal on new fixtures). Since the approval process for an MCA is done online, you can access funds much faster. Often, the money will be in your account in a day or two.

  1. There’s no interest.

With an MCA, there’s no interest and the amount you owe never changes.

How a merchant pays back the loan depends on the factor rate (the number that sets the total amount the business owner has to pay back for the MCA) and the retrieval rate (the fixed percentage taken out of credit card sales to pay back the advance).

The factor rates generally range between 1.12 and 1.5. For example, if the factor rate is 1:3 and an owner gets an advance of $50,000, this means they’ll have to pay back $65,000 — and so on. Retrieval rates vary between 5% and 15%. So, if the retrieval rate is 10% and the merchant brings in $2000 in credit card sales every day, $200 of that will have to go into paying back the MCA.

  1. It’s expensive.

If you need an influx of cash in a pinch, an MCA may be your best bet. However, that kind of convenience comes with a hefty price. If you do your research, you’ll find that as long as you make your payments on time, it may be much more affordable to get a traditional business loan.

  1. MCA’s aren’t regulated.

MCA’s aren’t loans, therefore they’re not regulated by standard lending and usury laws. This is why lenders can charge the exorbitant fees that they do. The general lack of regulation on MCAs leaves business owners open to the risk of taking an MCA deal with a predatory lender. Before you say yes to an MCA, make sure that you carefully review the terms and the reputation of the provider.

At the end of the day, you need to carefully consider what business goals an MCA will help you accomplish. Will it allow you to invest in an area of your business that will create even more revenue (for example, the purchasing updated equipment) or is it simply to cover overdue bills? When accepting an MCA you want to make sure that the funds are going to help you grow your business and not just provide a band-aid solution to pre-existing problems.

Running a cash-only business simply isn’t realistic. If you’re going to grow your business, you need to be prepared to accept credit and debit cards. (According to a recent study by Intuit, 83% of small businesses that began accepting credit cards saw an increase in sales.) This means choosing a credit card processor.

First thing first: no matter which payment processing company you choose, there’s going to be fees attached — that’s unavoidable. It’s also not an easy task choosing the right credit card processing company. There’s a lot of information to sift through before you can make an educated decision. With that said, there are some essential features you need regardless of which provider you choose.

Here’s a couple of things that you should look for in a credit card processing company.

  1. Accepts all major credit cards.

There’s nothing worse than having to turn a customer away because you don’t accept their payment of choice. Instead, look for a credit card processing company that accepts all major credit and debit cards. Depending on what kind of business you run you may also want to look into a processing company that also can handle gift cards and electronic benefit transfers (EBT).

  1. Supports new payment technologies.

If your business favors tech-savvy customers, you’ll want a processing company with near-field communication (NFC) technology, so you can accept digital wallets such as Apple Pay, Samsung Pay or Android Pay. That way, your customers can easily make a purchase directly from their smartphone or tablet.

  1. Fraud protection.

As a merchant, you’ll want to protect yourself from fraud as much as possible. Always make sure that your credit card processing company offers solid fraud protection services.

  1. PCI compliance.

If you’re planning to accept credit cards, you’ll want to make sure that your processing company is PCI compliant. The Payment Card Industry (PCI) Data Security Standard is an information security standard for organizations that handle branded credit cards from the major card schemes. The PCI Standard is mandated by the card brands and administered by the Payment Card Industry Security Standards Council. However, PCI compliance is not federally mandated and merchant account providers are not legally required to follow security standards set forth by the credit card industry (yikes!) Check to make sure they’re compliant before you choose a processor.

  1. The ability to process both online and offline payments.

Things change. While you may be a brick and mortar merchant right now, there’s always a chance that you’ll want to take your business online in the future (or vice versa). Look for a processor that can handle both in-person and online payments so that you don’t have to go through the hassle of switching providers when your business evolves.

  1. Helpful customer support.

While it may be tempting to go with the cheapest option possible, it’s worth paying a little extra for helpful customer service. Look for a processing company that includes 24/7 customer support. When you’re running a business, time is money. Having access to helpful and efficient customer service is worth its weight in gold.

It used to be that you’d walk into a small business and admire their iPad POS with a mix of admiration, curiosity, and awe. There’s something about an iPad POS that automatically signals “cool and forward thinking” — and dare I even say, “trendy.” However, iPads have now become an increasingly common POS choice  — especially for small businesses — because they offer advantages that a traditional POS doesn’t.

Here are a few reasons why an iPad POS might be the right choice for your business.

They’re affordable.

Unlike a traditional POS system which can cost a merchant upwards of $20,000, an iPad is much more affordable. You should be able to get set up for around $1000. If you’re a new business, this drastically reduces your startup costs. Also, iPads tend to be really durable and typically last for about 4-5 years. If you do need to replace an iPad, it will only set you back a couple of hundred dollars and you can easily pick one up through Apple or your local electronics store.

They’re flexible.

You’re not tied to one app. When you purchase an iPad for a POS, you’re buying into the entire Apple universe. If you’re not pleased with the POS app you’ve downloaded you can easily switch apps without impacting the flow of your business or your bottom line.

They provide an enhanced customer service experience.

Paying a restaurant bill. Purchasing spa services. Minimizing lineups. These are all customer service experiences that can be enhanced with an iPad POS. There’s nothing worse than having to wait to pay after you’ve had a great experience. Whether they’re on the shop floor, at their table or interacting with your business in another way, with an iPad POS you can provide your customers with the option to pay their bill on the go.

They have powerful integrated features that you can’t find anywhere else.

From inventory tracking and direct ordering for restaurants to shipping integrations, loyalty solutions (for example, the ability to integrate with Mailchimp to send customer emails) and more, an iPad POS offers powerful integrated features that are beneficial to both the merchant and the consumer.

They’re already familiar.

If you cringe at the thought of having to train your staff on how to use a POS, you might want to consider an iPad. Thanks to the proliferation of smartphones and tablets, people are already familiar with how an iPad works, making training very easy and straightforward.

They’re aesthetically pleasing.

When it comes to iPad POS, it’s hard not to mention cool points. For many merchants, the fact that they’re aesthetically pleasing is a huge selling point. Lloyd Swords, owner of the Harper and Madison coffee shop told ShopKeep (an iPad POS system), “The clientele we are going for has a sort of hipness to it and to see the iPad being used as a cash register will be a novel attraction for the café.” If you’re a business that prides itself on being cutting edge and forward thinking, an iPad POS is definitely going to send that message.

There’s an old adage: just because you can, doesn’t mean you should. As a business owner, you might be considering charging your customers a credit card processing fee. Charging the customer is an easy way of offsetting your own costs in that area. However, just because you can do this doesn’t mean that you should. There are different laws, card brand agreements and consumer laws that need to be followed depending on the nature of your business and where you’re located.

To help you make the right decision, here’s what you need to know about passing credit card fees onto your customer.

There’s a difference between Surcharge Fees and Convenience Fees.

First of all, it’s important to understand that Surcharge Fees and Convenience Fees are not one and the same. Surcharge Fees occur when you pass the processing fee onto the customer to help minimize the amount you as the merchant pays for processing credit cards. Whereas Convenience Fees are charged when you’re providing the customer with a payment option that may not have been available to them otherwise. (For example, when you go into your local bodega, make a purchase under a certain dollar amount and are charged an additional fee at the till.)

In the United States, there are certain states that don’t allow credit card surcharging.

If you’re operating in the United States, you’ll want to make sure that your State allows credit card surcharging. While some card brands allow surcharging if you follow the specific guidelines of their merchant agreement, at the end of the day it all comes down to where you’re located. California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Puerto Rico, and Texas all prohibit merchants from applying surcharges. Even if you don’t reside in one of these States, it’s important to read through your merchant agreement and know the local laws.

Each card brand has slightly different guidelines.

Research each card brand and familiarize yourself with their surcharge guidelines. Each brand has slightly different rules, so it’s important you read through each of them carefully.

Visa lists its guidelines under the 5.6.1.3 US Credit Card Surcharge Requirements – US Region and US Territories. Mastercard has its own distinct set of rules for US merchants which can be found here:  5.11.2 of the MasterCard Rules. Lastly, if you’re planning on allowing customers to pay by Amex, make sure you become familiar with their US Merchant Policy.

Consider the customer experience.

Sure, tacking on a credit card surcharge to customer purchases will help you offset credit card processing fees initially, but it might not be worth it in the long run. When you’re considering adding an additional fee to credit card payments, you need to carefully consider how it will impact the customer experience — especially if you’re a new business looking to develop a loyal customer base.

Think of it this way: people don’t like to pay extra just to use their preferred payment method. It leaves a bad taste and may impact whether a customer comes back in the future. As a merchant, credit card processing fees are a reality of doing business. To minimize the impact on the customer experience, it pays to do your research and find a processing company that offers you the best deal possible.

Trying to get a grasp on your monthly credit card processing bill can make you feel lost, with a bunch of hard to decipher numbers and what-the-heck-does-that-mean jargon laid out before you. As a business owner, you want to make sure that you’re not paying more than you have to for credit card processing and that your costs haven’t suddenly increased from one month to the next. This starts by having a firm grasp on your monthly credit card processing statement.

Trying to decode your statement? Here’s what you need to know.

Compare more than two months of statements at a time

If you’re looking to examine your costs from month to month, it’s helpful that you grab more than one statement to compare side by side. Because of the nature of credit card processing, it may take more than one statement to get a clear picture of one month’s worth of charges.

Effective Rate

The effective rate of a credit card processing statement is the total processing fees divided by total sales volume. In other words, it’s the percentage rate you’re paying for accepting payments by credit card. Effective Rate can be calculated using the following formula:

(Total monthly fees / Total monthly sales) x 100 = Effective Rate

Your total monthly fees include everything from processing charges and gateway fees to statement charges and equipment rental. It’s everything that you see on your statement. By looking at your Effective Rate (which should be visible in the summary portion of your statement) you’ll be able to see the big picture cost of how much you’re paying for credit card processing.

Interchange fees and card brand fees (wholesale costs)

Credit card brands like Visa, Mastercard and the like will take a cut of processing costs – these are called brand fees or “card association fees and assessments.” In addition, banks that have issued the credit or debit card to the customer will charge an interchange fee to cover the cost of processing each individual card and transaction (the more perks the card has, the higher the interchange fee). These are called wholesale costs and they might not be visible on your statements because sometimes they’re integrated with markups.

Markups

Everything outside of the fees mentioned above is considered a markup. This includes Processor Acquirer (fees added by the processor behind your merchant account), Merchant Service Provider (MSP) (the organization that sets up and manages your merchant account) and Additional Service Providers (fees associated with equipment or gateway providers).

Effective Markup

Markup fees vary wildly based on the the MSP, so knowing your markup costs is a good way to see if you’re paying more than you need to be. If you’re able to see your interchange rates and card brand fees on your statement, you can easily calculate your Effective Markup, which lets you see exactly how much you’re paying in controllable fees each month. You can calculate it using the following formula:

[Total Fees – (Interchange Fees + Card Brand Fees)] / Total Sales = Effective Markup

When decoding your monthly credit card processing statement, it’s important to understand the individual fees, but also look at your costs from a big picture perspective. If you don’t have access to your interchange rates and card brand fees on your statement, focus on your Effective Rate because that will tell you how much you’re paying in fees per month.