Signing up for a merchant account is an important step in extending the payment options your business offers. Signing up for a merchant account also carries financial responsibilities for the owner(s) and business. It is important to understand that a merchant account is a line of credit and will be underwritten with the processing bank as such.
The personal guaranty section of the application states that if the business suffers loses that cannot be covered by the business, the owner(s) personally guaranty repayment of such loses. This section is included in the application as protection from the high amount of risk the processor assumes from businesses that mismanage their account.
What to do if you would prefer not to sign a personal guaranty?
Most merchant service providers have alternate methods to evaluate the financial stability of a business and therefor waive the personal guaranty. The most common options are as follows.
- Business Financials
- Personal Letter of Credit
- Reserve Amount
Business Financials: A business that has been operating longer than one year can supply financial documentation supporting the strength of the company. Typical documentation includes income statements, profit/loss statements and balance sheets. Documentation prepared by a third party is always a plus.
Personal Letter of Credit: A personal letter of credit can be extended that promises a specific dollar amount for a specified amount of time. The terms of the promise to pay are outlined in the credit letter and both parties have to agree for the letter to be binding. This is often a good solution if the business financials do not satisfy the requirements to waive the personal guaranty.Reserve Amount: In the event that neither of the aforementioned solutions will satisfy the processor requirements to waive the personal guaranty, a reserve amount might. A reserve amount is a specific dollar amount that is held by the processor. A reserve amount will also have specific terms that outline how much will be held and how it will be collected. Typically a percentage of each settlement is withheld until the reserve is fully funded. Once the reserve is fully funded the processor holds the money in the event that the business is unable to fulfill the obligations of the account. The reserve amount is fully refundable if there are no contract violations.