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Merchant Account Soft Limits – Explained

Posted by Alex Neir on Tue, June 21, 2011 @ 02:49 PM
Merchant Account Soft Limits

Merchant Account Soft Limits – Explained

When a business applies for a merchant account the application will ask for three financial figures that represent the credit card processing amounts requested by the business. These three figures are:

  • The average ticket or sale amount
  • The high ticket or sale amount
  • Monthly credit card sales volume

These figures help the credit card processor compile a risk profile for the business and ultimately drives weather the business is approved or not. A risk profile is considered based on the fact that the funds received from the end customer are deposited directly into the business bank account. The credit card processor assumes that the products or services purchased will be delivered. If they are not and the business disappears, the processor is responsible for refunding the customers money.

The sales figures requested on the merchant account application are weighted against the businesses financial strength to determine acceptance. If the business and owners are financially capable of supporting the requested amounts the application is approved.

Once approved these figures represent the soft limits for the account. The term “soft limit” is used because the account will allow these limits to be exceeded, however, the credit card processor reserves the right to hold funds that exceed the soft limits amounts on the account. Therefore it is important to understand your account limits and to stay within them.

What if you have to exceed your soft limits?

The best thing to do is be proactive. If you know you are going to exceed your high ticket amount or your monthly volume, call your processor ahead of time and explain the situation. By being proactive you are demonstrating good management of the account and most processors will work with you and will not hold your funds. 

Tags: Merchant Account Soft Limit, Why Is A Merchant Account A Line Of Credit, Risky Credit Card Transactions

What is a merchant account?

Posted by Alex Neir on Mon, February 07, 2011 @ 05:12 PM
What is a merchant account

What is a merchant account?

A merchant account is a financial vehicle that lets you accept payments from someone else. The three important factors to understand about a merchant account are as follows:

A merchant account is….

  • Underwritten by a financial institution
  • Allows you to accept payments
  • Is a line of credit

A merchant account is underwritten by any number of financial institutions. Most major banks have the capability to set up a merchant account. However, most banks will actually refer the account to a licensed merchant service provider (MSP) or independent sales office (ISO). The reason; most banks see their core competency outside the merchant services area and will refer your business to an expert (for a commission, of course). An MSP/ISO is an institution that establishes relationships with a network of credit card issuing banks and credit card associations (Visa, Master Card, AMEX, etc) for the purpose of processing payments. In addition most MSP/ISO organizations offer many other services such as fraud detection, fund remittance, detailed reporting and customer service.

A merchant account allows you or your business to accept payments. Payment acceptance can be in the form of credit and debit card payments, automated clearing house (ACH) payments, and electronic check payments.

A merchant account is a line of credit. The reason a merchant account is a line of credit is a function of the liability that charge backs create.

If you are considering opening a merchant account please refer to – 7 items to consider with an affordable merchant account.

*Image provided by Andres Rueda

Tags: What is a Merchant Account, Why Is A Merchant Account A Line Of Credit, Chargebacks

Why is a merchant account a line of credit?

Posted by Alex Neir on Wed, February 02, 2011 @ 02:44 PM
Why is a merchant account a line of credit

Why is a merchant account a line of credit?

2 Reasons:

  1. The way merchant accounts are underwritten
  2. Charge backs

How is a merchant account underwritten?
When a business applies for a merchant account they indicate the volume (dollars processed via credit card) they would like to be approved for. For our example we’ll use $50,000 a month as the volume being applied for.

The bank/processor underwrites the account much the same way banks underwrite any loan application. A credit risk profile is generated based on the volume requested and ultimately determines whether or not the business is approved for the merchant account.

It can be confusing as to why a “credit” risk profile drives a merchant account approval. After all, the business is collecting funds directly from the customer who purchases good and services with their credit card. Credit risk is between the credit card issuer and customer. Why is the business scrutinized for credit liability for the customer’s use of a credit card? In order to answer this question it’s important to understand the concept of a charge back.

What is a charge back?
A charge back occurs when a customer contacts their credit card issuer and disputes a charge on their statement. When this occurs the card issuer refunds the money to the customer and then investigates the claim to determine if the customer deserves to keep their money. All customers have the ability to institute a charge back on any credit card and on any purchase that has occurred over the previous 18 months.

Now, let’s relate this back to application for $50,000 a month in processing volume and why the merchant account is a line of credit. When the business is approved for the merchant account they have the ability to collect $50,000 a month in credit card payments from their customers. Funds collected from customers are typically deposited the next day into the businesses bank account. So at the end of the month the business has collected $50,000.

Now, worst case scenario, all customers charge back the following month. The bank refunds the money to the customers and is on the hook for that money until the investigation completes. At that point if the customers “win” the bank must recoup the funds from the business. The $50,000 becomes a line of credit extended to the business on behalf of the bank.

So in conclusion, a merchant account is a line of credit because of the credit liability associated with possible charge backs.

If you would like help opening a merchant account please contact our friendly and helpful staff at (800)917-8026.

Tags: Why Is A Merchant Account A Line Of Credit, Merchant Account Underwriting, Chargebacks