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Epic How-To: Setting Up Your Business to Accept Credit Cards February 20, 2010

I’ve written a few posts before about my own experience with accepting credit cards, but I’ve finally put all of info together in one place.  Enjoy!

When I first decided to start taking credit cards, it took me weeks to sort out the fees, the terminology and the parties involved, and even longer to feel secure that I was buying what I needed at a reasonable price.  To save you some of that hassle I’ve laid out the process below.

Step 1: Estimate whether your business can afford to accept credit cards.

For a small business, accepting Visa and Mastercard for in-person or phone/fax/mail sales will cost you around $25 a month, plus 3.5% of each transaction, often with a $20 monthly transaction fee minimum.  If you want to accept credit cards through your web site, add another $20 a month for a gateway, shopping cart, and/or SSL encryption (more on this later).

But how can you tell how much accepting credit cards will increase your sales?  Here are two commonly used rough estimates:

  • you can estimate an increase of about 25% (I found this to be true for my own business).
  • for in-person sales like those at craft fairs or brick-and mortar stores, you can estimate an increase rate about equal to your average sale.  In other words, if your average sale is $20, you can estimate about a 20% increase in sales from credit cards.

Here’s a quick example: if your monthly sales average $500 and your typical sale is $10, you can expect $50 more each month in sales (a 10% increase), but your processing fees will eat up nearly all of it, so it might make sense to wait a little longer before signing up to take credit cards.

Step 2: Know what you need.

Depending on your business, you may need some merchant services and not others.  It’s important to figure this out before you start searching for a “merchant service provider” so that you don’t end up paying for products you don’t use.

No matter what, you will need a merchant account.  A merchant account is basically an intermediate account between your bank and the customer’s card-issuing bank.  A merchant account is presided over by a merchant acquirer (usually another bank), who is responsible for finding out whether transactions have been accepted or declined. Here’s how it works:

The day of the sale…

  1. Susie buys a handmade scarf from you for $50.  She hands you her Washington Mutual Visa card.  You swipe or imprint the card and she signs the receipt.
  2. You send the information about the card and the transaction to your merchant acquirer.  You might type this in yourself on a phone or through a website, or it might get sent automatically if you swipe the card using a terminal.
  3. The acquirer sends the info to Visa, and then Visa sends the info to Washington Mutual for verification.  If everything is cool (i.e. the card number is valid, Susie hasn’t exceeded her credit limit, etc.), Washington Mutual authorizes the transaction to Visa.
  4. Visa tells your acquirer that everything is approved.  Your acquirer keeps a record of the authorization for later (called “batching”).

The next day…

  1. Your acquirer takes the batch of all the approved credit card transactions you made that day and sends them back through Visa for payment.
  2. Visa sends all of the transactions to the appropriate card-issuing banks, including Susie’s for $50 to Washington Mutual.  Washington Mutual pays Visa the $50, and Visa pays the acquirer.  The batch is now “settled.”
  3. Once the acquirer gets paid, they put $50 minus their transaction fee into your merchant account.  Usually, the money is then transferred to your business’s checking or savings account the following day.

Now that you know how it works, it’s time to decide what you need.  You’ll need most basically to decide on your merchant account, equipment, and in some cases, your processing method.

The Merchant Account:

Lots of places offer merchant accounts, including banks, trade associations, and third-party companies.  Unfortunately, fee structures are not consistent from company to company, so it can be tough to comparison shop. Here are the most common charges to check on:

  • One-time set-up fees
  • Annual or monthly fees (often called “statement” or “reporting” fees)
  • Per transaction fees
  • Transfer fees (for transferring the money from your merchant account to your bank account)
  • Monthly minimums
  • Equipment fees (terminal lease, imprinter and name plate, etc.)
  • Any other fees they haven’t told you about yet

You might have to do a bit of math to figure out the best combination of fees for your business.  If you have low monthly sales, for example (like if your business is part-time), your best bet is a merchant account with low monthly fees even if it means higher transaction fees.  If, on the other hand, you make a lot of small sales ($10 or less), you’ll want to look for a merchant account with percentage-only transaction fees (3.5%), rather than fees that take a percentage plus a fixed charge (3.0 % + $0.50).  Propay is a popular merchant account with small-volume businesses.

Equipment/processing method:

This is the device you use to collect your customer’s credit card info.  There are three common options:

“Knucklebuster” credit card imprinter:  This is the old-school sliding machine that physically rubs the credit card info onto a receipt.  You need to get the name plates for these directly from your merchant services provider.

Pros: portable, don’t require electricity or a network connection, inexpensive ($25 for machine and name plate and $20 for 100 receipts).

Cons: inconvenient, require manual entry of transaction info, offer no instant authorization.

Best for: craft fair vendors or people who need a cheap, portable device to use occasionally.

Processing method: manual entry of all data via “MOTO” processing (telephone) or “virtual terminal” (online form).  For an extra fee you can sometimes add cell phone processing to get instant authorizations while on the road.

Credit card terminal: this is the machine that you swipe your card into. Some print receipts directly, and others connect to a computer or cash register running “Point-of-Sale” (POS) software, which might cost extra.  They need to be hooked up to a phone or data line, but this can be done wirelessly.

Pros: convenient, offer instant authorization (and therefore cheaper transaction fees), can be integrated directly accounting software like Quickbooks.

Cons: expensive ($300-$1000 per system), require electricity and phone/data line, non-portable

Best for: people with brick-and-mortar stores, offices or studios who process a fair number of credit cards each month.

Shopping cart and payment gateway: these are web tools you need to process credit cards through an eCommerce site.  The shopping cart collects your customers’ information, and the payment gateway transmits it securely to your merchant acquirer.  If the checkout page of your shopping cart isn’t secure, you might also need to add SSL (Secure Socket Layer) encryption to your site. Your web host can usually provide this for about $20/year.

I won’t go into detail about the various e-commerce products now, but here are some examples:

Pros: convenient, offer instant authorization, allow you to take credit cards over the internet.

Cons: requires separate monthly fees, can be complicated to set up, not all shopping carts work with all gateways.

Best for: people who want to set up web stores that move beyond Paypal.

Phew!  That’s a lot of options.  Now that you know what you want to buy and how much you can afford to spend, it’s time to take the plunge.

Step 3: Compare and negotiate

Do some research to find a short list of companies that offer what you need.  You can get suggestions from your bank, your credit card issuer, or your local chamber of commerce.  You can also let your mouse do the walking, but make sure any companies you find through the web are reputable by checking references or the Better Business Bureau.

Call the sales department of each company.  Salesmen will often waive or lower fees, especially if you present them with a competing offer.  You can also negotiate combo deals this way, such as a discount for adding a payment gateway for your web site.  When I did this step I kept the most current rates for each company in a spreadsheet for easy access and comparison.

Be aware that most merchant service providers will run a credit check on you and/or your business before giving you a merchant account.  Your credit can affect the fees that they charge you.

If you don’t have a separate bank account for your business, now is the time to open one.  Even if you’re a sole proprietor, it’s always a good idea to keep business and personal finances separate, and some merchant acquirers will not give you a merchant account without a business bank account.

Get your best offer in writing.  Read it carefully.  If everything looks good go ahead and sign up.

Step 4: Test

Ask a friend or family member to “buy” something from you so that you can run a test transaction.  Make sure everything goes smoothly on both ends before accepting cards from customers.

If you’re accepting credit cards through your web site, make sure every step in the process (shopping cart, gateway and merchant account) is functioning correctly before going “live.”

I hope this helps to remove some of the mystery and confusion from opening a merchant account.  It can be a long process but it’s worth it to do things carefully and correctly the first time.  I’ve had my merchant account and gateway for three years now and I’ve never had a problem or a chargeback.

For more resources, check out some of the links below.

Resources:

Visa’s rules for merchants (pdf): http://usa.visa.com/download/merchants/rules_for_visa_merchants.pdf

Mastercard’s rules for merchants (pdf): http://www.mastercard.com/za/wce/PDF/10071_MasterCard_Merchant_Rules.pdf

Craftster shopping cart poll: http://www.craftster.org/forum/index.php?topic=231406.0

How to Configure SSL With a Merchant Account: http://www.ehow.com/how_5704137_configure-ssl-merchant-account.html

How to Evaluate Credit Card Processing Companies: http://www.businessknowhow.com/money/tips5.htm

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Thing-A-Day: Plastic Leaves October 8, 2009

Inspired by this epic post at CrookedBrains (via DudeCraft) of things made out of credit cards (and these rat pins, specifically) I decided to see if I could cut complex shapes out of plastic gift/rewards cards.  Turns out that it’s not too difficult, as long as you only cut in towards the center of the card and don’t try to curve your lines too much–perfect for making leaf shapes for holiday wreaths.  Last year I made this wreath and it took forever.  Each leaf was constructed by tying together seven separate plastic triangles with wire.  Each leaf was then tied onto the wreath form one by one.  Oy.

creditcardwreath

This year, I’m thinking of making some mini-wreaths, but with just one piece of plastic making up each leaf.  Yesterday I practiced a few different leaf forms to see which ones were easiest to cut.  Here are some of the more successful examples, which only took a minute or two each to make.  I’ve got a maple in there, a couple of oakey/hollyish ones, and some toothed leaves.  I tried a few really simple shapes as well, but they didn’t seem as autumnal as these.

creditcardleaves

Do you have any other ideas for iconic leaf shapes?  What have you made from plastic cards or other recycled materials?

 

Business Credit Cards February 20, 2008

When I signed up for my WaMu business credit card, I regretted it. It’s got a pretty high interest rate and gives me no rewards of any kind. I just signed up for it because I was already at the bank and my accounting seminar instructor said it’s much easier to keep track of your finances with a credit card than with a debit card (this is true–especially if you use Quickbooks).

This week I got an offer in the mail from Citibank, so I figured it was time to switch. They wanted me to apply for their CitiBusiness Card with Thank You Network. It seemed like a pretty good deal. When you wade through the point nonsense, you essentially get 3% back on “qualified business purchases,” which they define as “purchases at certain office supply merchants, and on professional services,” and 1% on everything else you buy. You can also transfer your balance from another credit card and get 0% APR on it until May. Still, I thought I might be able to do better.

I did most of my research at CreditCards.com. This site is basically just a list of rewards cards. They don’t provide much specific information about any of them. For that you need to visit the card provider’s web site and read the terms and conditions. You really need to read the fine print carefully, because there is some weird stuff in there. For example, I got pretty excited about the Chase Business Cash Rewards Card, because it advertises in HUGE type that you can get 5% cash back with every business purchase. When you read the fine print, however, you discover that this only happens when you spend exactly between $2,000 and $2,500 every month. This is clearly a rule that was written just to screw the undiscerning applicant, since there is no logical reason whatsoever to encourage people to spend within that precise $500 range. The American Express Blue card has similar bizarre restrictions.

Other hidden rules have to with sliding rewards scales.  You can theoretically earn 3-5% cash back on lots of cards, but if you spend, say, less than $1,500 a month, you’ll only get 0.25% back. This makes more sense from a business perspective (after all, the more you borrow, the more interest you might have to pay), but it’s still kind of sleazy.

In the end, it came down to the CitiBusiness Visa and the Amex SimplyCash.  The CitiBusiness Visa was tempting because of the huge signing bonus (10,000 frequent flyer miles when you first enter the site, 15,000 when you’re trying to leave it), but Citibank web sites are extremely slow and unreliable on my computer.  I’ve also heard some not nice things about Citicorp as a company.  So I went with the Amex, because the rewards were simple, high (5% on business purchases, 1% on everything else), and never expire.  As an added bonus, Amex will also give you discounts at lots of major companies through their “Open” business network, like Delta, Hertz and FedEx Kinkos.  The discounts average 3-5% and it’s automatically deducted from your credit card statement, so you don’t have to remember to show or mention anything at checkout.

If I were just starting out, I might sign up for both cards, since some retailers don’t accept American Express.  I’m just going to keep my WaMu business Visa for now, though.  It may not give me any rewards or cash back, but it has an awesome online module to track my credit profile (including free FICO score tracking!).  WaMu websites are the best in banking, in my opinion.  They’re simple, fast and provide all of the information I need in a format that makes sense.