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Merchant Accounts: Improve Cash Flow and Convenience

July 13, 2023
merchant account

Merchant accounts are an important tool for businesses today. In a world where cash and check payments are steadily declining, these accounts enable businesses to accept card-based transactions.

Merchant accounts make payment processing more efficient for suppliers, speed up cash flow, improve customer satisfaction and open new revenue opportunities. Read on to learn more about how using a merchant account to accept virtual card payments can benefit your business.

Understanding Merchant Accounts

A merchant account is a bank account that lets businesses accept debit card, credit card and other types of electronic transactions. It’s not like a traditional bank account where you deposit money but instead more of a relationship with a merchant account provider that serves as a bridge between your customer’s credit account and your business bank account.

Here’s how a merchant account works in simplified terms:

  • When a customer pays you with a card, the card processor sends the transaction details to your merchant account.
  • Your merchant account provider then confirms with the customer’s card issuer that they have sufficient funds.
  • Your customer’s card issuer deducts the payment amount from their account.
  • Your merchant account provider deposits the transaction amount in your business bank account, minus a nominal processing fee.

In total, the time from payment to deposit is about 1-2 days with a merchant account. When customers pay via check, that time can be 15+ days depending on numerous factors, including the postal service and the customer’s check issuing procedures.

Benefits of Opening a Merchant Account

You do not need a merchant account to accept credit and debit card payments. Some businesses use a payment service provider like PayPal, Stripe or Shopify instead.

However, payment service providers are better suited to small businesses that process a modest number of transactions each month. Merchant accounts generally allow greater flexibility and lower service fees, though there’s more work involved upfront to get the account set up.

Compared to check payments, credit card payments via merchant account offer several benefits, including:

  • Faster cash flow: Receive payment funds in days instead of weeks.
  • Improved revenue: If you don’t accept credit/debit cards, you may miss out on sales. A report by the Federal Reserve notes that 28% of payments in 2021 were made via credit card. 
  • Customer satisfaction: Customers appreciate a full range of payment options so they can choose the one that works best for their business.
  • Digital transformation: Many businesses are transitioning from traditional paper-based payment processes to more efficient tech-powered solutions. Merchant accounts can integrate with software-based accounting systems for simplified reporting and analysis.

Opening a Merchant Account Step by Step

The first step to opening a merchant account is researching your options and choosing the provider that meets the needs of your organization. Consider the following elements when researching providers:

  • Contract terms: Make sure you understand all the terms and conditions of your contract, including length, transaction minimums/maximums and other limitations.
  • Fees: Some merchant account providers charge a fee per transaction, some charge by the month. Providers may charge flat fees or a percentage of the transaction amount.
  • Average processing time: Though exact processing time can vary by transaction, most merchant account providers deliver funds within 1-3 business days.
  • Scalability: Ensure the provider you choose can work with your business as it grows. Processing quotas or transaction caps may cost your business more as you scale. Consider service elements you could need in the future, including support for different payment types and channels.
  • Security: Your merchant account provider should adhere to Payment Card Industry (PCI) compliance standards.
  • Integrations: Certain merchant account providers may integrate with your existing accounting and business management software, simplifying data entry and record-keeping.
  • Support: Consider the support availability of the provider you choose. Understand the hours they address customer issues and the communication methods they use (e.g., Can you talk with a representative via phone after hours if necessary?)

Requirements for a Merchant Account

The next step in the process is gathering the information and paperwork you’ll need to open the account.

Merchant accounts are only for businesses, so you need a business license and Employer Identification Number (EIN) to open an account. You’ll also need to know your business bank account information, including the account and routing number. Depending on the provider you choose, you may need to provide other paperwork such as articles of incorporation and personal financial documents.

Additionally, your provider might request financial statements from your business as well as PCI compliance documentation.

It will help smooth the process if you know generally how many transactions you’ll likely process per month and the average dollar amount of those transactions.

Merchant Account Application

Some merchant account providers offer online applications, delivering an automatic price quote and account approval. These companies may close your account a few weeks later once they’ve reviewed the paperwork and determined your business doesn’t qualify. Don’t be tricked by the “convenience” of an automatic approval – it’s a waste of your time to set up an account just to do it again shortly after.

Other merchant account providers may let you initiate the process online, but they’ll follow up later once they’ve reviewed your application with an approval or a request for additional information. This may take several days to a week or more, as it involves underwriting, like when you apply for a loan.

If you aren’t comfortable applying online, you can call the merchant account provider to inquire about alternative methods of application. Or you can visit the bank where you have your existing business accounts to see if they offer this service.

Once you begin the application process, you’ll be on your way to accepting virtual card payments.

Advantages of Virtual Card Payments

Opening a merchant account allows your business to accept virtual card payments from your customers. A virtual card is a one-time-use digital credit card number used to deliver payment. These virtual cards are automatically generated by your customer’s accounts payable (AP) software provider once the customer approves your invoice.

Virtual card payments can be delivered directly to your merchant account. You receive remittance advice digitally to reconcile the payment. This is known as Straight Through Processing.  

Virtual card payments offer a number of benefits for your company, including:

  • Rapid payment processing, often in less than 24 hours, to speed cash flow
  • Secure payment processing – a virtual card number can only be used once
  • Reduced labor (and related costs) for payment processing
  • Improved tracking and reporting capabilities
  • Streamlined reconciliation and accounting with digital integration

Accept Virtual Card Payments via Merchant Account

If you’re ready to transition your organization from traditional check payments to virtual card payments, we recommend following these best practices:

  • Communicate the value proposition to internal stakeholders and decision-makers
  • Develop an implementation plan and timeline
  • Collaborate with your existing bank and payment processors to ensure compatibility of systems
  • Train accounts receivable staff on the new payment method
  • Monitor and evaluate the transition process as you go

Though opening a merchant account requires some groundwork, the benefits are undeniable. By taking the time to open an account, your business will drastically reduce the time and labor involved with payment processing.

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