Merchant Account Without Personal Guarantee

June 22, 2012

June 22, 2012

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By default, merchant account providers require a personal guaranteefrom their customers.  The reason is that most small businesses would not be able to function without the continued involvement of the owner(s), so extending credit to a business without the owner as guarantor runs the risk that the owner could walk and stick the merchant account provider with liability. Merchant […]

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By default, merchant account providers require a personal guaranteefrom their customers.  The reason is that most small businesses would not be able to function without the continued involvement of the owner(s), so extending credit to a business without the owner as guarantor runs the risk that the owner could walk and stick the merchant account provider with liability. Merchant accounts are not loans, but they do involve some credit risk for the merchant account provider because a merchant account provider is responsible for chargebacks not covered by the business.  The actual losses incurred by credit card processors are quite small, largely because the processors are very conservative in their underwriting. For very closely held businesses owned by 1 or 2 owners, a personal guarantee on a merchant account usually isn’t a big deal.  If you are careful about who you sell to, and avoid chargebacks, you won’t incur very much risk. However, if you are running a company with outside investors, such as a private equity or venture capital firm, a personal guarantee may be problematic.  In that case there may not even be a majority owner, and whichever corporate officer sets up and signs for a merchant account would likely not be willing to personally guarantee the company’s liabilities. Every credit card processor will underwrite businesses without a personal guarantee, but the underwriting will be more stringent, take longer and require more documentation.  Here are some variables processors take into consideration when deciding whether or not to waive the personal guarantee requirement:
  • Size of the company — is the business a viable entity even without the owner?
  • Financial stability — if your company is venture-backed and has millions of dollars in the bank, it greatly reduces the risk to the processor.
  • Riskiness of the underlying business — Online sales of physical products are quite risky, software and in-person sales are less risky.
  • Business credit score and profile — do you have a Dun and Bradstreet file?  Is it positive?
  • Age of the business — older is better.

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