Merchant account services are the bread and butter of any business. Merchant account services must process credit cards, take online payments, and protect your business from significant issues like fraud. These services can be expensive, of course. But, depending on your business needs, they can also be highly customized with services geared explicitly toward high-risk merchant accounts, taking check payments electronically, and more.
These services come with many specific fees and services vitally crucial for your business to understand and manage. As part of merchant account services, many individuals ask a fundamental question: What is a merchant account personal guarantee? Why will I need one? And how do they work?
What is a Merchant Account Personal Guarantee?
Before asking what a merchant account personal guarantee is, you must understand how fees work. You also need additional information regarding when and why your business might have to execute a merchant account personal guarantee.
Learning what a merchant account personal guarantee is is critical, as a merchant account personal guarantee is an essential component of many merchant processing agreements. A guarantee isn’t always utilized, but it’s often part of a high-risk merchant account, mainly when clients are engaged in high-risk business industries. You need a personal guarantee if your company or product is brand new and doesn’t have a credit history that a vendor can use to judge your creditworthiness. The same situation occurs when starting your personal credit history, as you may need a secured account to access a credit card. It would help if you didn’t view a merchant account personal guarantee as an insult. A vendor is simply protecting themselves and their business.
You’re more likely to learn what a merchant account personal guarantee is when a business accepts riskier payment methods, as companies like Zenti do. A contract is sometimes necessary if a company takes cryptocurrency or works within specific industries, like credit repair or subscription box merchant accounts. Companies that specialize in these areas — like Zenti — understand that they’re dealing with higher-risk merchants. In this case, they may need the additional protection that comes with a merchant account personal guarantee.
A merchant account personal guarantee operates like other guarantees, like a bank guarantee. They work to ensure that a merchant account processor will get the fees that you’re responsible for paying. These fees vary based on the transaction’s value, the methods the trade uses, and if you have a high-risk business. Like Zenti, some merchant services offer alternative arrangements, like zero-cost credit card processing. Services like this can be precious for certain types of companies.
A merchant account processor could be held responsible for paying fees or refunds that you’ve incurred. This predicament explains why you may need to provide a personal guarantee.
Here’s the good news: Not only are these guarantees not always necessary, but you can often remove them later. If you establish yourself as a business that has a steady stream of profit and is always able to pay bills on time, you may be able to work with your vendor to remove this merchant account’s guarantee. Companies like Zenti can work with high-risk merchants to set up contracts and ensure that businesses can get their money back reasonably.
What is the Purpose of a Merchant Account Personal Guarantee?
In addition to asking what a merchant account personal guarantee is, you probably have other important questions, too, such as why you need to make a personal guarantee? Isn’t this a business venture, not a personal one? How does it involve your finances?
To understand what a merchant account personal guarantee is, you also have to know when it may be necessary and what circumstances you can avoid.
A high-risk merchant account is an account that operates in an industry that has a greater risk for chargebacks. Chargebacks are a challenge for all merchant account processing services. In essence, they’re what happens when a payment is returned to the customer by the merchant account processor and the business. They can happen for several reasons, including refunds or fraudulent charges.
These chargebacks are expensive, and having a certain chargeback ratio can do a business classified as high-risk. For example, being labeled a high-risk business can result in a vendor having higher flat-rate fees charged against them and having a higher percentage of a credit card transaction removed from their account on a per-charge basis.
High-risk merchant accounts, like those offered by Zenti, are customized to handle your high-risk needs. Unfortunately, these businesses require personal guarantees to ensure that they can pay your debts if you can’t.
So, what is a merchant account personal guarantee? A guarantee from you to your merchant account provider is to protect a credit card processor and ensure that they will be fairly compensated if the business in question is unable to meet its financial obligations. The circumstances under which the processor will withdraw this money are contractually agreed to be both the merchant account processor and the business in question. If you’re a company being told that you need to create a personal guarantee, it’s not enough for you to only understand what a merchant account personal guarantee is. You also have to understand what circumstances the personal guarantee account will be tapped, how you can prevent it, and what events you can get the personal guarantee account removed.
What is an Example of a Merchant Account Personal Guarantee?
Looking for specifics about what a merchant account personal guarantee is? Picture this scenario: You run a business selling CBD, a high-risk business — and something that Zenti covers. You process $10,000 in sales in one month. Great! Your merchant account processor gives you your money, and you promptly spend it on various business expenses, including salary, advertisements, and more.
But then, the bad news: The batch is terrible and getting people sick, and you must issue refunds ASAP. Customers dutifully process their refunds through your merchant account processor, who administers the refund and asks you for the money. But you don’t have it anymore.
This is when your guarantee becomes due. In this scenario, you’re paying the $10,000 out of your pocket.
Painful? Yes. Necessary from the perspective of the vendor? Absolutely.
What is a Personal Guarantee Account?
If you’re trying to figure out a merchant account personal guarantee, you may also be wondering about a personal guarantee account.
A personal guarantee account will be used to ensure that you pay the money that you owe the payment processor. Remember, the payment processor in question will be the one who will have to make payments to credit card companies. They give you the money you’re owed and make these payments, but you’re the one who must ultimately pay the payment processor back.
A personal guarantee account is a separate account set aside by a merchant account processor to ensure that you have the money you need to make the payment of any fees. The requirements of this account may be filled in any number of ways, including with cash or a credit card payment on your behalf. You’ll have to submit specific documentation to your credit card processor as additional proof. Such documentation may include bank statements, tax returns, or evidence of personal credit.
With a personal guarantee, you’re ensuring your merchant service provider that you’ll always be able to pay all transaction fees and processing fees. It essentially acts as a warranty for all types of business.
How Does a Personal Guarantee Work?
Understanding what a personal guarantee is — and how it works — can give you a better idea of limiting your costs and personal financial exposure.
Personal guarantees work differently depending on the vendor in question. What works for one vendor may not be acceptable for another. First, you’ll need to understand the specifics of these transactions. Merchant account processors are responsible for possible refunds for any transaction they process during a six-month window. A business will thus need to have enough of a guarantee to potentially be able to refund six months’ worth of sales. In some cases, that number can be even longer: Eighteen months.
The specific length of time varies based on the industry and method of transaction. Fortunately, companies like Zenti can work with several initiatives to give them access to the services they need.
Once a merchant account processor has figured out how much in sales they would need to cover in the event of a worst-case scenario, they will likely conduct a risk analysis. This analysis will include an estimate of your chargeback ratio, the odds of them needing to cover all of your expenses and your past merchant history. If you’re a new account, you’ll likely need to recover even more, as there is no history to gauge how much money they would potentially need to cover.
You should also remember that a personal guarantee is more than just preventing a merchant account processor from needing to cover a slew of charges. It acts as a critical fraud prevention measure. In some cases, bad actors or dishonest vendors may create accounts, make various transactions, and then not ship the goods or deliver the services. In that case, the merchant account processor is on the hook for refunding all payments, but they may not be able to collect money from the original vendor. A personal guarantee can help prevent that fraud by ensuring that there is always money to pay for any services.
Do Personal Guarantees Hold up in Court?
A big part of understanding a merchant account’s guarantee is understanding the fundamental law: Personal security is a contract. As long as you’re not deceived when signing the contract, there is no question that it’s enforceable in court. You’ll be responsible for paying any expenses associated with the personal guarantee in your capacity.
Likely, it won’t ever come to this. Most merchant account processors are very clear about what a merchant account personal guarantee is, what steps you’ll need to fulfill and why they are asking for it. A good vendor will answer your questions about the guarantee and work with you to limit your exposure. However, personal guarantees are legally binding contracts. You’ll need to honor them to start a business with the merchant account vendor. If you expect to be able to process credit card transactions, you’ll have to fill in the account following the terms set by the processor.
More good news: A personal guarantee can be enforced in court, but you can work with your processor to set up circumstances under which this guarantee is no longer necessary. This may include a variety of events, including having a long enough history of clean transactions or a low chargeback ratio. You can potentially set these circumstances in writing. This will protect your interests and ensure that you have a goal as to when you can remove your merchant account personal guarantee.
Thus, when considering what a merchant account personal guarantee is, remember that it’s a two-way street: You should be able to work with your processor to protect your interests and set up a situation where you can revoke the guarantee.
Suppose you need credit card processing services and operate in a high-risk business. In that case, you may need additional assistance to process Mastercard, Visa, American Express, or other cards. Fortunately, Zenti is here. At Zenti, we pride ourselves on being able to assist all businesses with this critical service. We offer reasonable pricing and can work with any business owner to ensure you get your payments from your eCommerce platform into your bank account. In addition, we have years of experience working with businesses to answer essential questions, like what is a merchant account personal guarantee, and how can I limit my expenses?
High-risk vendors can be expensive, but at Zenti, we have years of experience working with small businesses and nonprofits to provide you with all the necessary point-of-sale equipment and ensure that your business credit card needs are covered. Are you looking for more information? Contact Zenti today.