Setting up a Merchant Account: Is your business high risk?

merchant-accountsSo you have decided to setup a business online and need a way to process credit cards. For that you need a merchant account. Setting up a merchant account should be fairly straight forward. You ring your local bank, fill out some forms and you are ready to go.

What few new online merchants know, is that your success greatly depends on the type of business you want to start.

Merchant Account Basics

Merchant Accounts are a type of bank account specifically for holding the funds from customers credit card and debit card transactions. Customers pay online or over the phone using their credit card details and funds are deposited into the merchant account.

Depending on the volume of transactions, the funds are then transferred to a normal business bank account daily or weekly.

You can either setup your own merchant account with a local bank, or use a third party service like Paypal, which processes all the credit card transactions through its own merchant account and then pay you after deducting their fees.

If you choose to setup your own merchant account, you are basically entering into a legal contract between yourself and the bank.

Risky Business

The problem arises when the Banks deny your application. This is because banks are risk averse, and don’t want to deal with business that will like have a lot of refunds or charge backs. They consider some business models too high risk.

Before applying for you merchant account, see if you business falls in to any of the categories below.

Risk Factors

  • Your previous merchant account has a high number of refunds
  • Your previous provider closed your account, for any of the reasons that follow
  • You sell internationally and have foreign currency credit card transactions
  • You have a high volume of transactions +$25k per month
  • Online or over the phone transactions where the customer is not present to sign
  • You have been blacklisted, or put on the Terminated Merchant File

Risky Industries

There are entire industries that some banks just won’t touch. Your only option here is to use a service that deals specifically with higher risk merchants. They match merchant account providers, willing to take on more risk in return for higher fees.

Risky industries include

  • Telemarketing
  • MLM
  • Firearm Sales
  • Travel and Vacation packages
  • Adult and Dating sites
  • Selling Alcohol online


There are many horror stories of online business owners having their merchant accounts shut down overnight, devastating their business. Once you have been shut down and put on the TMF or MATCH list, all merchant providers can see the black mark against your business, making it even harder to get a new account. Similar stories can be found using third party services like Paypal where accounts with thousands of dollars in them are frozen indefinitely.

If you are in one of the high risk industries mentioned earlier, it is better to get the right merchant account from the start.


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Start-Up Costs for a New Business

Starting a business isn’t cheap–that much we know. But crunching the numbers and pinning a dollar value to your enterprise is complicated. Every business has its own problems: one may be easy to get off the ground but expensive to maintain, while another takes tens of thousands at the outset but has virtually no overhead cost.

For most businesses, startup costs can be classified into six main categories:

  • Professional fees. Your first few hundred dollars will probably go into registering your company (as a corporation or partnership, for example) and all the legalities that go into it. You may need to file copyrights, trademarks, or patents; draft agreements with partners and employees; and hire an attorney, accountant, or both.
  • Sales expenses. Everything you spend to create and sell your products falls under this category. This includes raw materials and equipment, packaging and shipping, and conducting product inventories.
  • Technology. Pretty much every company needs to invest at least a minimal amount into technology. This can include computers (hardware and software), Internet access, phones and phone lines, and website development. Updating them will also be part of ongoing costs.
  • Marketing. You need marketing to establish your company’s identity and build a solid customer base. Marketing costs include creating promotional artwork and copy, printing brochures and letterheads, buying ad space, attending trade shows, and even buying lunch for potential clients.
  • Human resources. If you’re planning on hiring a staff, you will need to pay more than just their wages. Health plans, payroll taxes, and other benefits (minimum provisions vary by state) also have to be factored in.
  • Administrative costs. These costs don’t deal directly with your business, but are essential to keeping it going. Renting your office space, supplying pens and paper, buying office furniture, taking out insurance, and obtaining business permits all fall under administrative expenses.

You should also take into account the time it will take for your business to break even and start making profit. This can vary widely; an online business can take off much faster than, say, a restaurant or consultancy. Having an accurate estimate of the time you will need can help you plan out your expenses more efficiently. This is especially important if a bank or investor is funding your business, as there’s pressure to make money within a given time frame. Most experts recommend increasing your estimate by at least 10% to account for unexpected extras, which aren’t uncommon in today’s business landscape.

Finally, diligent research is essential to calculating your startup costs. A quick Internet search may give you a general idea, but for a really accurate number, you need to go deeper than that. Get your data from local trade associations in your industry and talk to fellow entrepreneurs. More often than not, they’ll be happy to give you a few tips.

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Most Profitable Small Businesses

Small businesses can be started on a shoestring, but they pose a different challenge to entrepreneurs: volatility. The market changes much more rapidly for small businesses, since they cater to tighter and often more fickle demographics. For example, an aging population, increased consumer spending, and heightened interest in health, travel and luxury mean that businesses in 2011 should bank on an increased willingness and ability to spend.

According to business and technology blog BETA Daily, the most profitable small businesses this year include:

Senior services: The first baby boomers are nearing retirement; some are set to retire this year. They will be seeking advice on financial management, lifestyle assessment, and finding the “magic number” that’s the amount they need to retire comfortably. If you’re good with money, this can be a good opportunity. Also on the rise are assisted living services, as more people move into retirement homes, and senior training, which helps seniors who are still in shape to acquire new skills for post-retirement work.

Home improvement: Housing starts went up in many states last year, and many new homeowners will be on the prowl for inexpensive furnishings: roof tiling, flooring, furniture repair, you name it. They’ll also be ready to invest in efficient technologies that will save them money in the long run. Working as an energy consultant or starting a home furnishing company can bring in lots of business, especially in recovering markets such as Washington, Oregon, and Michigan (according to Bloomberg Businessweek).

Health and fitness: Yoga, Pilates, mixed martial arts, and even pole dancing are starting to boom in most major cities. A health spa or fitness club will cater to a growing interest in keeping fit. Other profitable businesses in this area are acupuncture, alternative therapy, and sports nutrition.

Travel: More and more people are moving around, some as part of their retirement and others for business purposes. A bed-and-breakfast can be profitable in cities where hotels are normally costly in peak seasons. Business travel also offers great opportunities: many companies are bringing their business abroad, and they’ll be more than happy to pay someone to plan events and book venues.

Internet services: Bank on emerging technologies such as smartphones and tablets by developing specialized programs, such as iPad games. Apple expects their iconic tablet’s sales to go up this year, and new owners will be scrambling to vamp up their toys with applications. Web video is also expected to take over the Internet, as several overnight YouTube successes have proven, and a professional video production service is sure to meet high demand.

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Email Marketing Services and Web 2.0

The role of email marketing in the world of Web 2.0 has been hotly debated: some think it’s had its run, while others believe it still has a place amidst social media and reinforced spam filters. If you look at company activity, the latter seem to be winning over. Email marketing services continue to account for a good portion of e-mail messages sent out around the world.

Email marketing has stuck around for one obvious reason. It’s cost-effective in terms of reach: you can get your message to an entire mailing list in seconds and without shelling out for printing. But one obstacle that has touched every email marketing expert is the spam filter, which keeps a great many of these messages from reaching their target.

So how do you adapt your e-mail marketing efforts to an audience that’s increasingly averse to unsolicited mail? The most important thing is personalization. Readers—or their e-mail providers—are looking for personal messages, not mass communication. Use words that talk to your reader and suggest that you care about their interests. Focus on what your product can do for its user, not how great it is.

Impeccable grammar and spelling are a given, but so is the right tone. Knowing your target audience’s jargon, and using it in a believable context, is a great way to achieve personalization. To do this, you may want to frequent social media networks and get a feel of what kind of language your audience is comfortable with. If copywriting is not your strong suit, invest in a good email marketing service—even in this age, simple, well-chosen words can still get you a long way.

Another approach is to change the way you use email marketing altogether. Several marketing experts agree that these days, email works best at maintaining brand loyalty. In other words, it’s become a tool to keep existing customers in the loop. It doesn’t work as well in getting new customers on board, although there is always a way of making it work. For example, you can work pair up with companies with an existing customer base and create a joint email marketing campaign.

Of course, quality is always of top importance. Besides good writing, you want eye-catching graphics and a professional look and feel. The idea is to give the impression that you know what you’re doing, from spelling your customer’s name to perfecting your product. More than the volume of emails you send out, putting the time and effort needed to make your message work will make your e-mail marketing campaign worthwhile.

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