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A guide to merchant accounts for small businesses

Payments are a difficult area of business to get to grips with, particularly when you’re in the early stages of starting a company. After you’ve set up a business bank account, it’s a good idea to set up a merchant account as well. Why? Because otherwise, you may not be able to receive payment by credit or debit card. But what exactly is a merchant account? Find out everything you need to know with our guide to setting up a merchant account for small business owners.

What is a merchant account?

A merchant account is an account into which funds from debit and credit card purchases are transferred after they have been processed. It’s a very important part of the payments process, along with payment gateways and payment processors. While you own the account, you won’t have direct access to it. Instead, the funds in your merchant account are automatically transferred to your business banking account in 1-2 business days.

So, why should you open a merchant account when you can’t access the money directly? It’s simple. Without a merchant account, you won’t be able to receive payment from your customers via credit card or debit card. That’s a serious issue, as American consumers are frequent credit card users. In fact, a study conducted by GoCardless found that credit cards were the preferred payment method for traditional and online subscriptions in the U.S.

Why do I need to set up a merchant account for small businesses?

As a small business owner, you should try to accept as many forms of payment as possible. If you only accept cash, you could end up turning away potential customers. With a merchant account, you’ll be able to accept online credit and debit card transactions as well as in-house card payments. Plus, merchant accounts offer additional features that can help you get started when running a small business, such as check processing services or online reporting features. In addition, there are merchant accounts that offer services to ensure your account remains PCI DSS compliant, helping you keep your customers’ transaction data safe and secure.  

How to set up a merchant account for small businesses

It is not difficult to open a merchant account, but be sure to do your research into who is the best provider for your small business. Each provider will have their own features, pricing schedules, and contract terms. Make sure you pay attention to how much you will be charged, and compare the services offered by different providers.

Once you’ve chosen your provider, it’s time to actually create your merchant account. You will need to provide your business name, contact information, and tax information, as well as your routing and account numbers for the business bank account where you want to accept your deposits.

How do merchant accounts work?

After you’ve signed up for a merchant account, you can start using it to take payment by credit and debit card. Here’s a step-by-step guide to what you can expect:

  1. Taking payment – For in-house payments, you’ll need to use a card reader, which are generally provided by your payment processor. If you’re selling online, customers will simply need to submit their card details.

  2. Processing payment – After payment has been accepted, the customer’s card details are sent from the card reader to the payment gateway, before they are forwarded onto the payment processor. Then, the information is sent to the card network before it’s forwarded to the customer’s bank. Assuming sufficient funds are contained in the account, the transaction is authorised and a confirmation is sent back to the card reader.

  3. Receiving payment – This is where the merchant account comes in. The customer’s bank will deposit the funds here, where they’ll wait before being sent to your business bank account. There’s usually a downtime of around 24 hours to seven days (known as the “settlement period”).

Opening an international merchant account

If your small business has one eye on global expansion, you may want to consider opening an international merchant account. This will allow you to accept credit and debit card payments from customers around the world. International merchant accounts are a great way to expand your business, as you can open them in any region you want to break into.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services.