woman working on business financesMost people are well aware of the bearing a consumer’s personal credit history can have on their ability to obtain a mortgage or receive a loan. However, until you find yourself needing the services of a merchant account provider for your business, you may not realize this set of behaviors - generally quantified in what is known as a credit score - has even greater implications. In the end, how you have historically performed when it comes to paying off your Visa, Mastercard, Discover, American Express, and other bills could determine whether your company can get off the ground with accepting credit and debit card payments.

Credit scores explained.

First, let’s dive deeper into what a credit score is and how it is determined. It may go without saying, but it is important to keep in mind lenders, merchant account providers, and mortgage companies are extremely motivated to make sure that any business to whom they grant a loan will have a high probability of paying it off in full and on time. Credit scores are used to assess a company’s level of default risk; the higher the number, the more likely the customer is deemed to be a good candidate for the loan. Furthermore, creditors also use the scoring system to determine fees and payment terms.

There are five combined components that make up your credit score:

• Payment history. Making up 35 percent of your score, this number takes into account your history of paying revolving loans such as credit cards and installment loans like mortgages on time.

• Credit utilization. Comprising 30 percent of your credit score, this number is the percentage of your available credit that has been borrowed. Experts recommend that you avoid maxing out your credit cards; in fact borrowing only 6 percent of your maximum is an excellent ratio to aim for. 

• Length of credit history. Making up 15 percent of your score, this number is the length of time that each of your accounts has been open, as well as how long it has been since the most recent action has occurred on all accounts.

• New credit. Accounting for 10 percent of your score, this figure represents the new credit accounts that you have recently opened.

• Credit mix. Making up the final 10 percent of your score, this figure represents the scope of the revolving and installment loans that you possess. A good amalgam of both suggests to lenders that you are probably a good risk.

To come up with this numerical representation of your credit history, lenders use your credit report to collect relevant information about you. This includes the types of accounts you have and how many, your history of paying your bills on time, outstanding debt, any collections against you, and how long you have held your accounts. Using a statistical algorithm, lenders can then compare your results against the loan histories of business owners who are similar to you to decide if you are credit-worthy. This system’s reliance on your credit report means that you should regularly check this document to ensure it is up-to-date and accurate, with no errors that could work against you when applying for a merchant account or loan.

Merchant accounts explained.

Any retailer who accepts credit or debit cards must have a way to securely process these payments. A merchant account is a specific type of business account allowing you to collaborate with a merchant bank and a payment processor to accept these forms of payments. Upon completing a credit card transaction, the funds are first transferred to the merchant account where they are settled and ultimately transferred to your business account within a matter of days. Although competition in the merchant account marketplace is fierce, you must still show prospective partner companies that you are a good risk. Companies may look at the following criteria (among others) to get a good idea about your creditworthiness:

• How long you have been in business.

• The nature of your industry and its level of risk.

• Your business history, including any bankruptcies, or defaults on loans.

• Whether you have had merchant accounts in the past.

• Your personal credit history.

In order to get a handle on these issues, you will probably be asked to furnish one or more documents, including:

• Your most recent business and personal financial statements.

• Your most recent business and personal tax returns.

• Several recent bank statements.

• Fictitious name statement, if you have a DBA.

• Your partnership agreement, if applicable.

• Your articles of incorporation, if applicable.

• Dun and Bradstreet or other credible third-party reporting that verifies your legal business 

  address and includes a description of your location.

• IRS confirmation of your status as a nonprofit, if you are one. 

• The Social Security numbers of business principals — used in order to obtain credit reports.

The higher your personal credit score, the more likely you are to be accepted for a merchant account. In particular, a history of bankruptcies and loan defaults may make a prospective lender wary of entrusting you with their funds. After all, they will be held liable if your enterprise fails before you have fully repaid the loan.

However, all is not lost if you are deemed to be a high-risk business. Reputable options are available, though you can expect to pay a few additional fees and be subject to more restrictions. Regardless of whether you are considered low-or-high-risk, it is always to your advantage to work to maintain or increase your credit score. Paying bills on time and keeping balances as low as possible can help you raise that all-important number.

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