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Opening a Merchant Account Without a Personal Guarantor

When applying for a merchant account most small and medium-sized merchants will notice that a personal guarantee is required to establish the merchant account. A personal guarantee basically says that if the business cannot fulfill its obligations to the processing bank then the processing bank can legally pursue the guarantor to fulfill those obligations. This basically means if your business owes the processor money and it does not or cannot pay then the bank can come after the guarantor seeking those funds.

The reason why the processing bank does this is because of the high risk they are exposed to due to the nature of their business. If a new merchant commits fraud or just mismanagements their business and merchant account, the processing bank can be on the hook for a large sum of money. Naturally they wish to protect them from this scenario as best they can.

But what if a merchant does not wish to give a personal guarantee? What if they started their corporation with the explicit intent of separating personal assets from business assets? What are they to do? Some merchant account providers will allow you to use alternative forms of guarantees in place of a personal guarantee. These options include:

  1. A Corporate Resolution

    Instead of using your personal financial strength to back up your business, you use your business’ financial strength instead. To do this your business must be in a strong financial position. This typically means you have been in business for at least one year, although two or more is typically required, and have documentation to show your business’ financial strength. Typical examples of satisfactory documentation include balance sheets and any financial statements prepared by a third party.

  2. Provide a Letter of Credit

    A letter of credit basically is money that your bank promises to give your merchant account provider at a future date up to a certain amount if certain criteria are met (which are detailed in the letter). Basically, if you owe the processing bank money they can invoke this letter of credit and receive that money. This in turn essentially turns into a loan from your bank to you. It’s basically allows the processor to have a guarantee that funds will be available to them if they need it but you don’t actually have to take out a loan or front any money. As long as you don’t owe your processor money the letter of credit is never invoked.

  3. A Reserve

    In cases where the above two options are not practical or possible, simply allowing the processing bank to hold some of your funds in reserve may be enough to allow you to process without a personal guarantee. Basically if they have your money, they know they can get to it if they ever need. The amount the processing bank will want to hold will depend on many factors but it all boils down to how much exposure they calculate they will be subject to with your merchant account. Funds held in reserve are typically held for six months after a merchant account is closed although it is possible that can be extended depending on the product or service being offered.

Keep in mind not all processors offer these alternative although most offer at least one of them.

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