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In any small business, someone needs to process the credit card payments you take from customers, and this processor, or merchant account, may be with your bank or with a third party processor. Be careful, though. I make a lot of mistakes when I started my first retail business years ago. The process of accepting credit cards is complex, and you'll need to be careful when signing on with a merchant processor.
I started out by not accepting credit cards, and that was the smoothest and easiest period of my business. I was able to avoid a lot of extra costs associated with credit card processing. However, times are different now. Back then, I thrived for three years without the need, but nowadays it seems imperative to accept these cards. Be careful with the hidden fees, though. I ran into several problems.
Banks
Your bank may offer you the best deal, but they often won't approve new companies. A couple of banks approved me with a high 4% rate, but I couldn't justify that cost. The better banks rejected me outright as a new business. You'll need three years under your belt before they will even talk to you, unless you have $100,000 in a savings account as collateral. They are afraid you might double-swipe cards for extra cash, take the money, and run! Apparently new businesses often do this.
Third party processors
I was approached by a lot of third party companies who process credit cards, and finally I gave in to one of them, but it was a costly mistake. They offered me a nice 1.5% rate, which meant I would only pay a 1.5% fee on every credit card purchase made in my store. It sounded good, but all the fine print came up to haunt me. There was also a 40 cent charge on every transaction in addition to the 1.5%, and a 60 cent charge on purchases less then $10. So if someone came in and charged $3.50 for a movie rental, the cost to me was 65 cents, or 18% of that purchase. There go the profit margins!
And there were more fees, including equipment and a $10 statement fee. I was charged $10 per month for a piece of paper. Additionally, the machine required to process the cards - that cool machine you swipe the card through - was $68 per month for three years! That's $2,448 to lease a machine that is worth $400. I was suckered into that one.
When my three-year contract ended, I tried to sever ties with that company, but they kept reaching into my account for that $10 statement fee, and a $17 inactivity fee. I had moved on to another processor, but the first company was still taking fees from me. Additionally, they said I needed to "buy out" my machine for another $300. Eventually, I had to involve the Pennsylvania Attorney General's office to get free from the sham company. That company is still in business, by the way.
Lessons
Learn from my mistakes. Be very wary of any contract longer than one year for card processing. Don't get tied to card processing equipment rental. You may wish to consider buying the equipment outright. For my second processor, Discover sold me the equipment I needed for $350 flat, even though I was processing through my bank. That was many years ago, but it was a good deal even then.
Fees on small purchases will kill your margins, so adjust prices accordingly. Believe me, people are ridiculous enough to charge a $3 purchase. Sometimes the machine line would be down, and a customer charging $3 or $4 wouldn't have any cash on him, not even a dollar. These are ridiculous times, my friends. Be aware that your customers are not cash savvy, and many of them live on their credit cards, You'll need to prepare for that. I combated this by raising prices on smaller items, but offered a discount on multiple purchases.
As a small business owner, you're caught in the middle between a new type of consumer and a ton of greedy credit card processors. Tread carefully through that mine field.
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