Do you accept credit card payments from your customers? If so, then you most likely have been through the process of applying for a merchant account with a merchant services provider. However, when applying for a merchant account it is required that one or all owners of the business sign a personal guarantee. But what exactly is a personal guarantee and how does it differ from just your business entity signing up for a service? Are there ways to avoid signing this type of agreement? This article breaks down everything you need to know about what is required in order for a business to open a merchant account.
Personal Guarantee For Merchant Account
Your personal guarantee means you’re putting your own neck, assets, and credit on the line if your business can’t pay them. See, these providers are taking on risk by allowing your business to charge payments, so they want to make sure they can recover their losses if things go south. A personal guarantee reduces their risk but introduces a whole new risk for you.
It’s really daunting to put that kind of personal liability and financial exposure at risk, even for your business. However the truth is, most providers won’t approve a merchant account without at least some kind of personal guarantee. It’s usually not optional if you want an account to accept credit card payments. There are also sometimes alternative options to a personal guarantee, like using business assets as collateral, but every option has its pros and cons.
The bottom line is, as a business owner, you have to weigh all risks versus rewards for your unique situation. Make sure you understand everything completely before agreeing to anything. Ask lots of questions, and get guidance from others who’ve been there. Determining if and how personal guarantees could work for your business is a big decision – but with the right approach, your business can get the merchant account it needs without your personal finances suffering as a result.
Merchant Accounts Enable Businesses To Accept Payments
Merchant accounts allow businesses to accept credit cards, debit cards, gift cards, and other electronic payments from customers. They are essential for any business to process customer purchases and conduct sales. Without a merchant account, a business would not be able to accept any electronic payments and would lose key payment functionality.
Establishing a merchant account provides businesses with an essential tool for revenue generation and growth. It opens up new opportunities to reach more customers via e-commerce websites, mobile apps, phone/mail order sales, and brick-and-mortar locations. Customers today expect the convenience and flexibility of paying electronically, whether for small purchases or large-ticket items.
A merchant account also reduces costs compared to only accepting cash payments. It minimizes the risks of fraud, theft, accounting errors, and high fees associated with physical money. Electronic payments have lower processing fees and make funds available faster in the business’s bank account. This improves cash flow and the overall financial management of the business.
For many business owners, the ability to process customer payments through electronic means outweighs the costs and responsibility of a merchant account. However, it does require finding a merchant account provider, submitting an application, and potentially putting personal guaranties on the line to qualify for approval and fair terms.
While merchant accounts provide essential functionality and benefits, the process of obtaining one introduces its own set of considerations regarding risk, responsibility, fees, and finding the right provider partner for your business needs.
Building the right partnership with a merchant account provider is just as crucial as the account itself to business success and stability. With the proper account and provider, electronic payments can fuel business growth rather than drag it down under burdensome costs, terms, or lack of functionality.
Does this draft section adequately explain why merchant accounts are necessary to enable electronic business payments? Please provide any feedback or suggestions for improvement. I can also draft additional sections on this topic if needed.
Personal Guarantees Reduce The Risk For Merchant Providers
Merchant account providers take on risk by approving accounts and allowing businesses to charge customer payments. A personal guarantee from the business owner helps reduce this risk by making the owner personally liable for the account. If the business defaults on payments or becomes insolvent, the provider can pursue the owner’s personal assets to recover losses. This allows providers to approve higher-risk account applications that they might otherwise deny.
Personal guarantees motivate providers to extend more credit and flexible terms to businesses that may not qualify based on the business’s financials alone. Knowing they have recourse to the owner’s personal finances in case of default makes the risk more palatable. It enables more business owners to gain access to the payment functionality and financing they need to operate, grow and succeed.
By requiring personal guarantees, providers are able to support more entrepreneurs and small businesses than if they only approved accounts with a low-risk profile. At the same time, personal guarantees ensure that providers do not incur catastrophic, unrecoverable losses from risky accounts that ultimately become uncollectible. There is more balance between risk and reward.
Of course, not all personal guarantees eliminate risk entirely. There is always a possibility of losses even with recourse to personal assets. However, personal guarantees do substantively reduce the overall risk profile for providers and allow them to extend more fair and flexible terms as a result. Business owners, in turn, benefit from more approvals and choices of providers, not to mention the opportunity to build their business credit over time with responsible use of the account.
When used responsibly, personal guarantees create “win-win” dynamics between merchant providers and business owners. Risk is reduced enough for providers to approve accounts, while owners gain access to crucial payment functionality and even build their own financial reputation. By understanding how and why personal guarantees motivate providers, business owners can make better decisions regarding whether or not to sign one and which providers/terms are in their favor.
Personal Guarantees Motivate Responsible Use
Knowing their personal assets are on the line encourages owners to use the merchant account responsibly and manage payments, fees, and account balances properly. Irresponsible use or excessive fees/interest charges could threaten the owner’s personal finances, giving them a strong incentive to keep the account in good standing. This aligns the interests of the owner and provider, promoting a sustainable business-provider relationship.
There is real “skin in the game” with a personal guarantee, as the owner’s own money and credit are at stake. This leads to better decisions and avoidance of reckless spending, overspending, missed payments, or other misuses that could damage the owner’s credit or drain their personal accounts to cover business expenses. Responsible use is motivated by self-interest, even if that self-interest originally benefited the business.
Personal guarantees also ensure that owners maintain “ownership” of the account and financial responsibility that might otherwise be diffused in a business-only application. The business entity and finances remain legally separate from the owner’s personal affairs, but the owner still feels a very direct, personal impact from account performance, fees, and penalties. This “personal touchpoint” inspires diligence.
Of course, not all owners will necessarily become model stewards of responsibility overnight with a personal guarantee. However, it does establish clear motivations and consequences that most owners will duly consider with every account decision. And those that don’t may find their personal guarantee revoked, forcing more prudent habits or exit from that account/provider relationship.
When exploring merchant account options and personal guarantees, business owners must go in with eyes open to both the responsibilities and motivations that come with them. Used constructively, personal guarantees can encourage the kind of responsible spending, management, and sustainability that benefits both business financial performance and an owner’s personal financial security. By understanding these motivational impacts, owners work with providers as balanced, accountable partners rather than either/or.
Not All Personal Guarantees Require Personal Liability
While personal guarantees do require personal assets/credit to be placed at risk, the owner is not necessarily personally liable for the full business debt. Contracts can be structured to only make owners liable up to a certain dollar amount. Above that amount, the personal assets/credit are no longer at risk. This allows for personal risk-taking without reckless financial exposure.
For example, an owner may guarantee up to $50,000 in business charges, but above that amount, the provider would bear the full risk of losses with no further claim on the owner’s personal financing or property. The owner accepts responsibility and “skin in the game” to qualify for an account, but caps their liability at a reasonable limit. If structured properly, this limit helps ensure personal finances remain secure rather than jeopardized.
Some providers may require higher personal guarantees, but owners have the leverage to negotiate and find alternatives if needed. They can also re-evaluate guarantees over time as the account is used responsibly and a good payment history is established. Personal guarantees are not “set in stone” and permanent, especially for trustworthy clients. Providers often prefer long-term relationships and may reduce or release guarantees if liability risks substantially decrease.
Other options also include personal guarantees secured by assets (e.g. house equity or investment portfolio) rather than unsecured personal credit/financing. While assets are at risk, the overall financial impact may be less damaging. Business asset collateral and corporate guarantees from related companies are additional alternatives to provide security without unlimited personal liability.
Not all personal guarantees must be an “all or nothing” proposition in terms of responsibility or financial exposure. By understanding options, reserving leverage, starting with lower limits, and re-evaluating over time, owners can gain access to merchant accounts with a balanced approach to risk. Personal liability is not an inevitability, even if personal guarantees are commonly requested. With good information and judgment, personal guarantees can motivate responsibility without recklessness.
Personal Guarantees Can Build Business Credit
By taking on responsibility for business debts and payments through a personal guarantee, the owner helps establish a good payment history on the business’s behalf. This allows the business to build a solid credit profile over time as payments are made on time and in full. A good credit profile makes it easier and less risky for the business to obtain financing and credit in the future.
The owner’s own good credit also helps qualify for a personal guarantee, benefitting both the business and the owner. As the business uses the merchant account responsibly, the owner’s credit serves as security while their own credit score and report remain intact if no defaults or penalties occur. The owner maintains control and “ownership” of their credit even when guaranteeing the business’s liabilities.
Personal guarantees motivate diligence in ensuring on-time, full payments to build credit and preserve the owner’s own good standing. Any negative mark against the business could also negatively impact the owner’s credit and financial reputation, giving them every incentive to avoid issues. This aligned self-interest helps establish a good payment history and responsible financial management from the start.
For new businesses especially, personal guarantees present an opportunity to gain access to accounts and credit typically only available to more established companies with long credit histories. By standing behind the business with its own established credit, the owner opens up more possibilities for growth rather than beginning with high-cost “subprime” options. They access real benefits with reasonable, responsible risk.
Over time and with a proven track record of on-time payments, businesses can also work towards the release of personal guarantees as their own creditworthiness becomes evident. While guarantees remain an option for new relationships or additional financing, they can evolve into a “training wheels” approach rather than a permanent necessity. Owners and businesses both build credit and earn opportunities through trust and responsibility.
Alternatives To Personal Guarantees Are Limited
While personal guarantees require personal responsibility, the options are limited for business owners seeking a merchant account. Most providers will not approve an application without a personal guarantee, as the risk is too high. Some providers may accept a corporate guarantee from another company, but that also puts other business/personal assets at risk.
Other options like business asset collateral may not fully mitigate risk for the provider and do not provide the motivational benefits of personal liability. Business assets could decline greatly in value, have limited liquidity, or be otherwise inadequate to secure the line of credit and financial responsibility required for a merchant account. Personal guarantees, when structured reasonably, generally provide the strongest form of security for providers.
For many high-risk businesses, a personal guarantee from the owner is the only way to qualify for a merchant account at all. Without the owner’s personal finances and credit explicitly at stake, providers see the accounts as too risky to approve. Personal guarantees create incentives for responsible management and “skin in the game,” aligning the owner’s interests with the provider’s interests in minimizing losses.
Alternatives are limited, but options do exist for owners willing to negotiate and find the right providers. Some providers may accept lower personal guarantee amounts, asset-secured guarantees, corporate guarantees from stable companies, higher down payments, or personal indemnities instead of full guarantees. For some businesses, a combination of alternatives may be possible to reduce overall risk to an acceptable level without a standard personal guarantee.
However, alternatives are not always easily obtainable or suitable given an owner’s full financial situation or account needs. And they still do not provide the motivational impacts of direct personal liability. Unless and until new options emerge, personal guarantees frequently remain necessary to gain access for riskier account applicants or more substantial lines of credit.
Conclusion
In conclusion, while personal guarantees for merchant accounts put personal assets and credit at risk, they provide unique benefits that often justify that risk for business owners. Personal guarantees motivate responsible account use, align interests, build business credit, reduce the risk for providers enough to approve applications, and do not necessarily require unlimited personal liability when structured properly.
As an entrepreneur, you have to weigh all risks versus rewards for your unique situation. But understand your options, do your homework, get guidance – and go in with your eyes open to how personal guarantees can empower and benefit you, not just expose you. Know your leverage and alternatives, start conservatively, limit liability as needed, and work with providers as partners rather than adversaries.
Personal risk frequently leads to business rewards when it comes to merchant accounts and personal guarantees. Gaining access to the payment functionality and opportunities a merchant account provides may depend on finding the right solution for balancing risk and responsibility. The options are not perfect, but with a balanced and well-informed perspective, even personal guarantees can work in your favor rather than against you.
For many business owners, especially new ventures or riskier propositions, personal guarantees make merchant accounts possible and open up pathways to progress that might otherwise remain closed. While not an easy decision or responsibility, personal guarantees need not doom a business or bankrupt an owner when entered into deliberately and constructively. By understanding what’s really at stake, owners can ensure any personal liability remains reasonable and motivating rather than reckless.
In the end, you have to determine what level of risk feels right for your unique business and finances. But I hope this overview of the pros and cons of personal guarantees has provided a balanced perspective to empower that determination. Know your options, know your leverage, know the motivations – and find the solution that will set you up not just for short-term gains but long-term success.
