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December 16, 2019

Whatâs The Difference Between Nonprofit & Not For Profit Organizations?

If you’ve looked into setting up a nonprofit organization, you’ve probably noticed a few terms floating around. The industry is usually described as “nonprofit,” but at other times the term “not for profit” is used instead. So which is it, nonprofit or not for profit? Is there an appreciable difference between these two terms, and if so, which best describes your organization?

In this article, we’ll compare the terms “nonprofit” and “not for profit.” Then, we’ll go into more detail on the advantages and disadvantages of officially registering as a nonprofit organization. Finally, I’ll point you to a few resources that can help you during the process of registering as a nonprofit.

However, before we go on, it’s important to note that we have written this article for organizations based in the United States. If you aren’t based in the US, you should look into your home country’s laws, terms, and policies regarding nonprofits.

Keep reading to learn about the difference between nonprofit and not for profit, and to find out how those terms apply to your organization!

Nonprofit VS Not For Profit

In the past few years, there has been some discussion online about the exact definitions of “nonprofit” and “not for profit.” Some writers argue that these two terms represent two entirely different types of organizations, while others say that the terms are completely interchangeable. As I researched for this article, I spent some time exploring the different sides of the argument, as well as diving into IRS resources for more detailed information. Here’s what I’ve found:

The terms “not for profit” and “nonprofit” both refer to organizations that are designed to serve the public and not intended to make a profit. These organizations are typically eligible for tax-exempt status, provided they keep up with the IRS’s requirements.

“Not for profit” is a newer term that has gained popularity because it more clearly describes what a nonprofit does. Most “not for profit” or “nonprofit” organizations do in fact make a profit at some point in their existence. However, they do not exist for the sake of making a profit. Any profits made are put to use furthering the cause of the organization, not making anyone richer. Many people feel that the term “not for profit” better expresses the intention of these types of organizations without mistakenly implying that the organization will never make a profit.

In addition, the term “not for profit” is often used as a descriptor for all organizations that serve nonprofitable purposes. These organizations include charities, sports clubs, business leagues, and more. Some of these organizations serve the public while others provide services for their own members. “Not for profit” is a good umbrella term that many people use to talk about all of these organizations.

Key Takeaway: Not for profit is NOT an official business structure, and the IRS does not use this term to describe any business. As you look into registering your organization with the IRS, you will only find them using the term nonprofit.

The word “nonprofit,” is an older and more familiar term for organizations that work for the good of society without the intent to earn a profit. While there are many types of organizations that are “nonprofit,” people tend to use this term to refer to charitable organizations such as The American Red Cross, The Human Society of the United States, and Feeding America. Nonprofit is the more common term, and it is the one that the IRS favors.

To sum things up, despite the slight differences in the ways these words are used colloquially, nonprofit and not for profit are technically interchangeable terms. They both refer to organizations that don’t profit from earnings and which are typically eligible for tax-exempt status and other IRS benefits. So, despite some nuance, there is no real difference between “nonprofit” and “not for profit”.

Types Of Nonprofit Structures

Even though “not for profit” and “nonprofit” mean essentially the same thing, there are still some distinctions that you can make between different types of nonprofits. As I mentioned above, there are many types of nonprofits, and this list goes beyond the charitable organizations that typically come to mind. Fraternities, recreation clubs, and employee associations can also apply for tax-exempt status as nonprofit organizations.

So, what category does your organization fall under? Let’s take a look.

501(c)(3) Nonprofits

The most common types of nonprofits are those that fall under section 501(c)(3) of the IRS’s “Publication 557: Tax-Exempt Status for Your Organization.” 501(c)(3) organizations are the types of organizations that immediately come to mind when you hear the word “nonprofit.” They are charitable organizations, churches, medical research groups, and so on. These organizations are eligible to be exempt from federal income tax (and state income tax depending on state law). Here’s a quote from the IRS that describes 501(c)(3) organizations:

An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes:

Religious.

Charitable.

Scientific.

Testing for public safety.

Literary.

Educational.

Fostering national or international amateur sports competitions (but only if none of its activities involve providing athletic facilities or equipment; however, see Amateur Athletic Organizations, later in this chapter).

The prevention of cruelty to children or animals.

To qualify, the organization must be organized as a corporation (including a limited liability company), unincorporated association, or trust. Sole proprietorships, partnerships, individuals, or loosely associated groups of individuals won’t qualify. (Publication 557: Tax Exempt Status for Your Organization)

Organizations that fall under section 501(c)(3) are also eligible for many benefits beyond just tax exemption. For more information, jump down to the Pros & Cons of Registering as a Nonprofit section of this article.

Other 501(c) Nonprofits

While section 501(c)(3) encompasses many nonprofit organizations, it is by no means the only classification of nonprofits. The IRS’s list of tax-exempt organizations includes many organizations that do not fall into any of the categories above. These include social and recreational clubs, business leagues, voluntary employee’s beneficiary associations, and more. Although these organizations do not fall under section 501(c)(3), they do fall under other 501(c) sections. The IRS lists a total of twenty-nine 501(c) sections, including the following:

501(c)(4): Civic Leagues and Social Welfare Organizations
501(c)(5): Labor, Agricultural, and Horticultural Organizations
501(c)(6): Business Leagues, etc.
501(c)(7): Social and Recreation Clubs
501(c)(8) and 501(c)(10): Fraternal Beneficiary Societies and Domestic Fraternal Societies
501(c)(13): Cemetery Companies

These 501(c) organizations tend to differ from 501(c)(3) organizations because the funds raised often go towards furthering the existence of the club or league, rather than accomplishing a charitable purpose. This means that members of these organizations benefit in a non-financial way from participating in the nonprofit.

Pros & Cons Of Registering As A Nonprofit

When you set up a nonprofit organization, you will be faced with a choice. Do you go through all the hassle of applying for tax-exempt status with the IRS, or do you forego that step and continue as usual? As you make this decision, you should keep in mind the pros and cons of each option. So, here are the pros and cons of registering as a nonprofit with the IRS.

Pros

1. Tax Exemptions

This is a pretty obvious advantage to registering for tax-exempt status with the IRS. If your organization qualifies, you are exempt from federal income tax. In addition, you can pass along tax benefits to your donors. If you are a registered nonprofit, donors can count their donations as tax-deductible.

Your organization may also qualify to be exempt from state income tax, sales taxes, and employment taxes, depending on your state.

2. Eligibility For Many Discounts

On top of the tax benefits, nonprofits–and more specifically 501(c)(3) organizations–are eligible for discounts from many services. Registered nonprofit organizations get access to reduced postal rates, and you can use your 501(c)(3) status to get discounts on many business software options. For example, many project management software apps (for example Basecamp, Asana, and Trello) offer discounts for 501(c)(3) nonprofits.

3. Lower Credit Card Processing Rates

One of the biggest discounts from which 501(c)(3) organizations can benefit is reduced credit card processing rates. These reduced fees allow nonprofits to keep more of their donor’s contributions. Take a look at our article on the best credit card processors for nonprofits for more information.

Cons

1. Applying For Tax-Exempt Status Can Be Difficult

Setting yourself up as a tax-exempt nonprofit can be a long and difficult process. You’ll need to read through the IRS’s documentation to understand the requirements your specific type of organization has to meet, and then you have to gather all of the necessary documentation. The IRS estimates that the application form alone should take you 100 hours to complete, and the whole application process typically lasts between three and six months. Fortunately, we have a few resources to help you down this path. Take a look at our Step-by-Step Guide to Registering your 501(c)(3) Nonprofit Organization as well as the IRS’s interactive course on Applying for Section 501(c)(3) Status for some guidance.

2. You Have To Work To Stay Exempt

Gaining tax exemption status is not a one-time event. In fact, The IRS refers to tax exemption as a “lifecycle.” In order to stay tax-exempt, you have to meet certain responsibilities. These responsibilities include maintaining good records, filing an annual return, and allowing the public to inspect certain IRS filings. And, of course, you have to always remain a nonprofit, meaning that the money that you earn should go only to furthering the purpose of your organization.

How To Register Your Organization As A Nonprofit

Have you decided to register your organization as a nonprofit? If so, you’re in for a long haul, but it should pay off in the end!

Registering your organization is an eight-step process, beginning with selecting a name.

Nonprofit Registration Process

Choose and reserve a name for your nonprofit.
Form a board of directors
File articles of incorporation
Write your organization’s bylaw
Hold your first board meeting (taking minutes, of course)
Apply for an Employer Identification Number (EIN).
File your 501(c)(3) application.
Obtain business licenses and permits

Is your head spinning yet? Registering as a nonprofit is not a small task. Fortunately, we have some resources to get you started. If you’d like to see the eight steps to registering a nonprofit laid out in much more detail, check out our Step-by-Step Guide to Registering your 501(c)(3) Nonprofit Organization. This guide names the specific forms you have to file to register as a 501(c)(3) nonprofit, and it provides much more information about each step along the way.

Or, have you decided that your organization doesn’t quite fit within the category of a nonprofit? Take a look at our complete guide to the different types of business structures to find something that better fits your organization.

Whatever route you decide to take, we wish you the best of luck! And as always, feel free to share your questions and advice in the comments below.

The post Whatâs The Difference Between Nonprofit & Not For Profit Organizations? appeared first on Merchant Maverick.

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November 19, 2019

The Step-By-Step Guide To Registering Your 501(c)(3) Nonprofit Organization

Nonprofit organizations are responsible for doing so many amazing things, from combatting hunger and homelessness, to helping sick children and animals. But no one said saving the world was easy. While there are multiple steps to registering a business, you have to jump through even more hoops if you want to register a nonprofit business. Still, officially registering as a nonprofit is important because it legitimizes your organization and provides it with some distinct advantages. In particular, nonprofits registered as 501(c)(3) organizations have a tax-exempt status, which means they do not have to pay federal or state income tax.

Whether you want to start a nonprofit or have already begun your nonprofit, it’s important to make sure your organization is properly registered, compliant, and set up for success. Read on for an actionable, step-by-step guide to help you make your nonprofit official.

Why Register As A Nonprofit?

It is possible to informally operate as a nonprofit organization without officially registering as a nonprofit. However, until you make it official, you are basically turning away free money, as well as other benefits.

Here are the main reasons to register your nonprofit:

Legal Protections: Nonprofit corporations have limited liability protection, which protects directors and members from being held personally responsible for the organization’s debts or liabilities. The nonprofit is considered a separate entity that can enter into contracts, sue or be sued, take out business loans, etc., without anyone who works for the nonprofit being held personally liable.
Tax Benefits: Once you have your federal and state tax-exempt status, your organization will be exempt from paying income tax. There are also tax benefits for donors, who can deduct donations made to 501(c)(3) organizations on their taxes.
Access To Grants: Many business grants are only available to organizations registered as nonprofits.
Access To Discounts: With proof of your nonprofit status, your organization is eligible for various discounts, such as USPS nonprofit discounts and credit card processing discounts for nonprofits.
Crowdfunding Eligibility: 501(c)(3) status lets you raise money through certain nonprofit crowdfunding platforms, such as CrowdRise. Some crowdfunding platforms will also eliminate platform fees for registered nonprofit entities.
Credibility: An official nonprofit status lets people know your organization is legit and not just a bunch of yahoos or even scammers. Obtaining your nonprofit status is likely to attract more donors and larger donations.

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The 8 Steps You Need To Take To Get Started

The process to execute some of these steps varies somewhat from state to state. For example, in some states, you will need to apply for both federal and state tax-exempt status. But wherever you live, you will need to follow all of the below 8 steps.

1. Select A Name

Though you may have a working name for your organization, to make your nonprofit official, you will have to make sure that name is available and hasn’t already been trademarked. After you choose your name, check with your Secretary of State office as well as the U.S. Department of Commerce website to ensure that it is available. You can normally pay a nominal fee to reserve your name until you file your articles of incorporation.

2. Form Your Board Of Directors

Generally, you should form your board of directors before incorporating. Some, but not all states require that you list your board members’ names in the incorporation documents. You’ll also need to list at least three directors when you file for your 501(c)(3) tax-exempt status. These members should ideally be unrelated (by blood or marriage).Â Â

3. File Articles Of Incorporation

This is the documentation that forms an official corporation for your nonprofit and will be filed with your secretary of state. It includes information such as your organization’s name, location, board of directors, and purpose (what your nonprofit is being created to do/provide). Although incorporating your nonprofit does not make it tax-exempt, you will need to include certain language in the articles of incorporation for when you apply for tax-exempt status later—your state’s nonprofit formation packet should include the required information.

Some states also require you to publish a notice of incorporation with your local newspaper.

4. Write Bylaws

After your articles of incorporation have been approved, you can write your bylaws. These are your nonprofit’s internal rules and guidelines for procedures such as holding issues, voting, and electing officers. You will need to include a copy of your bylaws in your 501(c)(3) application.

5. Hold First Board Meeting

At your first board meeting, you will make your articles of incorporation part of the official record, adopt your bylaws, and elect officers. Someone will need to take minutes, which you will keep on file. It’s recommended that you hold this initial board meeting before you file for federal tax-exempt status. In a later meeting, you can record the receipt of federal and state tax exemptions.

6. File For EIN

The final thing you need to do before filing for your 501(c)(3) status is to apply for an Employer Identification Number (EIN). You need to do this even if you don’t have employees yet, as it is required by the IRS to obtain your tax-exempt status. The IRS uses your EIN to track your organization’s financial activities. You’ll also need an EIN later on when you open a business bank account and hire employees.

To obtain an EIN, file Form SS-4 with the IRS.

7. File For Tax-Exempt Status

After you have your directors, incorporated status, bylaws, and EIN, it’s finally time to file for your federal tax-exempt status with the IRS. For nonprofits in most states, you only need to do this at the federal level, but some states require you to file for tax-exempt status at the state level too. For example, nonprofits in California must also apply for tax exemption with the California Franchise Tax Board after obtaining tax-exempt status from the IRS.

To apply for your federal tax-exempt status under section 501(c)(3)Â of the Internal RevenueÂ Code, you will need to file Form 1023Â with the IRS. If your organization has gross receipts of less than $50K and less than $250K in assets, you can file the 3-page 1023-EZ application (vs. the 26-page standard 1023).

Some information you’ll need to include in your 1023 application:

Your budget, including any balance sheets or other financial information
The names of your directors
Copy of your articles of incorporation
Copy of your bylaws
Dissolution clause (usually included in articles of incorporation or bylaws)
Conflict of interest clause (usually included in articles of incorporation or bylaws)
Statement of exempt purpose (usually included in articles of incorporation or bylaws)

In order to ensure that your application meets all state and federal requirements, it’s a good idea to consult with a lawyer or someone familiar with tax-exempt law. Including attachments, a 501(c)(3) application package can easily exceed 50 pages.

Note that even after your organization receives its letter of determination from the IRS with its tax-exempt status, each year you will have to submit Form 990 in order to maintain your 501(c)(3) status. This document provides financial information about your organization to both the IRS and to the public.

8. Obtain Business Licenses & Permits

Once you have your tax-exempt status, you’re almost ready to start raising funds. But first, you’ll need to make sure you’re in compliance with all business licenses and permits applicable to your state and your organization’s activities. For example, you may need a sales permit or a zoning permit. Check with your local department of consumer affairs to find out what kind of licenses and permits you need to operate as a charitable organization in your particular state. Some cities may require a city business permit as well.

Registering As A Nonprofit: FAQs

How long does it take to register a nonprofit?

The IRS estimates it will take 100 hours to fill out Form 1023. The application process typically takes between 3-6 months, though it could take as long as a year, depending on whether the IRS has follow-up questions and how quickly you provide the answers.

How much does registering a nonprofit cost?

To file for 501(c)(3) status, you will pay either $600 to file Form 1023, or $275 to file Form 1023-EZ.

The costs of incorporating and obtaining the necessary permits to operate as a nonprofit vary from state to state; however, they usually do not exceed $100-$200.

Is the registration process different in each state?

Yes, somewhat. Check with your state to see if you need to complete any extra steps, such as publishing your nonprofit’s articles of incorporation or filing for state-level tax exemption.

Can any organization register as a nonprofit?

No. Your organization must meet the IRS’s definition of a public charity (the most common type of 501(c)(3) organization), private foundation, or private operating foundation. Be sure to read up on the IRS’ exemption requirements for 501(c)(3) organizations before you apply.

Can I register my business as a nonprofit to dodge taxes or get rich?

No. The IRS has strict regulations in place to make sure that businesses cannot use misuse their 501(c)(3) status for personal gain or to avoid paying taxes. All of your organization’s financial information, including salaries and use of income, will be closely and regularly scrutinized to look out for possible fraud and conflicts of interest. For example, if your nonprofit brings in $500K a year, you will not be able to get away with paying yourself a $200K salary.

Should I hire a lawyer to help with the registration process?

Yes, it is a good idea for first-timers to consult with a legal professional at some point to ensure compliance with all state and federal requirements, particularly when filling out the incorporation paperwork and when preparing the 501(c)(3) forms.

Final Thoughts

Whether they benefit schools, the environment, public safety, or another cause, nonprofit organizations do a lot of good in this world. But if a nonprofit is not officially registered, then it can only make a limited impact. When a charitable organization is incorporated as a nonprofit corporation and obtains a 501(c)(3) status from the IRS, the organization does not have to pay income taxes on the money it brings in, and the organization becomes eligible for other funding opportunities, including government grants and charitable crowdfunding platforms. Additionally, donors are more motivated to donate to IRS-registered nonprofits because any contributions they make to these organizations are tax-deductible.

There is some work involved in registering a nonprofit and maintaining nonprofit status, but your charity and your cause will ultimately benefit from your diligence. If you’re not sure your nonprofit qualifies for 501(c)(3) status, the IRS has information you can review on the various types of tax-exempt/nonprofit organizations, including 501(c)(3) and others. If you think maybe a nonprofit structure is not right for your organization after all, I recommend reading our article on the different types of business structures.

The post The Step-By-Step Guide To Registering Your 501(c)(3) Nonprofit Organization appeared first on Merchant Maverick.

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November 18, 2019

Should You Form A Business Cooperative? Consider These 9 Advantages And Disadvantages Before Getting Started

A business cooperative, also called a “worker cooperative” or just a “co-op,” is a type of business that offers some special advantages—namely, the advantages of group ownership. Though it has some commonalities with other business types, including business partnerships and traditional corporations, a business co-op is its own animal with its own unique legal structure. A cooperative is not the most conventional business type and can only work for certain types of businesses. Read on to learn more about whether this unique business model could work for your new or existing business.

What Is A Business Cooperative & How Does It Work?

Essentially, a business cooperative is an employee-owned business. Every member of the cooperative has an equal voice, regardless of how many shares they own. Profits and earnings are divided equally among the members (also called “member-owners”). However, it’s important to know that there are different types of co-ops with different goals, and that there are other business types that resemble co-ops.

How Business Co-ops Differ From Consumer Co-ops

A business cooperative is not to be confused with a consumer cooperative, though the legal structure may be the same. With a consumer co-op, members of the co-op are also consumers of the co-ops good or services, paying into the co-op or sometimes volunteering their labor (usually part-time) in exchange for membership.

Why join a consumer co-op? Membership typically gets you a free service or lower prices for a service. For example, a food co-op typically offers high-quality food at much lower prices than you’d pay at, say, Whole Foods. A parent joins a preschool co-op so that their children can attend the school for free or at a discounted rate. Consumer co-ops typically not-for-profit, community-based services. They may or may not be incorporated as businesses.

Business cooperatives, on the other hand, serve workers. The member-owners of a business cooperative are typically full-time corporate employees.

While business co-ops are democratic by nature and often have a socially conscious business ethos, the main goal of a business co-op is not to provide a community service, but to make a profit. Typically a percentage of profits are distributed equally among owners, while the rest is reinvested in the company. There are co-op businesses in retail, agriculture, healthcare, manufacturing, and other industries. Business cooperatives are incorporated and do business as cooperative corporations.

Business Cooperatives VS Other Business Structures

A cooperative corporation is also not to be confused with a regular corporation (C corp). Though many corporations are partly owned by shareholders who also work for the company, a cooperative, by contrast, is 100% owned by its employees, with no owner having any more control or ownership of the company than any other owner. Unlike a traditional corporation, a cooperative corporation has no executives who hold the majority of shares (among other differences).

Co-ops are also different from business partnerships, which have different liability structures and tax structures, and can involve unequal ownership arrangements. Learn more about the different types of business structures if you’re not sure which one is right for your company. Depending on your goals, a more appropriate business structure might be a partnership or even a limited liability company (LLC), which has a lot of the same benefits of a co-op but with fewer restrictions.

Other business types may borrow some features of co-ops without being true co-ops. For example, Costco and Sam’s Club resemble co-ops in that members pay a fee in order to shop there; however, these businesses are not true co-ops because they are not member-owned.

Business Cooperatives On A Large Scale

Very large business co-ops can operate much like franchises—in that members pay to use the company name and resources, but each individual business location is more or less independently managed. ACE Hardware, whose shares are all owned by individual ACE Hardware store owners, is an example of a retail cooperative. In exchange for purchasing shares of company stock, approved ACE outlets become part owners of the company and can use the ACE name, products, and distribution channels.

A business cooperative can also function sort of like a union, in that its democratically-elected leaders can exert collective bargaining power in their industry if the co-op is large enough. Land O’Lakes Inc., owned by dairy farmers, is an example of a large-scale agricultural business cooperative. Due to its large size and purchasing power, Land O’Lakes has a lot of negotiating power from its suppliers (of trucks, farming equipment, etc.), which it uses to lower its cost of production.

But not all business cooperatives are nationwide brands; most are actually small businesses. A new co-op might only have a handful of employees. There are still benefits to forming business cooperative, even on a very small scale.

The Advantages Of Owning A Business Cooperative

Incorporating your business as a co-op can provide great benefits and establish your organization as a really special entity where workers love their job — with low operating costs to boot. Read on to learn about the benefits of owning a business cooperative.

Invested Employees

Because employees are directly impacted by the company’s performance and share in the company’s successes and losses, they are more invested in the company they work for. Employees are more likely to pour their hearts and souls into a company when they are also owners. Having an equal voice in the company, as co-op owners do, can also inspire more motivated workers. In addition to their labor, employees invest their money into the company, which helps fund the business.

Funding Opportunities

Cooperatives may be eligible to receive certain business grants from the federal government and other entities.

Reduced Liability

Equal distribution of ownership in a cooperative also means equal distribution of liability. In contrast to partnerships where all partners are fully liable for both their own and their partners’ actions, each owner of a cooperative has only limited liability for company debts, obligations, etc. The liability of the co-op’s members is limited only to the extent of their investment in the co-op, provided that they were not engaged in illegal or negligent activities. (LLCs, which can also have multiple owners, also have limited-liability benefits.)

Lower Overhead

Owner-employees are more motivated to keep costs down, because lower costs ultimately increase the company’s profitability. By leveraging their large size, co-ops may also be able to obtain lower-cost goods and services from suppliers, resulting in an overall lower cost of production.

Tax Advantages

Earnings are taxed twice in a traditional corporation—the corporation pays tax on their net earnings and then the shareholders pay taxes on their individual dividends.Â The federal tax structure of a cooperative—subchapter T of the U.S. tax code—is such that these entities are not taxed on the surplus earnings/dividends they redistribute to members. Co-op owners are only taxed once on their personal co-op income, and not at the co-op level. Thus, a cooperative has a reduced tax burden compared to regular corporations.

The Disadvantages Of Owning A Business Cooperative

A cooperative business model is also not without its downsides. Before you decide to incorporate as a cooperative, make sure you are okay with the following caveats of forming a co-op:

Legal Restrictions

Depending on where you live and work, you may not be allowed to incorporate your business as a co-op. Every state has a co-op law, but they are all different. Some states have very restrictive co-op laws, only allowing co-ops in certain industries, such as agriculture, to incorporate. Other states allow co-op businesses in almost any industry. If your state allows you to form a co-op business, you will still have to adhere to your state’s co-op laws. Before you get yourself in some legal challenges, make sure you are following your state’s business cooperative laws.

Not As Profitable For Founders

Because a cooperative’s earnings and profits are distributed equally among all employees, this type of business is not nearly as profitable for the company’s founders. This doesn’t mean that all cooperative employees are paid equal wages, but in a conventional business structure where the owners/founders have the majority of control and ownership in a company, those owners stand to take a much bigger chunk of the profits. Then again, if you’re considering forming a co-op, there is a good chance that personal profit is not your primary goal.

Funding Challenges

FindingÂ startup loans and other types of funding through traditional lenders may be difficult due to a cooperative’s financial and liability structure. Co-ops also struggle to attract large investors, since a large investor will not have any more control in the company than a small investor. During the startup phase and sometimes beyond, co-ops may have to get creative with other funding sources, such as launching a crowdfundingÂ campaign or applying for small business grants.

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Slow Decision-Making

Have you ever tried to make a decision as a large group? It can be pretty challenging! By the time the entire group decides where to eat, you are out of your mind with hunger. The process to make big decisions as a cooperative, where everyone gets an equal vote in all company decisions, can be equally time-consuming and frustrating.

How To Form Your Co-op

The following are the main steps you need to take to form a business co-op. However, the steps to register your business as a co-op vary somewhat from state to state; check with your state’s Secretary of State or State Corporation Commissioner for more information regarding your stateâs specific co-op laws.

1. File Articles of Incorporation

The articles of incorporation is a document that makes your co-op an official business. This document includes your company’s name, location, purpose, financial structure, and the names of your charter members (incorporators/founders). Your incorporators must file the articles of incorporation with your state business entity registration office.

2. Obtain Business Permits & Licenses

You will need to obtain all local, state, and federal permits and licenses before you can operate as a legal business. These requirements will vary based on your industry and location.

3. Create Bylaws

Once your articles of incorporation have been approved by the state, you can write your bylaws. These are all of the rules and procedures for your cooperative and include membership requirements and duties, as well as general operational procedures for your co-op. Your bylaws must comply with state law, so you may need to consult with an attorney at this time if you haven’t already.

4. Hold Charter Meeting

During this meeting, charter members will adopt the bylaws and elect a board of directors (if the board wasn’t already established in the articles of incorporation).

5. Recruit More Members

To make your co-op a success, it needs to grow its membership. These are the employees and co-owners of your company who will supply the capital and labor. The application members use to join the company needs to include names and signatures from the board of directors, as well as a description of the member rights and benefits.

6. File With The IRS

Even though you are exempt from certain taxes as a cooperative, you will still need to file with the IRS (before the end of your fiscal tax year) to validate your organization’s tax-exempt status. In particular, most cooperatives will need to file Form 1120-C to report income, gains, losses, deductions, credits, and to determine your income tax liability. Any cooperative with employees needs need an Employer Identification Number (EIN) to file taxes, so be sure to sign up for one before tax-time if you haven’t already.

7. Obtain Additional Financing

Depending on your financial needs, you may need to obtain additional financing at some point, especially if contributions from co-op members are not sufficient to cover all your initial startup expenses. As mentioned, crowdfunding and startup business grants are a couple of potential ways co-op startups get capital, and certain online lenders might be willing to extend you a startup loan as well.

Note that if you are converting an established company to a co-op, this process will look different. In addition to incorporating as a cooperative, writing bylaws, etc., you will also need to buy out the original owners/founders and then redistribute that money to the co-op.

Final Thoughts

A business cooperative can be the perfect business structure for certain organizations, particularly those with a democratic business ethos. A strong corporate culture and reduced costs are just two of the many benefits that cooperative businesses enjoy. However, co-ops are also limited in certain ways, and are not appropriate for every business type.

Don’t think a co-op is right for you? Take a look at our business structures explainer to learn about other business structures and their pros and cons.

The post Should You Form A Business Cooperative? Consider These 9 Advantages And Disadvantages Before Getting Started appeared first on Merchant Maverick.

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November 1, 2019

The Complete 2019 Small Business Guide To Holiday Shipping: Deadlines, Prices, And How To Save

The holiday season is upon us! For many small businesses, this is the busiest time of the year for sales and shipping, so busy that UPS is said to have delivered over 800 million packages in 2018 during the holidays alone.

In today’s world, consumers are accustomed to inexpensive and fast shipping, which means making a holiday shipping plan is essential. But how do you prepare for such a busy season as a business owner? What are your best shipping options? And how do you get the best rates to make your customers happy and compete in a space with Amazon and other two-day shipping providers?

Heading into the holiday season blind, without information about shipping rates and times, is an expensive mistake you can’t afford to make. It’s important to understand what customers want in shipping rates, the shipping methods customers prefer, and how to navigate general holiday busyness. We’ll answer all these questions and more to help your business handle holiday shipping with ease.

Here is what you need to know about holiday shipping 2019.

The Best Holiday Shipping Options For Your Business

Holiday shipping choices are an integral part of your overall business strategy, especially during the holidays. Even though the small business holiday season starts with Halloween, don’t let your shipping start with a scare. Learn what shipping options you have ahead of time so you can be prepared and ease the stress of the holidays.

In today’s small business world, there are more shipping options than ever, whether you outsource or use software apps and software. That means the holiday shipping rush doesn’t need to be crazy. Still, when it comes to shipping options, there are really three major contenders: The United States Postal Service (USPS), United Parcel Service (UPS), and FedEx.

We’ll explain what services each provides, how much they cost, and which is the best to use for your shipping needs. And, if none of these fit your needs, we’ll also cover the best shipping software and outsourcing options.

Small Business Shipping Options	Best For
USPS	Affordability and saving money when packages don’t need to arrive quickly
UPS	Fast deliveries with guaranteed shipping, package tracking, and no peak surcharges
FedEx	Fast deliveries with package tracking and Saturday shipping
Shipping Software	Streamlining your shipping process and integrating with your eCommerce site
Outsourcing	Business owners who are too busy to handle shipping themselves

useful and easy-to-navigate shipping calculator. You can use it to get an estimate for your shipping rate. If your shipping method is available via their Click-N-ShipÂ® option, you can sign-in to your account, select shipping type, pay, and print your label. Small businesses can use Click-N-ShipÂ® to create batch shipments or order flat-rate boxes to be delivered directly to your home/place of business. Pick-up at residences and almost all business locations is free.

For international shipping prices, visit the USPS business prices page. Prices listed below are up-to-date as of October 30, 2019.

Shipping Service Price Delivery Time Price Details

USPS Retail Ground Starts at $7.35 2-8 days Prices based on package weight, size, and destination location; only available in-person at a post office

First-Class Mail Starts at $0.33 1-3 days Prices based on package weight, size, and destination location; for envelopes or small packages up to 13oz

Priority Mail Starts at $7.35; flat-rate boxes available 1-3 days Flat-rate boxes prices do not vary based on weight or destination location; non-flat-rate box priority mail rates are based on weight, size, and destination location

Priority Mail Express Starts at $25.50 Overnight Prices based on package weight, size, and destination location

Media Mail Starts at $2.75 2-10 days Only available in-person at a post office

USPS also has flat-rate prices their priority mail service. With flat-rate boxes and envelopes, weight and destination do not affect pricing. If you can fit it, it’ll ship for the pre-determined price. Prices listed below are up-to-date as of October 30, 2019.

Package Type Size Price

Letter Envelope 12 1/2″ x 9 1/2″ $6.95

Small Envelopes 10” x 6” $6.95

Padded Envelopes 12 1/2″ x 9 1/2″ $7.55

Small Box 8 11/16″ x 5 7/16″ x 1 3/4″ $7.50

Medium Box 11 1/4″ x 8 3/4″ x 6″ or 14″ x 12″ x 3 1/2″ $12.80

Large Box 12-1/4″ x 12-1/4″ x 6″ or 24-1/16″ x 11-7/8″ x 3-1/8″ $17.60

APO/FPO Box 12-1/4″ x 12-1/4″ x 6″ $16.10

Shipping Service	Price	Delivery Time	Price Details
USPS Retail Ground	Starts at $7.35	2-8 days	Prices based on package weight, size, and destination location; only available in-person at a post office
First-Class Mail	Starts at $0.33	1-3 days	Prices based on package weight, size, and destination location; for envelopes or small packages up to 13oz
Priority Mail	Starts at $7.35; *flat-rate boxes available	1-3 days	Flat-rate boxes prices do not vary based on weight or destination location; non-flat-rate box priority mail rates are based on weight, size, and destination location
Priority Mail Express	Starts at $25.50	Overnight	Prices based on package weight, size, and destination location
Media Mail	Starts at $2.75	2-10 days	Only available in-person at a post office

Package Type	Size	Price
Letter Envelope	12 1/2″ x 9 1/2″	$6.95
Small Envelopes	10” x 6”	$6.95
Padded Envelopes	12 1/2″ x 9 1/2″	$7.55
Small Box	8 11/16″ x 5 7/16″ x 1 3/4″	$7.50
Medium Box	11 1/4″ x 8 3/4″ x 6″ or 14″ x 12″ x 3 1/2″	$12.80
Large Box	12-1/4″ x 12-1/4″ x 6″ or 24-1/16″ x 11-7/8″ x 3-1/8″	$17.60
APO/FPO Box	12-1/4″ x 12-1/4″ x 6″	$16.10

When To Use USPS For Holiday Shipping?

If you are a low-volume merchant, USPS does free pick-up, and you can use the Click-N-ShipÂ® method for the shipping services available. The entire process is quick and simple. Click-N-ShipÂ® is the most economical, it reaches all households/PO Boxes, and can be a great option this holiday season when time isn’t of the essence. USPS overwhelmingly provides the best experience for most small businesses and eCommerce merchants. UPS and FedEx can’t compete with the prices and speed for lightweight (under 2lbs) packages. If that applies to your shipments, then this is your best choice.

UPS

Best for fast deliveries with guaranteed shipping, package tracking, and no peak surcharges.

We recognize those trademark brown vans anywhere. UPS (United Parcel Service) is a favorite among merchants because of their amazing customer service, package tracking abilities, and reliability. However, it is the most expensive option whether you ship from a regular pick-up or from a retail shop. It is notable, though, that UPS does not have any peak pricing or peak surcharges this year.

Pros

Great tracking
Reliable expedited shipping
No holiday peak pricing surcharges

Cons

No free pick-up
More expensive than most
No Saturday delivery

a handy calculator to determine shipping costs. Prices for shipping are different for daily rates or retail rates. Daily rates are for businesses with a scheduled UPS pick-up. Retail rates are the shipping rates you will pay if you go into a local UPS retail location. The fees for scheduling a pick-up start at $13.45.

Here’s a breakdown of UPS’s shipping by service. Prices listed below are up-to-date as of October 30, 2019.

Shipping Service Price Delivery Time Price Details

Ground Starts at $12.32 1-5 days Prices based on package weight, size, and destination location

UPS 3-day Select Starts at $11.23 3 days Prices based on package weight, size, and destination location

UPS 2nd Day Air Starts at $18.40 2 days Prices based on package weight, size, and destination location

UPS Next Day Air Starts at $24.70 Next business day Prices based on package weight, size, and destination location

UPS Express Critical Varies Contact UPS Prices based on package weight, size, and destination location

Shipping Service	Price	Delivery Time	Price Details
Ground	Starts at $12.32	1-5 days	Prices based on package weight, size, and destination location
UPS 3-day Select	Starts at $11.23	3 days	Prices based on package weight, size, and destination location
UPS 2nd Day Air	Starts at $18.40	2 days	Prices based on package weight, size, and destination location
UPS Next Day Air	Starts at $24.70	Next business day	Prices based on package weight, size, and destination location
UPS Express Critical	Varies	Contact UPS	Prices based on package weight, size, and destination location

When To Use UPS For Holiday Shipping?

UPS has great tracking. If you have a package you need delivered fast and you want to keep a close eye on its travels, then UPS might be worth the extra cost. Tracking and guaranteed speed are the two reasons to choose UPS over USPS. While some small businesses have amazing relationships with their UPS drivers, most small businesses and eCommerce sites won’t want to pay the pick-up fees or increased rate prices by heading into a store.

are negligible. However, FedEx, like USPS, does have Saturday delivery, and they tout a more involved tracking system, too. There are fewer FedEx stores in the United States, so locations are limited, and that could add time to delivery for remote locations.

Pros

Excellent tracking

Saturday delivery

Cons

Fewer locations

No free pick-up

Can be expensive

Holiday peak pricing/surcharges

FedEx Services

Source: FedEx

FedEx offers several shipping options, which vary depending on how quickly you need your packages to arrive.

Ground: Prices for Ground shipping are based on package weight, size, and destination location. Shipments will arrive between 1-7 business days.Â Ground shipping is only provided for Monday-Friday delivery days.
FedEx Express SaverÂ®: Prices for the FedEx Express SaverÂ® shipping are based on package weight, size, and destination location. Your shipment will arrive between 1-3 business days.Â
FedEx 2Day AirÂ®: Prices for FedEx 2Day AirÂ® are based on package weight, size, and destination location. Your shipment will arrive by the end of business on the 2nd day. (You can also purchase 2DayÂ® AM and make sure your package is delivered by the morning.)
FedEx Standard OvernightÂ®: Prices are based on package weight, size, and destination location. Your package will arrive by the next business day.Â
FedEx Priority OvernightÂ®: Your package will arrive by mid-morning the next business day.Â

How Much Does FedEx Holiday Shipping Cost?

For the holiday 2019 season, FedEx does have peak and surcharge fees. Surcharge fees start at $4.20. You may also need to pay a fee for a package traveling to a remote area. You can use their rate calculator here and view a breakdown of their pricing details below. Prices listed below are up-to-date as of October 30, 2019.

Shipping Service	Price	Delivery Time	Price Details
Ground	Starts at $7.85	1-7 days	Prices based on package weight, size, and destination location
FedEx Express Saver	Starts at $16.07	1-3 days	Prices based on package weight, size, and destination location
FedEx 2Day Air	Starts at $18.22	2 days	Prices based on package weight, size, and destination location
FedEx Standard Overnight	Starts at $27.19	Next business day	Prices based on package weight, size, and destination location
FedEx Priority Overnight	Starts at $29.18	Mid-morning on the next business day	Prices based on package weight, size, and destination location

FedEx also has flat-rate prices. With flat-rate boxes and envelopes, weight and destination do not affect pricing. If you can fit it, it’ll ship for the pre-determined price. Prices listed below are up-to-date as of October 30, 2019.

Source: FedEx

When To Use FedEx For Holiday Shipping?

If you are close to a FedEx store or need a very detailed tracking provider, this is a solid choice. Pricing between UPS and FedEx is similar and inconsistent (some years one is more economical, the next year the other one is; it’s impossible to tell you which one is the best option). So, this comes down to your own preference. This year, FedEx does have peak/surcharge pricing for the holiday season (which UPS does not have this year), but the pricing differences between UPS and FedEx are negligible.

Shipping software is a helpful tool to streamline the shipping aspect of your business. If the information about shipping prices and options above made your head hurt a little, that’s okay. If you don’t have the time or inclination to do shipping calculations yourself, finding shipping software that works for you can cut time off your precious holiday work hours.

What can shipping software do? It can: give real rates, print labels in bulk, manage shipments, and it works with your eCommerce site. Here are the top choices you should look into.

Best Shipping Software For The Holidays

Merchant Maverick’s top-rated shipping software is a great place to start to find a shipping software that works for you. Here are a few of the top merchants we recommend:

Shipping Easy:Â Shipping Easy is, you guessed it, easy to use and its pricing is excellent. That makes it one of our favorites at Merchant Maverick. A bonus of partnering with Shipping Easy is the partnership with USPS, and it’s an affordable option for low-volume merchants.
ShipStation:Â ShipStation is one of the leaders in eCommerce shipping and it has integrations for UPS/FedEx/USPS.
Ordoro: Ordoro has great dropshipping options where you can send packages directly from a supplier, which might be an amazing step for the holiday rush.
Stamps.com: Stamps.com works directly with the United States Postal Service. This is a flat-rate service; you pay a flat monthly fee no matter how many packages you ship. With free pick-up from USPS at almost all residences and businesses, for companies looking for a great economical option, Stamps.com is a great choice.

How Shipping Software Can Help For The Holidays

Shipping software takes some of the labor of shipping and moves it into a streamlined process. Time is money and time is limited. If you have a dedicated person working on shipping, that’s amazing, but human error is bound to happen, and shipping software helps take some of the labor out of your shipping process.

Here are the top reasons why you should invest in shipping software:

Saves you time
Reduces chances for error
Simplifies your shipping craziness
Streamlines your shipping process
Keeps shipping information in a single location

These shipping software companies are prepared for the holiday rush and they can help you, too. Anytime you can economically outsource, you should.

Is it worth the cost? Keep on reading!

How Much Does Shipping Software Cost?

Shipping software is an expense, and rates vary. However, many of theses shipping software companies have worked on shipping discounts and cheaper rates for their clients, and that makes the differences in price negligible vs. not using shipping software.

If you acquire help via a shipping app that is saving you up to 40% on shipping costs, it’s worth it to pay a monthly fee for that type of discount — that fee is absorbed by savings on shipping costs. When you look at the bottom-line, there is no way to go wrong with a shipping software company if your company ships enough products to benefit.

Read our post on the advantages of shipping software to learn if this option is right for you.

Outsourcing shipping is really just the act of saying, “Let’s not hassle with this craziness!”

You might be a smaller merchant who is hoping to get to the level where you can outsource. The savings threshold is 25 orders a day. If you fulfill over 25 orders a day, you can economically benefit from outsourcing. (And we’re cheering for you to get to that level or above!)

One important thing to consider: Third-party shippers are better equipped for dealing with the holiday shipping madness, and it’s nice to hand a difficult task off to someone else. Read our complete post on outsourcing to learn if this option is right for you.

Best Options To Outsource Holiday Shipping

There are multiple options to outsource your holiday shipping. Finding a way to keep yourself as hands-off as possible is a small business owner’s dream. Here are a few options for holiday outsourcing:

Amazon: Fulfillment By Amazon (FBA) Multi-Channel Fulfillment is a great way to get your items to customers by using the Amazon platform. Using the Prime shipping feature is a huge benefit. It’s indisputable that Amazon is the leader in commerce in 2019; why not ride on their coattails?
Fulfillrite: This company has same-day shipping and amazing cost plans. If your eCommerce site is looking to outsource, this is an option that works directly with your business.
Shipware: Shipware says that through their program, they have saved $1,321,250 per year for small business merchants in shipping.
FedEx Fulfillment: FedEx also has a fulfillment service to help businesses reach their customers. This is a great option if FedEx is a close and competitive selection for your business.

How Outsourcing Shipping Can Help For The Holidays

Outsourcing your shipping gives you the freedom to focus on all the other important business issues during the holidays. Timely customer service is still a huge part of consumer decisions. When choosing whether to outsource, ask yourself:

How fast am I able to fulfill orders?
What are my plans for returns/refunds?
Can I respond to issue situations immediately?

If the answers to these questions are inducing a heart attack, stop right now. Outsourcing may be the cure for you.

How Much Does Outsourcing Shipping Cost?

To set up an outsourcing system for your company, you will need to find an outsourcing company and set up an account through them. There are initial set-up fees and fees based on use and inventory. Costs for outsourcing vary. The average industry cost for outsourcing shipping is $2 per order, with negotiated rates.

When To Outsource Your Holiday Shipping

If you are struggling with shipping your holiday orders, outsourcing is a no-brainer. Here is the best way to assess if you need to outsource. Close your eyes. Imagine that you don’t have to worry about fulfillment regulations, inventory space, the time spend on shipping, training staff to ship, or where you’ll keep holiday inventory. If this vision has you relaxing for the first time since the Back To School supplies hit the shelves, then you need to find a way to outsource.

Remember: in general, if you have more than 25 shipments a day, it may be cost-effective to outsource.

Holiday Shipping Schedule for 2019

As a small business, it’s important to fulfill your shipping promises. Knowing the shipping deadlines and understanding the holiday schedule will help you plan and set your own shipping costs and let customers know when to expect their items. We’ve all had one or two close-calls or misses with holiday packages. (Or those packages that came just a few days late…)

Deadlines listed below are up-to-date as of October 30, 2019.

USPS Holiday Shipping Deadlines

With USPS the last day to ship a package and have it arrive by Christmas is December 23. However, for cheaper shipping options, you’ll want to send your packages well before this date. See the deadlines below:

USPS Shipping Deadlines
December 13	Last day to mail USPS Retail Ground service
December 19	Last day to mail First-Class Mail
December 20	Last day to mail First-class packages (up to 15.99 ounces)
December 21	Last day to mail Priority Mail
December 23	Last day to mail Priority Mail Express

UPS Holiday Shipping Deadlines

With UPS, the last day to ship a package and have it arrive by Christmas is December 23. However, if you don’t want to be stuck paying for NextDay Air, you’ll want to use another one of UPS’s shipping services and get those packages in sooner. See the deadlines below:

UPS Shipping Deadlines
December 13	Last day to mail Ground packages
December 19	Last day to mail UPS 3 Day SelectÂ®
December 20	Last day to ship via UPS 2nd Day AirÂ®
December 21	Last day to mail UPS 2nd Day AirÂ® with Saturday service
December 23	Last day to mail Priority Mail Express/UPS Next Day AirÂ®

FedEx Holiday Shipping Deadlines

With FedEx, the last day to ship a package and have it arrive by Christmas is December 25. But, if you want to save some money, and save a poor soul from having to work on Christmas day, you’ll want to send your packages before this date. See the deadlines below:

FedEx Shipping Deadlines
December 16	Last day to mail FedEx Ground shipments
December 16	Last day to mail FedEx Home Delivery shipments
December 19	Last day to mail FedEx Express Saver shipments
December 20	Last day to mail FedEx 2Day and 2Day A.M. shipments
December 23	Last day to mail FedEx Standard Overnight, Priority Overnight and First Overnight shipments
December 25	Last day to mail FedEx SameDay shipments

5 Tips To Make Holiday Shipping Easier For You & Your Customers

Shipping is crucial and people invest in your business because of what you promise to deliver. According to a recent study, 70% of customers navigate away from a shopping cart because of questions about shipping and shipping timing, so it is 100% true that shipping can make or break a sale. It’s gut-wrenching to get a customer to that final click and lose him/her/them with shipping speeds and prices.

With that in mind, how can you make holiday shipping easier for both you and your customers? It’s easy. Think about your own needs as a customer in today’s holiday market and try to meet those needs for your customers. Here are a few tips:

Tip #1: Keep Your Inventory In Stock

This should go without saying but I’ll say it anyway: keep your inventory in stock during the holiday season. Nothing creates a headache like running out of an important item during the busiest time of the year. (Is this the appropriate place to incorporate an anecdote about the time I worked for a chain restaurant famous for ribs, and a man actually threw a pitcher of water at me one day when we ran out of those ribs? Stay in stock, people!)

Waiting for a shipment yourself will slow down the shipping process. Be ready to ship as close to receiving an order as you can. That’s what most customers expect.

Tip #2: Make Shipping Work For Your Business

Whether this involves utilizing free shipping options or putting effort into tracking packages, shipping needs to be an integral part of your business plan and not an afterthought. Instead of feeling like shipping is bringing you down, make a shipping plan.

Maybe your shipping plan involves utilizing all shipping options (USPS/UPS/FedEx) depending on price. Maybe you promise free ground shipping, knowing you can absorb the cost. Research your business and what your customers expect for holiday shipping options.

Tip #3: Provide Shipping Information In Your Meta-data

It’s the year 2019. We don’t quite have the fully automated-flying cars we were all promised, but we do have a robust internet that is an incredible resource for small businesses.

If customers are looking for your product and a way to ship fast or free, advertise and capitalize on your ability to provide that option. Lead people to your site or product by offering up transparency.

Tip #4: Make Shipping Information Clear For Everyone

Will you provide tracking? Do you have a ship-by date? When will packages arrive?

Transparency is the number one most important quality in a business.

If you advertise certain shipping speeds, be ready to make good on those claims. Customers and clients who go into a sale with clear expectations are often the most satisfied. Whether the shipping takes one day, three days, or 14 days, as long as the customer can decide and choose, they will be happy.

However, it should go without saying, if you make a promise, stick with it and keep customers informed.

Tip #5: Prepare For Returns

Lastly: No matter how you ship, it’s important to prepare for returns. It’s inevitable that someone will need or want to return a product.

Do you have a return policy? How will customers return incorrect or damaged items? These are critical components of the shipping process. Implementing an automated return process is integral. Also, customers may be looking for information on returns before making a purchase, so communicate your return policy in a clear, public location.

Get Started On Your Holiday Shipping

Holiday shipping is crucial. If you and a competitor are equal in all other things, you’d better make sure you have the better shipping options. How do you do that? By knowing your inventory inside and out, including how much it weighs; by checking prices between the carriers and deciding on a shipping plan to utilize during the holiday season; and by understanding whether outsourcing or using a shipping service is the right choice.

The holiday shipping rush starts now. People are already thinking about holiday purchases; make it easy for them to choose your business. Check out our other articles on shipping to make sure you are prepared for the holiday rush.

The post The Complete 2019 Small Business Guide To Holiday Shipping: Deadlines, Prices, And How To Save appeared first on Merchant Maverick.

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October 25, 2019

Why Nonprofits Canât (Usually) Get Business Loans — And How To Get The Financing Your Organization Needs Anyway

So, you’ve started a nonprofit. You’re passionate about your cause and have put together an inspiring team, united by your shared mission to make a positive difference in the world. But you need some money to help finance your venture. Unfortunately, in our profit-motivated society, it can be extremely difficult to find a lender or other party who has financial incentive to extend you some capital. Whether you need an infusion of capital to maintain your existing nonprofit, or you want to secure financing to get your fledgling nonprofit off the ground, you may have to turn over a lot of stones before you find an interested lender. However, obtaining financing as a nonprofit is not entirely impossible, as long as you know where to look.

Is a business loan a viable option for a nonprofit organization? Where else can nonprofit businesses get financing? Read on to learn the answers to these questions.

Why Nonprofits Have Trouble Getting Business Loans

Nonprofit organizations are, of course, not about turning a profit. Any money they make—if they bring in any money at all—is meant to be reinvested in the organization. Banks, which are all about profits, have little to no interest in helping nonprofit organizations. Lenders consider nonprofit organizations to be “high-risk borrowers,” because they do not trust that you will make enough money to repay a loan. If they do not receive any additional financial incentive to do so—for example, a government subsidy or a “corporate giving” PR campaign—banks typically will not lend to a nonprofit that is not bringing in significant revenues. Such is capitalism.

7 Ways To Get Financing For Your Organization

Fundraising, donations, and member fees are typically the main sources of funds that drive a nonprofit organization. If you need additional money on top of what your organization is able to bring in through these channels, you’ll face a pretty steep climb. However, while it’s not easy, there are ways to finance your nonprofit, even if you can’t get a loan. Also, a loan is not necessarily out of the question, particularly for a more established nonprofit. The appropriate type of funding for your organization will depend on various factors, which I’ll describe in more detail in the sections below.

1) Community Development Financial Institutions (CDFIs)

Short for “Community Development Financial Institution,” a CDFI is a financial institution with a mission to facilitate community growth by providing financial assistance to businesses and consumers in low-income or disadvantaged areas. CDFIs are typically not-for-profit or nonprofit organizations, but may take the form of traditional banks/credit unions or venture capitalists. Usually, they do not operate on a national scale, so you will need to seek out CDFI opportunities in your local area.

CDFIs may be microlenders offering loans of $50K or less, while some CDFIs also issue larger loans to more established businesses. City First Bank in Washington D.C. is an example of a CDFI that offers loans to nonprofits.

While CDFIs can be a viable source of capital to nonprofit organizations, particularly to those that operate in disadvantaged regions, there are some downsides. CDFIs usually charge higher rates than banks do (though lower than you’d get with short-term or payday loans) and typically require you to submit a lot of documentation. It can also take a long time for the funds to come through.

Learn more about CDFIs by reading our comprehensive CDFI loans article, and search for CDFIs in your region on the CDFI Fund website.

2) Banks & Credit Unions

Though it’s much harder to qualify a loan from a traditional bank, there are some banks that offer loans to nonprofits. Big corporations — banks included — often like to flex their philanthropic muscles via nonprofit grants or loans programs. However, banks may charge higher interest rates on loans to nonprofits due to the higher risk involved, and you will likely have to have an established nonprofit with documentation to show your revenue, expenses, fundraising plans, and other financial information.

Credit unions, being nonprofit themselves, are more likely than traditional banks to offer nonprofit loan or grant programs (or serve as CDFIs). As nonprofits, credit unions do not have to pay taxes and can offer very competitive interest rates. A credit union may also be more likely than a bank to extend a loan to a newer or smaller nonprofit. Credit union loans are typically offered in smaller amounts than bank loans and you may have to have a checking or savings account with that credit union in order to qualify.

It’s important to only apply for funding to banks and credit unions that specifically advertise that they work with nonprofits/have a lending program for nonprofits. These institutions will better understand your needs as a nonprofit, and will be more likely to accept your application.

Learn more about credit union loans for businesses (including nonprofit businesses) and how they differ from bank loans.

3) Crowdfunding Platforms

For startup nonprofit organizations that are less likely to qualify for bank loans, crowdfunding can be a good option. There are various types of crowdfunding, but charitable/donation lending is the one most suited to nonprofit businesses. Depending on the crowdfunding platform you use, you may be able to obtain free capital for your nonprofit, in the form of online donations you do not have to repay. Or, you may qualify for a no-interest crowdfunded loan, and you’ll only have to repay the principal on the loan.

It is extremely important to familiarize yourself with the laws regulating nonprofit fundraising in the state or states in which you will be operating. You may have to register your charitable nonprofit with the state before you begin soliciting donations.

If you’re ready to explore fundraising online, start by looking at these 6 platforms that do crowdfunding for nonprofits.

4) Nonprofit Grants

Business grants are another form of funding that nonprofits may be eligible for. Grant money for nonprofits can come from government sources, business associations, corporations, or other nonprofit organizations. Typically, grant money is intended for very specific purposes, and government grants, in particular, require a rigorous vetting and application process. Additionally, they will want to see what you’ve achieved with your nonprofit thus far. Most non-government grants are for smaller amounts (less than $50K) and may resemble a contest or competition in which you’re competing with other organizations. Make sure you check that the grant you’re interested in is open to nonprofit businesses; some grants only apply to for-profit businesses.

When searching for grants, you can check grants.gov, the centralized source for all U.S. government grants. You should also do a more targeted search for grants in your particular region, as many grants only apply to applicants living in a certain state, city, or municipality. For example, the state of Maryland has a lot of business financing programs including grants, many of which apply only to applicants in certain counties. If you operate in an economically distressed region or serve a disadvantaged demographic, you might also be eligible for special grant opportunities. For example, there are business grants for women, business grants for minorities, and business grants for veterans.

You can learn more about business grants for nonprofit organizations by reading our nonprofit grants article.

5) Nonprofit Loan Funds

Nonprofit loan funds are another viable source of capital for nonprofit organizations to investigate when looking for funding opportunities. These institutions, often nonprofits themselves, offer loans to nonprofits in need of funding, and especially to nonprofits in underserved communities. Typically, nonprofit loan funds charge less interest than do traditional lending institutions; in some scenarios, the loans may be interest-free.

Some nonprofit loan funds include:

Nonprofit Finance Fund
Growth Partners Arizona (formerly the Nonprofit Loan Fund of Tucson and Southern Arizona)
The Loan Fund (New Mexico)
Open Road Ventures
Propel Nonprofits (created from the 2017 merger of Nonprofits Assistance Fund and MAP for Nonprofits)

Nonprofit loan funds differ from nonprofit grants in that you will have to repay whatever you borrow. Nonprofit loan funds may also be CDFIs. As with other loans, nonprofit loan funds typically require an operating history—meaning your nonprofit startup may not be eligible.

6) Online Loans

There are various types of online business loans that your nonprofit may be eligible for. Generally, online loans have higher rates and more relaxed requirements compared to loans from banks or credit unions. More established nonprofits may be eligible for a medium-term online loan with a decent interest rate, while newer organizations may have to settle for short-term, high-interest loans. Despite their higher price tags, one benefit of online loans is their speed and convenience; often, an online loan’s time-to-funding—the amount of time from when you apply to when you receive the funds in your account—is only a few days.

For nonprofit startups without any track record, a personal loan could be an appropriate online loan option. You can apply for this type of loan from a personal lender, and the only thing the lender will typically care about is your personal credit score. Personal loans are usually for $50K or less. As these loans come with high interest rates and a short repayment schedule, you might only turn to this type of loan as a last resort. Still, if you choose a reputable personal lender, you will get a better deal than you would from a payday loan or from a cash advance on your credit card.

Some, but not many, online lenders have special loan programs for nonprofits. Accion is an example of one online lender (also a CDFI) that lends to nonprofits.

Note that online loans may require you to sign a personal guarantee which states that you—not your organization—are personally responsible to repay the loan balance.

7) Corporate Giving Programs

Even if you cannot secure a sizable loan or grant, you can benefit from contributions from corporations and even smaller businesses in your community. Whether motivated by generosity or just good PR, it doesn’t really matter: businesses increasingly want to “give back” to their community, and that includes helping nonprofits. Companies in your city or county may have various programs or policies you can benefit from as a nonprofit:

Sponsorship of fundraising events (dinners, dances, 5Ks, etc.)
Non-cash donations (food, clothing, office supplies, etc.)
Paid-release days (days employees are paid to volunteer for a charity)

Taking advantage of corporate giving programs requires some creativity and hard work, as you will have to work together with local businesses to figure out how they can best serve you, typically in combination with your own fundraising efforts. You will also have to generate awareness in your organization about corporate giving programs in your region and frequently reach out to local businesses. The good thing is that businesses are generally happy to display their generosity to the community, as this benefits their organization as well.

How To Improve Your Chances Of Getting Approved

Once you decide to apply for financing, it’s time to find a potential lender and start putting together your application package. If you take the time to properly prepare for the application process, there is a much higher probability that a lender will decide to take a chance on your nonprofit. Here are a few important tips to keep in mind.

Make Sure You Meet The Borrower Requirements

Nonprofit loans are a very specific type of financing, and if you bark up the wrong tree, you’ll just be wasting everyone’s time. Make sure that your organization meets all the minimum borrower requirements for whichever loan you’re considering before you apply. Or if you’re applying for a personal loan, check your credit score to make sure you meet their minimum accepted score. A lender will not make a special exception for you, no matter how awesome your nonprofit sounds.

Choose The Right Type Of Financing

In addition to meeting the minimum requirements for a loan, you also need to choose a loan that will work best for your needs. For example, maybe a line of credit will better meet your organization’s needs than a term loan. Even if you are pre-approved for a loan offer, you must also consider whether you can reasonably afford the loan repayments and are comfortable with the repayment timeframe. If not, you should apply for a smaller loan or consider applying for grants, ramping up your fundraising efforts, etc.

Have A Strong Business Plan

Just like a for-profit business, a nonprofit business needs to have a solid business plan in place, especially when applying for financing. The lender will want to see a specific plan detailing both how your nonprofit organization meets a need in the community and how you plan to use proceeds from a loan, all supported by thoughtful research and strong financial documentation. They’ll also want to see that your organization can successfully raise funds.

Have Your Documents Ready

Whether you’re applying for a loan or a grant, you will be asked to submit certain documents. It is best to have all of these materials on-hand when you apply so you are ready to supply them when asked. Some items you might need include:

Driver’s license or other government issued ID
Your organization’s fundraising case statement
Proof of 501(c)(3) (nonprofit/tax-exempt) status
Recent tax returns
Recent bank statements
Other financial documents such as income reports and cash flow projections
Proof of collateral

Keeping strong records, particularly of your organization’s financial information, will make you better-prepared to supply documentation that supports your nonprofit’s need and eligibility for financing.

Need more loan application help? While we wrote the following articles mainly with for-profit businesses in mind, the same tips for business loan applications generally apply to nonprofit business loan applicants as well:

How To Get A Small Business Loan: The Step-By-Step Guide
20 Tips To Improve Your Business Loan Application

Final Thoughts

Although the nonprofit’s business model is in some ways very different from that of a for-profit business, nonprofits operate similarly to regular businesses in many respects. Working capital, operational expenses, and expansion of services are valid reasons to seek financing, regardless of an organization’s business model. While your financing options as a nonprofit are somewhat limited, you may actually have an advantage over for-profit businesses when applying with organizations such as CDFIs, microlenders, and nonprofit loan funds, and also when applying for government grants.

Has your nonprofit been successful in obtaining financing? Have a favorite nonprofit lender? Sound off in the comments!

The post Why Nonprofits Canât (Usually) Get Business Loans — And How To Get The Financing Your Organization Needs Anyway appeared first on Merchant Maverick.

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October 25, 2019

The Best Business Credit Cards For Startups And Entrepreneurs

When you launch a new business, you’re probably aware of how a business credit card can help you smooth out your cash flow to help you get yourÂ enterprise off the ground. You may also be aware that a business credit card can help you out in other ways — by helping you buildÂ your credit score and earn rewards for your business spending.

However, with your other responsibilities, you may not have the time to spend studying the business credit card universe to determine which cards have the most to offer a young business.

Thankfully for those of you who prioritize pursuing your passion over comparing credit card offers, Merchant Maverick exists! Let us separate the winners from the losers and give you the scoop on the business credit cards best suited to entrepreneurs and startup businesses.

Credit Card	Best For
Chase Ink Business Cash	Overall Best Startup Card
Amex Blue Business Plus	Long 0% Intro APR
Chase Ink Business Preferred	Big Signup Bonus
Capital One Spark Miles Select For Business	Travel Rewards
Brex Corporate Card	No Personal Guarantee
Capital One Spark Classic For Business	Average Credit
Wells Fargo Business Secured Credit Card	Secured Card For Bad Credit

Chase Ink Business Cash: Best Overall Card For Startups

Chase Ink Business Cash Compare	Annual Fee: $0 Purchase APR: 15.49% – 21.49%, Variable
Required credit: Good, excellent Bonus offer: $500 cash back if you spend at least $3,000 in the first three months of opening your account Purchase intro APR: 0% for the first 12 months Balance transfer intro APR: N/A Foreign transaction fee: 3% Rewards: 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable, and phone purchases each account anniversary year 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year 1% cash back on all other purchases Notable Perks & Benefits:Â Employee cards at no additional cost Travel coverage & emergency assist services Purchase protection & extended warranty More card details (click to expand) Hide

Due to both its overall combination of features and its 5% cash back earning rate on several common purchase categories for new businesses, we’re picking the Chase Ink Business Cash as the best overall credit card for entrepreneurs and startups.

To start off, the Ink Business Cash offers an introductory 0% APR for 12 months on purchases and balance transfers and a bonus offer of $500 cash back when youÂ spend $3,000 on purchases in the first 3 months. The card also lacks an annual fee, which is remarkable for a business credit card that offers this much value.

Startup businesses stand to reap some great rewards when using Ink Business Cash to pay for building up a young company. The card offers 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable, and phone services each year. No other business card offers such a high level of cash back for the spending necessary to build your office.

You’ll also earn 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants and 1% cash back on everything else. All in all, few cards tailor their reward structures to the needs of startups better than Ink Business Cash. Despite this, the card offers a very competitive variable APR of 15.49% to 21.49%.

You can redeem your cash back for statement credits, travel (via Chase Ultimate Rewards), shopping at amazon.com, and gift cards. The card also includes handy benefits such as an auto rental collision damage waiver, travel and emergency assistance services, roadside dispatch, and purchase protection.

American Express Blue Business Plus: Best For Long 0% Intro APR

Blue Business Plus Credit Card from American Express Compare	Annual Fee: $0 Purchase APR: 15.49% – 21.49%, Variable
Required credit: Good, excellent Bonus offer: None Purchase intro APR: 0% for the first 12 months Balance transfer intro APR: 0% for the first 12 months Foreign transaction fee: 2.7% Rewards: 2 points per dollar spent on all purchases, up to $50,000 per year 1 point per dollar on all purchases after $50,000 Notable perks & benefits: Expanded buying powerÂ â buy above your credit limit with no penalty fees Access to Amex OPEN Savings benefits More card details (click to expand) Hide

Blue Business Plus Credit Card from American Express

Compare

Annual Fee:

Purchase APR:

15.49% – 21.49%, Variable

Required credit: Good, excellent

Bonus offer: None

Purchase intro APR: 0% for the first 12 months

Balance transfer intro APR: 0% for the first 12 months

Foreign transaction fee: 2.7%

Rewards:

2 points per dollar spent on all purchases, up to $50,000 per year
1 point per dollar on all purchases after $50,000

Notable perks & benefits:

Expanded buying powerÂ â buy above your credit limit with no penalty fees
Access to Amex OPEN Savings benefits

More card details (click to expand)

Hide

TheÂ Blue Business Plus Credit Card from American Express has one distinguishing feature that should be of particular benefit to those starting a business.

The card offers a 15-month intro 0% APR on purchases and balance transfers — the longest such period offered by any business credit card issuer. So while circumstance may force you to carry a balance on your card as your business gets on its feet, you’ll have 15 months before you start having to worry about paying interest.

As for spending rewards, they’ll come in the form of Membership Rewards points. You’ll earn 2X points on your first $50,000 in annual purchases with no category restrictions whatsoever. All purchases beyond this $50K annual double points limit will earn you 1 point per dollar spent.

Just as with some other Amex business cards, the Blue Business Plus lets you spend above your credit limit. There’s also no annual fee. On the downside, there’s no bonus offer, and the card carries a foreign transaction fee of 2.7%.

Chase Ink Business Preferred: Best For Big Signup Bonus

Chase Ink Business Preferred CompareÂ	Annual Fee: $95 Purchase APR: 18.24% – 23.24%, Variable
Required credit: Good, excellent Bonus offer:Â 80,000 points if you spend at least $5,000 within the first three months of opening your account Purchase intro APR:Â N/A Balance transfer intro APR:Â N/A Foreign transaction fee: None Rewards: 3 points per dollar spent on the first $150,000 in combined purchases on travel, shipping purchases, internet/cable/phone services, and advertising purchases made with social media and search engines each account anniversary year 1 point per dollar on all other purchases Notable Perks & Benefits:Â Points are worth 25% more if redeemed for travel via Chase Ultimate Rewards Points can be transferred to other travel programs on a 1:1 point basis Points do not expire while your account is open Employee cards at no additional cost Cell phone protection More card details (click to expand) Hide

Chase Ink Business Preferred

CompareÂ

Annual Fee:

$95

Purchase APR:

18.24% – 23.24%, Variable

Required credit: Good, excellent

Bonus offer:Â 80,000 points if you spend at least $5,000 within the first three months of opening your account

Purchase intro APR:Â N/A

Balance transfer intro APR:Â N/A

Foreign transaction fee: None

Rewards:

3 points per dollar spent on the first $150,000 in combined purchases on travel, shipping purchases, internet/cable/phone services, and advertising purchases made with social media and search engines each account anniversary year
1 point per dollar on all other purchases

Notable Perks & Benefits:Â

Points are worth 25% more if redeemed for travel via Chase Ultimate Rewards
Points can be transferred to other travel programs on a 1:1 point basis
Points do not expire while your account is open
Employee cards at no additional cost
Cell phone protection

More card details (click to expand)

Hide

Business credit cards don’t typically come with bonus offers as generous as that offered by Chase’s Ink Business Preferred card.

The card offers 80,000 bonus points when you spendÂ $5,000+ on purchases in the first 3 months. Because your points are worth 25% more when you redeem for travel through Chase Ultimate Rewards, these 80,000 points can be worth $1,000 when spent on travel. For entrepreneurs needing to travel for business, this $1,000 bonus can be a godsend.

As for earning points, you can earn 3 points per $1 on the first $150,000 spent annually in combined purchases on the following items:

Travel
Shipping purchases
Internet/cable/phone services
Advertising purchases made with social media sites and search engines

You’ll earn 1 point per $1 spent on all purchases in these categories after the $150K annual high-earning limit and on all other purchases. The card also carries some great travel benefits, has no foreign transaction fee, and you can transfer your points to various airline and hotel travel reward programs on a 1:1 basis.

Sadly, the card carries a $95 annual fee, no introductory 0% APR, and a higher purchase APR than that offered by Chase’s Ink Business Cash card.

Capital One Spark Miles Select For Business: Best For Travel Rewards

Spark Miles Select FromÂ Capital One Compare	Annual Fee: $0 Purchase APR: 15.24% – 23.24%, Variable
Required credit: Good, excellent Bonus offer:Â 20,000 miles if you spend $3,000 on purchases within the first 3 months of opening your account Purchase intro APR: 0% for the first 9 months Balance transfer intro APR: N/A Foreign transaction fee: None Rewards: 1.5 miles per dollar spent on all purchases Notable perks & benefits: Free employee cards Redeem miles for any airline tickets, hotel stays, vacation packages and more with no expiration date Transfer points to over 10+ travel partners on a 1:1 basis Capital One and Visa Business Benefits More card details (click to expand) Hide

The beauty of Capital One’s Spark Miles Select For Business lies in its simple travel rewards earning scheme: Earn an unlimited 1.5X miles on your every business purchaseÂ with no blackouts or seat restrictions and no minimum to redeem. Considering that you can redeem rewards directly for flights, this card can really benefit the startup that incurs a lot of travel expenses.

The Spark Miles Select card has no annual fee, no foreign transaction fee, and carries a 0% intro APR for 9 months on purchases, but not on balance transfers. However, there is no balance transfer fee.

The card’s bonus offer —Â 20,000 miles ($200 for travel) when you spend $3,000+ on purchases in the first 3 months — is more modest than that of many of the other cards featured in this article.

Brex Corporate Card: Best For No Personal Guarantee

Brex Corporate Card Compare	Annual Fee: $0 Purchase APR: N/A (this is a charge card)
Required credit: No credit requirements,Â though your business must have at least $100K in the bank Bonus offer:Â None (though over $25,000 in discounts and credits for Brex’s partner services becomes available to you upon approval) Purchase intro APR: N/A (this is a charge card) Balance transfer intro APR: N/A Foreign transaction fee: None Rewards: 7 points per dollar spent on rideshares and taxis (all points multipliers are for Brex Exclusive members only) 4 points per dollar spent on travel booked through Brex Travel 3 points per dollar spent at restaurants 2 points per dollar spent on recurring software/SaaS purchases 1 point per dollar spent on everything else Notable perks & benefits: No personal guarantee required Get 5 free cards when you open your account (additional cards cost $5 per user per month) No points multiplier spending caps No foreign transaction fees More card details (click to expand) Hide

Brex Corporate Card

Compare

Annual Fee:

Purchase APR:

N/A (this is a charge card)

Required credit: No credit requirements,Â though your business must have at least $100K in the bank

Bonus offer:Â None (though over $25,000 in discounts and credits for Brex’s partner services becomes available to you upon approval)

Purchase intro APR: N/A (this is a charge card)

Balance transfer intro APR: N/A

Foreign transaction fee: None

Rewards:

7 points per dollar spent on rideshares and taxis (all points multipliers are for Brex Exclusive members only)
4 points per dollar spent on travel booked through Brex Travel
3 points per dollar spent at restaurants
2 points per dollar spent on recurring software/SaaS purchases
1 point per dollar spent on everything else

Notable perks & benefits:

No personal guarantee required
Get 5 free cards when you open your account (additional cards cost $5 per user per month)
No points multiplier spending caps
No foreign transaction fees

More card details (click to expand)

Hide

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And now for something completely different. The Brex Corporate Card is a unique product — created in 2018 — that aims to disrupt the world of business credit cards. How does it do so?

The card does not require a personal guarantee. That means that in the event that your business goes under, you won’t be personally liable for the debt on your card and your personal assets will be safe!
Brex doesn’t even check your personal credit score when you apply for the card. Instead, Brex relies solely on the health and potential of your business when considering your application.

The Brex Corporate Card is a great fit for tech startups with at least some history, but not so much for entrepreneurs just starting out or the mom-and-pop dry cleaning place down the street. Your business will need at least $100,000 in cash assets in order to qualify for the card.

The Brex card offers some truly impressive points-earning rates on common startup expenses as well:

7 points per dollar spent on rideshares and taxis
4 points per dollar spent on travel booked through Brex Travel
3 points per dollar spent on restaurant purchases
2 points per dollar spent on software subscriptions
1 point per dollar spent on everything else (Brex Exclusive membership not required)

The only drawback is that to earn points at these rates (except for the 1 point per dollar on general spending), you need to make Brex your exclusive corporate card. You won’t be able to use any other cards for company-related purchases.

The Brex card is a charge card, so you won’t be able to carry a balance from month to month. Thankfully, there’s no annual fee.

Capital One Spark Classic For Business: Best For Average Credit

Spark Classic From Capital One Compare	Annual Fee: $0 Purchase APR: 25.24%, Variable
Required credit: Fair Bonus offer: None Purchase intro APR: N/A Balance transfer intro APR: N/A Foreign transaction fee: None Rewards: Unlimited 1% cash back on all purchases Notable perks & benefits: Free employee cards Fraud coverage and alerts Capital One and Visa business benefits More card details (click to expand) Hide

Entrepreneurs trying to realize their plans while dealing with average credit will find a lot to like about theÂ Capital One Spark Classic For Business credit card.

Being a card for business owners with average personal credit, the Spark Classic For Business doesn’t come with much in the way of bells and whistles. There’s no signup bonus, no intro 0% APR, you’ll get only 1% cash back for your purchases, and the APR is high (currently 25.24% variable).

However, if your credit is less than good and your startup doesn’t fit the profile of a business that would be eligible for the Brex card, the Spark Classic For Business is one of the few ways you can actually fund your business operations. Furthermore, the card has no annual fee, no foreign transaction fees, and there are no transaction fees applied to balance transfers (though the high APR still applies).

While the Spark Classic For Business can be a godsend, try not to carry a large balance from month to month.

Wells Fargo Business Secured Credit Card: Best Secured Card For Bad Credit

Wells Fargo Business Secured Credit Card Compare	Annual Fee: $25 Purchase APR: Prime + 11.90%
Required credit: Poor Bonus offer: None Purchase intro APR: N/A Balance transfer intro APR: N/A Foreign transaction fee:Â None Rewards: If you choose cash back rewards: Unlimited 1.5% cash back on net purchases Receive cash back automatically as a credit to your account or to an eligible checking or savings account each quarter If you choose reward points: 1 point for every dollar spent on net purchases 1,000 bonus points when your company spends $1,000 in a billing period Redeem points for gift cards, merchandise, airline tickets, and more 10% bonusÂ if you redeem points online Extra bonus points or discounts fromÂ Earn More MallÂ retailers Notable perks & benefits: Up to 10 employee cards Zero liability on unauthorized card usage Purchase assurance coverage against theft More card details (click to expand) Hide

Wells Fargo Business Secured Credit Card

Compare

Annual Fee:

$25

Purchase APR:

Prime + 11.90%

Required credit: Poor

Bonus offer: None

Purchase intro APR: N/A

Balance transfer intro APR: N/A

Foreign transaction fee:Â None

Rewards:

If you choose cash back rewards:

Unlimited 1.5% cash back on net purchases
Receive cash back automatically as a credit to your account or to an eligible checking or savings account each quarter

If you choose reward points:

1 point for every dollar spent on net purchases
1,000 bonus points when your company spends $1,000 in a billing period
Redeem points for gift cards, merchandise, airline tickets, and more
10% bonusÂ if you redeem points online
Extra bonus points or discounts fromÂ Earn More MallÂ retailers

Notable perks & benefits:

Up to 10 employee cards
Zero liability on unauthorized card usage
Purchase assurance coverage against theft

More card details (click to expand)

Hide

As hard as it is to access startup capital when you’ve got average credit, it’s even worse when you’ve got bad credit. That’s where secured business cards like theÂ Wells Fargo Business Secured Credit Card come in.

With theÂ Wells Fargo Business Secured Credit Card, you make a security deposit of between $500 and $25,000. This becomes your credit limit, as you are essentially borrowing from your own money. Not ideal, but when your credit is bad, entrepreneurial beggars can’t be choosers.

If your credit stinks but your startup business is thriving, check out the Brex card instead. But for entrepreneurs with bad credit just getting out of the gate, the Wells Fargo Business Secured card is a solid option in the secured business card market. You can choose to enroll in either the Cash Back or the Rewards Points program. The first option gets you 1.5% cash back on every dollar you spend while the second option gets you 1,000 bonus points when your company’s spending is $1,000+ in any monthly billing period. Not bad for a secured card!

Unfortunately, there’s a $25 annual fee for each card you get (you can add up to 10 employee cards).

What You Need To Apply For A Business Credit Card

Here’s what you’ll need in order to apply for a business credit card.

Your business name — Note that your business doesn’t necessarily have to be a corporation or even an LLC. You sole proprietors and freelancers can just give your own name (or another name if you’ve filed for a DBA)
Your tax identification number — This can be your Employer Identification Number (if your business is a corporation/LLC/partnership) or your Social Security number (if you’re a freelancer/sole proprietor)
Your business type — Corporation, limited liability partnership, sole proprietorship, etc
The nature of the business you’re in — Designing apps, running a restaurant, selling hats for dogs on Etsy, etc.
Your role in the business
Your business phone number/address
Time in business
Number of employees
Annual business revenue — Brand new businesses can just put “$0” here
Your estimated monthly business spending

Remember, though you’re applying for a business credit card, your chances of getting approved will depend to a significant degree on your personal credit, and you’ll have to sign a personal guarantee, thus making you responsible for your business debt. (Note that this is not the case for the Brex card)

Final Thoughts

Great business ideas can come from anybody and anywhere. Unfortunately, startup capital is notoriously hard to access for those who were not born into wealth or privilege. Business credit cards may be an imperfect instrument for entrepreneurs trying to stake their claim to the ever-receding American Dream, but if you’re careful, they can help you manage your expenses and set you up for greater success.

Still trying to make sense of the world of credit? Here are some helpful articles for you!

Doâs and donâts of business credit cards
Best business credit cards for 2019
Using personal cards for business

The post The Best Business Credit Cards For Startups And Entrepreneurs appeared first on Merchant Maverick.

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October 16, 2019

Everything You Need To Know About Merchant Services

Being a first-time business owner can be a daunting experience. In addition to having to comply with a dizzying array of legal requirements, youâll also have to have at least a working knowledge of credit card processing, inventory management, and other topics. At one point or another, youâre going to encounter the term merchant services, and youâll want to know what it’s all about.

To put it in the simplest terms, unless youâre only going to accept cash and paper check payments in your business, youâll need to understand merchant services: what they are and where to get them from. Merchant services â and the providers who offer them â are essential to providing your customers with the largest range of convenient and secure payment methods. Signing up through a merchant services provider will â provided you choose the right one for your business â result in increased sales that more than offset the cost of those services.

In this article, weâll explain what merchant services are, and provide explanations of each of the primary products that are available from merchant services providers. Weâll also tell you how to find the best merchant services for your business, and what features you should look for in choosing a provider. Finally, weâll give you a brief overview of the best merchant services providers in the industry for small businesses, and explain which providers are the best choice for certain types of companies.

What Are Merchant Services?

The term âmerchant servicesâ can be confusing, because there are a lot of different definitions floating around out there, and they donât all agree on every detail. For our purposes, weâll define merchant services as the products and services a business needs to accept and process any form of payment other than cash or paper checks. This includes processing services for credit cards, debit cards, eChecks, ACH payments, and the newer mobile wallet services such as Apple Pay and Google Pay. It also encompasses hardware and software, such as credit card terminals, point-of-sale (POS) systems, payment gateways, virtual terminals, and mobile processing systems.

Note that there are also a variety of ancillary services that are often bundled with merchant services, including inventory management software, gift card/loyalty programs, online reporting features, merchant cash advances, and many others. These are not considered to fall under the rubric of merchant services, as theyâre not strictly necessary to enable your business to process credit card transactions. They can still be pretty useful, however.

Where do you go to get merchant services? Why, to a merchant services provider (MSP), of course! Again, the term âmerchant services providerâ is an umbrella term that covers any type of business offering merchant services. However, there are really two main types of merchant services providers: (1) merchant account providers, who offer true full-service merchant accounts with a unique merchant identification number for your business, and (2) payment services providers (PSPs), who offer credit card processing services, but donât provide a true merchant account. PSPs aggregate your account with that of other businesses using their services â a low-cost solution that can be very affordable for a small business thatâs just starting out.

Hereâs a brief description of the primary merchant services that your business will need to accept credit cards, debit cards, and eCheck/ACH payments:

Credit/Debit Card Processing: Of all the merchant services you might want to add to your business, credit (and debit) card processing is obviously the most important one. If a customer pays for a purchase with a credit card, youâll undoubtedly want some cold, hard cash to make its way into your bank account â and that wonât happen unless you have a service to process the transaction. As weâve noted above, you can get credit card processing through either a merchant account provider or a payment services provider (PSP). In either case, your provider will usually rely on a larger, direct processor (also called a backend processor) to approve and process transactions. While large direct processors such as First Data and Elavon offer merchant services, they arenât good choices for a small business. Popular payment services providers (PSPs) include Square (see our review) and Stripe. Traditional merchant account providers are much more numerous, with Dharma Merchant Services (see our review), National Processing (see our review), and Payment Depot (see our review) among the best choices for small and medium-sized businesses.
eCheck/ACH Processing: In addition to accepting credit and debit cards, you might also want to allow your customers to pay by check. While old-fashioned paper checks are rapidly declining in popularity, they can be accepted without the need for a check processing service. However, youâll have to take the check to the bank yourself, wait for it to clear, and hope that it doesnât bounce. eCheck and ACH (Automated Clearing House) payments bring advanced security and convenience to paying by check, allowing you to scan physical checks for processing or accept an ACH payment from a customer on your website. While some providers include these features with every merchant account, itâs more common for them to be offered as optional add-ons. In this case, youâll usually pay an additional monthly fee (typically around $20 – $30) for the service. For more information about these alternative payment methods, see our articles Everything You Need To Know About Accepting ACH Payments and The Complete eCheck Payment Guide.
Credit Card Terminals: Obviously, youâre going to need some type of physical credit card terminal to accept card-present transactions in a traditional retail setting. Options range from simple mobile card readers that require a smartphone or tablet (and the appropriate app) to function all the way up to complex point-of-sale (POS) systems that also include a variety of software features to help you run your business. While magstripe technology was the only option for many years, today EMV (i.e., chip card) is the standard acceptance method in the United States, Canada, and Europe. We also recommend that you seriously consider investing in hardware that also accepts NFC-based payment methods such as Apple Pay and Google Pay, as theyâre rapidly gaining in popularity and offer a higher degree of security than either magstripe or EMV. We also recommend that you buy your equipment outright. Terminal leases are wildly over-priced and should be avoided at all costs. Buying your hardware directly from your processor is usually the best option, but in some cases, you can save money by buying from a third party and having your equipment reprogrammed by your provider. For an overview of some great equipment options, see our article The Best Credit Card Machines And Terminals.
Point-Of-Sale (POS) Systems: As weâve mentioned above, a POS system is basically a credit card terminal with additional integrated software services built-in. Inventory management is a popular option, but there are also software add-ons for employee management and scheduling, online reporting, customer information management, and many others. While a POS system is a worthwhile investment for some businesses (such as restaurants), theyâre overkill for others. Beware of sales representatives trying to sell you a POS system if your business doesnât really need one. For more information on how to select a POS system thatâs right for your business, see our article POS 101: Choosing A POS System.
Payment Gateways: If your business has an online presence and makes sales through your website, youâre going to need a payment gateway to process those transactions. Payment gateways essentially perform the same function as physical credit card terminals, connecting your customerâs payment information with your providerâs processing network to approve the transaction and send you the money from the sale. Because not all merchants need a payment gateway, theyâre often offered as a separate feature (with an additional monthly gateway fee). However, itâs becoming increasingly common for providers to offer a gateway thatâs part of an integrated payment processing system designed to support both retail and eCommerce sales channels. For more information on what to look for in a payment gateway, see our article The Complete Guide To Online Credit Card Processing With A Payment Gateway.
Virtual Terminals: Used primarily by mail-order or telephone-order businesses, a virtual terminal is a software application that allows a laptop or desktop computer to function as a credit card terminal. Transactions can be manually keyed in or swiped/dipped with a compatible card reader (these usually connect via USB or Bluetooth). Retail merchants should be aware that, in most cases, youâll pay significantly higher processing rates if you manually enter the card data rather than using a card reader.
Integrated Payment Platforms: One common complaint we hear from merchants is that they often have to sign up with one vendor for a merchant account, another vendor for a payment gateway that has the special features they need, and possibly other vendors for things like online shopping carts or POS systems. Merchant services providers are well aware of this problem, and in recent years theyâve started to offer integrated, cloud-based processing systems that combine all these separate features into a single product. Obviously, they have a vested interest in keeping you tied to their particular ecosystem. However, there are genuine benefits to this approach for merchants as well. You wonât have to worry about compatibility problems or dealing with multiple customer service departments to keep everything humming along. Integrated systems can also (usually) save you money over signing up with multiple service providers. Finally, having all your business data accessible through the cloud is a significant advantage, even for smaller retail-only merchants who donât have a website. At the same time, youâll want to ensure that a vendorâs integrated system has all the features you need for your business before signing up.
Security & Fraud Prevention Features: Ensuring the security of your customersâ credit card data is essential for any business â retail, online, or a combination of the two. Obviously, you also want to take every step possible to minimize the chances of a fraudulent transaction. Security features such as tokenization and encryption protect your customersâ payment data and reduce the chances of experiencing a data breach. For online companies, fraud prevention features such as Address Verification Service (AVS) and card verification features such as CVV, CVV2, or CVC should be available through your provider at a minimum.

For more in-depth information on merchant services and merchant services providers, please refer to the following articles:

What Is A Merchant Services Provider?
What Is A Payment Service Provider?
What Is A Merchant Account?

High-Risk Merchant Services

Finding a good merchant services provider is challenging enough, but itâs even harder if your business is considered high-risk by the processing industry. What does it mean to be high-risk? Basically, certain business types are considered to be a riskier underwriting proposition by processors, and theyâll either refuse to give you a merchant account or put you in a high-risk account that invariably will be more limited and more expensive than what a comparable low-risk business would receive.

Besides being in an inherently high-risk business type (i.e., vape shops, online gambling, etc.), you can also find yourself in the high-risk category if you have an unusually high chargeback rate or your personal credit isnât so great. Fortunately, high-risk merchant service providers are available to serve your business. These providers usually work with a variety of banks (some of them located offshore) and direct processors to get you approved for an account. Your processing rates will be higher, and the terms of your contract wonât be so generous, but youâll have access to a stable account and youâll be able to accept credit and debit cards without any problems.

If youâre having particular difficulties in finding a high-risk account, you might want to consider an eCheck/ACH-only option. We only recommend this option for merchants who have been truly unable to get a merchant account, as youâll potentially lose sales when your customers find out that they canât use their credit cards.

For more details about high-risk industries and high-risk processing, check out our article Are You A High-Risk Merchant?.

How Do You Find Great Merchant Services?

Over the years, the question weâre most frequently asked is some variation of âWhatâs the best provider for my business?â Unfortunately, the sheer number of variables involved usually makes this question difficult to answer. As a very general rule, the best merchant services provider for your business is the one that offers the best combination of features, low processing rates, reasonable account fees, and favorable contract terms. In many cases, this might be such a close call that several providers might be able to offer you a good deal, without any single one standing out above the others.

One point we continually try to impress on merchants is that the best provider for your business is not necessarily the one with the lowest processing rates â or even the lowest costs in general. The most important thing to look for is a provider that offers the best overall value. Things like high-quality customer service are often worth paying a little extra for in the long run.

As a general rule, weâd also point out that payment services providers (PSPs) are usually a better value for small or newly-established businesses, while merchant account providers are more suited to medium-sized or larger companies that have been around for a while and have an established processing history. Signing up with a PSP is usually a good idea when youâre just starting out, but at some point, youâre going to reach a level where youâll need the stability and security of a true merchant account. It will probably cost you less money as well, as lower processing rates become more important as your monthly processing volume increases.

If youâre looking for a good merchant services provider, the resources available here at Merchant Maverick are an excellent place to start. Weâve reviewed almost all of the major players in the industry, and can give you an in-depth look at the pluses and minuses of each provider. As a starting point, we recommend that you look over our Merchant Account Comparison Chart, which compares several of the top-rated providers side-by-side.

How Much Should You Pay For Merchant Services?

No one likes to overpay for anything, and the merchant services industry makes it all too easy to pay too much without even realizing it. With complicated processing rate plans, highly-variable account fees, and surprise incidental fees that can show up on your processing statement without warning, figuring out whether youâre getting the best deal can be very difficult. If youâre new to payment processing, youâll want to evaluate pricing information and rate quotes from several providers before picking one to use for your business. This is also true if you already have a processing service and are thinking about switching to a (hopefully) less expensive provider.

Below is a quick overview of the various processing rate plans that will be the single most significant factor in determining your overall costs. Be aware that different pricing models will be more cost-effective for some businesses than others. Youâll want to have a good idea of your total monthly processing volume and your average ticket size to make valid comparisons between different providers.

Flat-Rate Pricing

The simplest pricing structure is flat-rate pricing. Despite the name, none of the providers offering this type of pricing actually use just a single rate for all transactions. However, youâll usually have only two or three rates to be concerned with, making your costs stable and predictable. Merchant services providers offering flat-rate pricing typically have a single rate for all card-present transactions, and another rate (or two) for card-not-present transactions. Often, there will be a higher rate charged for card-not-present transactions that have been manually keyed-in, rather than processed over a payment gateway.

Flat-rate pricing works best for very small businesses, mostly because you usually wonât have to pay any additional account fees. Be aware, however, that the flat rates themselves are often significantly higher than what youâd pay under an interchange-plus or subscription-based pricing plan (see below). For this reason, flat-rate pricing is usually not a good deal once your monthly processing volume exceeds a certain amount (typically around $10,000 per month).

Payment services providers (PSPs) usually offer flat-rate pricing as their only processing rate option. Popular providers offering this type of pricing include Square (see our review), Stripe, and PayPal.

Interchange-Plus Pricing

Arguably the most cost-effective pricing method for medium-sized businesses, interchange-plus pricing passes your transactionsâ interchange fees on at cost and also includes a fixed markup for your provider. For example, a typical interchange-plus rate quote might look like interchange + 0.30% + $0.15 per transaction. While the underlying interchange rates themselves can vary wildly, this pricing method is more transparent than others because youâll always know exactly how much of a cut your provider is taking.

Interchange-plus pricing is usually only available through a merchant account provider offering a full-service merchant account. Because these types of accounts also typically have a number of monthly and annual fees, they arenât the best choice for very small businesses. Depending on the provider and the particular details of your business, the threshold where youâll start to save money with interchange-plus pricing can be anywhere from $1,500 to $10,000 in monthly processing volume.

Popular providers offering interchange-plus pricing include Dharma Merchant Services and National Processing,Â among others. While these two companies offer interchange-plus rates exclusively, many run-of-the-mill providers offer a combination of tiered and interchange-plus pricing plans. Unless you specifically negotiate for an interchange-plus plan, youâll usually be given a tiered pricing plan. Although itâs still the most common type of pricing plan in the processing industry, we donât recommend tiered pricing under any circumstances because it makes it impossible to determine how much of a markup your provider is charging for each transaction. Itâs also the most expensive type of rate plan, in most cases.

Membership (Or Subscription) Pricing

A variation of interchange-plus pricing, membership pricing has only been available for a few years from a small number of providers. Pricing is similar to interchange-plus, except that you donât pay a percentage of each transaction as part of your processorâs markup. Thus, a typical membership pricing quote might be interchange + $0.15 per transaction. However, thatâs not all youâll pay. Membership pricing also includes a monthly membership fee that ranges from as little as $49 per month to as high as $199.00 or more per month. This fee combines all of your other account fees into a single charge, plus includes an extra amount to cover the per-transaction percentage markup that you otherwise wouldnât be paying.

Membership pricing isnât for everyone. The high monthly membership fee makes it particularly unsuitable for very small or seasonal businesses. However, high-volume businesses can save a substantial amount of money over what theyâd pay with a traditional interchange-plus pricing plan. In some cases, these savings can amount to several hundred dollars per month.

If youâre interested in seeing whether membership pricing is right for you, we highly recommend both Fattmerchant (see our review) and Payment Depot (see our review). Both of these companies provide excellent service and a full set of features to fulfill the needs of any business.

Monthly Billing VS Pay-As-You-Go

Most merchant services providers use one of two billing methods: (1) monthly billing, or (2) a pay-as-you-go billing model. With monthly billing, youâll pay a variety of separate fees for each service included with your account. These fees will be deducted once a month, at the end of your billing cycle. The processor will deduct any processing fees before sending the funds to your bank account, but if you have a statement fee, software subscription fees, etc. those will be billed at the end of the cycle.Â Pay-as-you-go billing, on the other hand, doesnât have monthly fees. Youâll only pay for the transactions that you actually process, and those fees are deducted before the processor deposits your funds in your bank account. If you don’t process anything in a month, you won’t pay anything — which is not true of a monthly billing plan.

If you sign up with a traditional merchant account provider, you can expect to be on a monthly billing plan, regardless of whether youâre on a long-term contract or a month-to-month arrangement. Payment services providers, on the other hand, usually use a pay-as-you-go model. This lowers costs for small businesses and also is the best option for seasonal businesses that arenât running year-round. Despite the additional fees, a monthly billing plan can actually save medium-sized or larger businesses money due to the cost savings of using an interchange-plus or membership pricing plan.

The Best Merchant Services For Small Businesses

As weâve noted above, some merchant services providers are a better fit for certain types of businesses than they are for others. Below, weâll briefly introduce our top picks for the most common types of businesses. Note that if your business falls into one of the categories described below, the provider we list wonât be the only good choice available to you. Rather, theyâre generally the best choice for most businesses that are similar to yours. If youâre interested in one of these providers, be sure to read the full review to learn more about them before deciding to sign up.

Vendor	Best For	Monthly Fee	Retail Rate	Online Rate	Contracts
Payment Depot	Mid-sized businesses ($10k-$25k/month)	$49-$199	0% + $0.15 markup*	0% + $0.15 markup	Month-to-month
Fattmerchant	High-volume businesses ($25k+/month)	$99-$199	0% + $0.15 markup*	0% + $0.15 markup	Month-to-month
Dharma Merchant Services	Non-profits	$20	0.15% + $0.07 markup*	0.20% + $0.10 markup	Month-to-month
Square	Micro-merchants & low-volume	$0.00	2.6% + $0.10 total	2.9% + $0.30 total	Month-to-month
PaymentCloud	High-risk businesses	Varies	Varies	Varies	Varies
PayPal	Online businesses	2.70%	2.9% + $0.30 total	$0.00	Month-to-month
Stripe	Tech-driven businesses	N/A	2.9% + $0.30 total	$0.00	Month-to-month

*Markup over standard interchange and assessment rate with interchange-plus pricing (our preferred pricing plan for transparency of fees).

Best For Micromerchants & Low-Volume Businesses: Square

Square (see our review) has been around since 2009, and has quickly become the leading choice for small businesses looking to accept credit cards with a minimum of fuss and paperwork. Square offers flat-rate pricing and uses a pay-as-you-go billing method that doesnât include any additional monthly account fees (unless you sign up for one of their optional services).

Square

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Squareâs most common processing rates are as follows:

2.75% for all retail and mobile (card-present) transactions
2.9% + $0.30 per transaction for all online (card-not-present) transactions
3.5% + $0.30 per transaction for all manually entered (also card-not-present) transactions

If youâre looking to minimize your up-front costs, Square offers a free mobile card reader that plugs into your smartphone or tablet. However, itâs magstripe-only. We highly recommend that you upgrade to either the $35 EMV-enabled reader or the $49 contactless + chip reader, which adds NFC compatibility and Bluetooth connectivity.

The company has expanded its services tremendously over the last ten years, and now offers far more features than we can discuss here. However, itâs still an excellent choice for merchants looking for a simple, low-cost solution. Squareâs flat-rate pricing is more expensive on a per-transaction basis than interchange-plus, but you’ll save money overall due to the lack of extra account fees. This pricing structure works best for businesses processing less than $3,000 per month, in most cases.

Best For Mid-Sized Businesses ($10K-$25K/Month): Payment Depot

For larger businesses with a stable processing history that need to upgrade to a full-service merchant account, Payment Depot (see our review) is an excellent choice. The company offers membership-based processing rates, true month-to-month billing, and a full range of products and services for retail or online businesses.

Payment Depot

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Membership fees at Payment Depot range from $49 per month up to $199 per month, depending on your monthly processing volume. This single fee covers all your merchant services, so thereâs nothing extra to have to pay. You can also receive a significant discount for paying your membership fees on an annual, rather than monthly, basis.

The companyâs processing rates start at a simple interchange + $0.15 per transaction, and go down with higher monthly processing volumes. There are four basic membership plans, which are tied to your monthly processing volume. For really large businesses, thereâs also a custom pricing option.

As long as your monthly processing volume is high enough that membership-based pricing makes sense for your business, Payment Depot is an excellent choice that will save you a significant amount of money over traditional merchant account providers. Just be aware that the company only serves US-based merchants, and they donât accept high-risk businesses.

Best For High-Volume Businesses (Over $25K/Month): Fattmerchant

Fattmerchant (see our review) also offers a membership-based pricing plan. However, their membership fees are high enough that their pricing structure only works well for an established business with a significant monthly processing volume.

Fattmerchant

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The companyâs membership fees start at $99 per month for businesses processing under $500,000 per year. Above this amount, youâll pay $199 per month. Bear in mind, however, that this one fee covers everything the company provides â unlike traditional vendors who nickel and dime you for every âextraâ service they provide. Processing rates start at interchange + $0.15 per transaction, with lower rates available for higher processing volumes.

Because of the steep monthly subscription fee, Fattmerchant isnât cost-effective for small businesses with a low monthly processing volume. However, if your volume is high enough, you can potentially save hundreds of dollars a month under this pricing structure. All accounts are billed on a month-to-month basis with no early termination fee (ETF), so you can always switch processors if things arenât working out.

Fattmerchant is an excellent choice for businesses that are large enough to benefit from the companyâs pricing structure. They offer excellent customer service and a terrific cloud-based integrated payments platform that will have you up and running in no time. However, they donât accept high-risk merchants, and theyâre only available in the United States.

Best For Online Businesses: PayPal

For a newly-established eCommerce business, you canât go wrong with PayPal. Pay-as-you-go billing means that, in most cases, youâll only pay for your transactions â and nothing else. Note, however, that the companyâs virtual terminal comes with a hefty $30 per month fee, so theyâre not such a great choice for a mail-order or telephone-order business.

PayPal

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PayPalâs flat-rate pricing structure couldnât be any simpler. Online transactions are always 2.9% + $0.30 per transaction, while manually entered and virtual terminal payments are 3.5% + $0.15 per transaction. The companyâs PayFlow Gateway comes bundled with every account, allowing you to quickly and easily integrate it with your website. There are no additional gateway fees, either.

While PayPal is a great choice for a small online business, be aware that the companyâs high processing rates will no longer be cost-effective once your business grows beyond about a $3,000 per month processing volume. At that point, you should seriously consider upgrading to a true merchant account with one of our other recommended vendors. Also, PayPal has relatively limited customer service options and doesnât serve high-risk businesses.

Best For Tech-Driven Businesses: Stripe Payments

If your business is 100% online and you donât plan to ever expand into the retail sector, Stripe Payments is a great choice for your payment processing needs. The company offers simple flat-rate pricing, pay-as-you-go billing with no monthly fees, and a host of developer tools for integrating their platform into your website.

Stripe Payments

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Pricing couldnât be more straightforward. All eCommerce credit and debit card transactions are charged 2.9% + $0.30 per transaction. International cards are also charged an additional 1.0% if currency conversion is needed. ACH payments are charged 0.8%, with a maximum charge of $5.00 per transaction.

As with any payment services provider, account approval is easy and can be accomplished online. However, the chance of later having your account shut down for any number of reasons is also higher. Stripe does a better job than most PSPs when it comes to customer service, offering live chat and telephone support on a 24/7 basis.

Overall, Stripe is a great choice for fledgling eCommerce businesses. Just be aware that your account wonât be as stable as a true merchant account, and the companyâs flat-rate pricing isnât cost-effective at higher processing volumes. Itâs also not available for high-risk merchants.

Best For Nonprofits: Dharma Merchant Services

Nonprofit businesses looking for a full-service merchant account will have a hard time finding a better choice than Dharma Merchant Services. One of our favorite processors, the company seems to be run like a nonprofit itself sometimes. Of course, itâs actually a public benefit corporation (B-corp), something thatâs almost unheard of in the processing industry.

Dharma Merchant Services

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Whether youâre a nonprofit or not, Dharma offers full-service merchant accounts that are billed on a month-to-month basis to all its users. There are no long-term contracts and no early termination fees (although you will have to pay a one-time account closure fee of $25 if you close your account). For nonprofits, the company offers special interchange-plus processing rates of interchange + 0.15% + $0.07 per transaction for retail transactions and interchange + 0.20% + $0.10 per transaction for eCommerce transactions.

Dharma offers a full range of products and services, including the popular Clover lineup of terminals and point-of-sale (POS) systems. The company also provides some of the best customer support in the industry. However, be aware that their pricing structure works best for merchants processing over $10,000 per month, and they donât support international or high-risk businesses.

Best For High-Risk Businesses: PaymentCloud

If youâve read this far, youâve probably noticed by now that most of our top choices for merchant services donât support high-risk businesses. Fortunately, if youâre in the high-risk category, there are high-quality vendors out there that specialize in serving the high-risk community and provide excellent services at a reasonable cost. PaymentCloud is one of our favorites due to their reputation for top-notch customer service and because they offer many features that are typically reserved for low-risk merchants only.

PaymentCloud

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Unlike many of our other top providers, PaymentCloud doesnât disclose their processing rates or account fees on their website. Because they work with a wide variety of banks and direct processors to get you an account, pricing is highly variable and subject to negotiation. While they have a reputation for fair pricing, you can expect to pay more than what a comparable low-risk business would pay. However, this is true with any high-risk merchant account provider.

The company offers a free credit card terminal with each account, which you can use for as long as you keep your account open. They also donât charge an account setup fee, which also helps to set them apart from most traditional high-risk providers. Finally, PaymentCloud is one of the few providers to offer support to the burgeoning CBD oil industry. However, they only allow CBD products that are applied externally â no food items or other ingestibles. If youâve had a hard time finding a merchant account for your high-risk business, be sure to check them out!

If youâre looking for additional options beyond the providers weâve profiled above, check out the following articles for more great choices:

The 5 Best Small Business Credit Card Processing Companies
The Cheapest Credit Card Processing Companies For 2019
How To Accept Credit Card Payments For Your Small Business

The Final Word On Merchant Services

Merchant services can be a complicated subject, and finding a merchant services provider thatâs a good fit for your business is often a real challenge. Youâll want to carefully evaluate the unique needs of your business, and factor in how much you can afford to pay to add the capability to accept credit and debit cards. In most cases, the added expense will more than pay for itself in additional sales.

All of the vendors weâve profiled above are excellent choices in their particular niche. However, they arenât the only good choices out there. So, we encourage you to look over the articles weâve linked to, and carefully read the full reviews of any vendor youâre considering. Most of the best merchant services providers for small businesses offer a very transparent disclosure of their processing rates and account fees on their websites, so check those out as well.

If youâre still having trouble deciding which company is best for you, youâll want to actually âcrunch the numbersâ and make a more informed analysis of what your potential costs will be. An excellent resource for doing this is our Cost Analysis Workbook, which will walk you through the steps necessary to estimate your overall costs with various providers. The workbook also includes spreadsheets to do the math for you â it couldnât be easier!

The post Everything You Need To Know About Merchant Services appeared first on Merchant Maverick.

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September 17, 2019

The Complete Guide To Finding An Internet Merchant Account

So you’re looking to take advantage of everything that online commerce has to offer and enter the world of ecommerce? Good for you! Of course, this will require you to be able to accept online credit card payments. To do this, you’ll need an internet merchant account.

Sounds simple enough, right? If only! Not all merchant accounts are created equal. When choosing an internet merchant account for your ecommerce business, you’ll need to understand how a merchant account interacts with the other elements necessary for selling online, like payment gateways, payment processors, and shopping carts (not the kind you push around). Some services combine one or more of these elements, but it’s still important to distinguish these elements from one another.

Confused yet? Don’t worry — we’ll spell it all out for you!

What Is A Merchant Account?

A merchant account is a specific type of business account into which your customers’ money is deposited after they use their credit or debit card to make a purchase from you. After these payments are verified, the money is transferred to your own business bank account, which is entirely separate from your merchant account. You have no control over the merchant account — it is merely the middleman between your customers’ money and your business bank account.

So, why include this middleman at all? Wouldn’t it be easier to simply accept credit and debit card payments directly and get the funds deposited directly into your business bank account?

Unfortunately, credit card processing doesn’t work that way. When your customer pays you, the transaction ultimately still involves two other major parties: the issuing bank (which grants the customer cards and is responsible for collecting any payments from the customer) and the acquiring bank (which requests and then collects payments from the issuing bank and then releases them to the merchant). Because the payment process is so complicated — the acquiring bank has to ask for the funds from the issuing bank, which has to verify that the customer has those funds available and then transfer them — the merchant account essentially functions as a holding space or even as a sort of line of credit.

Merchant Account VS Third-Party Processor

When selecting a service to process your customers’ card payments, you’ll be choosing from between two different categories of services: direct processors (the providers of merchant accounts like the kind described above) and third-party processors (also called aggregators) like PayPal, Stripe, and Square.

Square

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Setting up an account with a third-party processor is simpler and less time-consuming than setting up a merchant account. This is because third party processors don’t set you up with your own unique merchant account. Instead, the third-party processor aggregates all of its merchants into one enormous merchant account.

What do these differences mean for you, the merchant? For starters, the merchant accounts offered by direct processors typically provide you with a higher level of account stability. This is due to the extensive underwriting and risk assessment you have to undergo to get your merchant account. With third party processors, you are subjected to very little underwriting beforehand. Therefore, the processor scrutinizes your activities much more intensely, making it more likely that you’ll experience an account hold or termination.

The flip side of this is the cost advantage of third party processors. These services typically feature flat-rate pricing and pay-as-you-go agreements. There are few (if any) monthly or annual fees to pay, and you don’t need to meet a monthly minimum in card transactions, making it easy to start taking credit card payments with no established business history.

With direct processors, you’ll be paying monthly and potentially annual fees, you’ll need to be processing at least $5,000 to $10,000 per month in card transactions, and the pricing is not normally flat-rate — your rates may vary depending on the nature of your business model and your industry. Many merchant accounts still require you to sign a multi-year contract. (That said, many of the best processors in the industry have done away with these 3-year contracts and early termination fees in favor of month-to-month agreements, and we recommend that you not settle for a multi-year contract until you’ve explored all your options.) Still, above that $10,000/month mark, merchant accounts do offer cost savings and as your volume increases you’ll qualify for even more discounts.

For more on third-party processors and how they stack up against traditional merchant accounts, check out these articles:

The Best Online Credit Card Processing Companies
The Truth About Third-Party Payment Processing

What’s A Payment Gateway?

We’ve established what a merchant account is, so let’s move on to payment gateways.

While a merchant account is the account into which your payment processor sends your customers’ payments before they are transferred to your business bank account, a payment gateway connects your online store to your payment processor, facilitating your customers’ online transactions.

Payment gateways enable online transactions like so: the gateway integrates with your ecommerce store to securely capture the payment details for customer transactions. The gateway then routes that information to your payment processor or acquiring bank, which assumes control of the payment process. The gateway will then send an approval or decline message back to the merchant based on whether or not the processor/acquiring bank accepts the payment.

When you use a third-party processor, a payment gateway is typically included in the service. With direct merchant accounts, a gateway service may or may not be included for an additional fee. Some processors do offer gateways as part of their services, at no additional cost. Ultimately you’ll need to check with the processor to find out.

PCI Compliance With Online Merchant Accounts

What is PCI compliance, and how do you achieve it?

PCI compliance refers to a set of safety practices established by a council (the Payment Card Industry, or PCI) sponsored by the major credit card companies to ensure that a consumer’s payment information is secure when making a purchase using a credit or debit card. These standards, which apply to all businesses that accept credit and/or debit cards, are meant to standardize the securing, processing, and transmission of cardholder data.

If your merchant account provider deems you to be PCI non-compliant, you’ll be subject to a PCI non-compliance fee of around $30 per month until your account is compliant. What’s more, if your non-compliance results in a data breach, you can be fined anywhere from $5,000 to $500,000!

You’ve probably gathered by now that it’s a good idea for your business to be PCI compliant. For most small businesses, that means being Level 4 PCI compliant. Level 4 is the PCI standard that applies to businesses up to a certain size — it’s essentially the lowest bar to clear. Larger businesses must comply with higher PCI standards, with Level 1 standards applying to both the largest businesses and businesses that have suffered a data breach.

When choosing a payment processor, you’ll want to make sure your provider offers features such as PCI compliant processing hardware and software, quarterly network vulnerability scans, and assistance with completing and filing a Self-Assessment Questionnaire (SAQ).

Most third-party processors handle the entire process of PCI compliance for you, but with a merchant account, you should be expected at minimum to have to complete the SAQ.

If you’re running a brick-and-mortar business with no ecommerce component, you might think PCI compliance has nothing to do with you. However, if your business accepts credit cards, it almost certainly utilizes the internet to do so at some point in the process, so you’ll still need to be PCI compliant. It’s easier for physical-only businesses to establish PCI compliance than it is for online businesses, though.

Some PCI best practices are no-brainers. For instance, you don’t want to store your customers’ card data on your own hard drive or server, you should never use default passwords, and you’ll need to use a firewall on your network and computers. There’s more to PCI compliance than these obvious measures, however. For a detailed explanation of what PCI compliance means for your business, I highly recommend reading our comprehensive article on the subject, The Quick Guide To PCI Compliance For Small Businesses.

How Much Does An Internet Merchant Account Cost?

When choosing a merchant account, it’s important to know the different pricing models offered by payment processors:

Flat-Rate Pricing: This pricing model has the advantage of being predictable. You’ll pay a fixed rate for each transaction, making it easier to predict your processing costs. While you’ll usually pay more on a per-transaction basis than with other pricing models (and you donât know how much the processor is making off a transaction), you probably won’t have to pay monthly fees or other types of fees charged by processors offering other pricing models. Third-party processors like PayPal, Square, and Stripe use this pricing model. To learn more about flat-rate pricing, check out our flat-rate credit card processing explainer.
Interchange-Plus Pricing: Also known as cost-plus pricing, interchange-plus pricing is the pricing model preferred by Merchant Maverick. Why? Because it’s the most transparent model and it makes rate comparisons between processors easy. With interchange pricing, the processor passes on the interchange fees (fees charged to the merchant’s bank account and paid to the bank that issued the card) and assessments (fees paid directly to Visa or Mastercard etc.) while charging a small markup above that (often a percentage and a flat fee). Check out this article for more on how interchange-plus pricing works and why we prefer it.
Membership Pricing: This is the pricing model used by subscription-based payment processors like Fattmerchant and Payment Depot. Under this pricing model, you’re charged a single monthly subscription fee instead of the assortment of fees other pricing models feature. You’ll also likely pay a flat fee of between $0.08 and $0.15 per transaction as well as interchange fees. Higher-volume businesses can find themselves saving money under this pricing scheme.

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Tiered Pricing: Tiered pricing is an older pricing model not commonly used by modern businesses. We don’t recommend it. All transactions are grouped into two or three tiers of transactions, ranging from the lowest-priced transactions to the highest-priced transactions. Essentially, the problem with tiered pricing is that processors can categorize transactions assumed to be in a lower-priced tier as higher-priced transactions, thus charging you more and leaving you little recourse. You should avoid tiered pricing arrangements.

For most small businesses, using a third-party processor with flat-rate pricing like Square or PayPal may be more affordable than using a full-service merchant account. Of course, this entails a much greater risk of having your account frozen or terminated, which is, in itself, a very costly thing to happen to any business.

One thing that affects what your internet merchant account will charge you is the fact that CNP (card not present) transactions, including online purchases, cost more to process than do in-person transactions. This is due to the fact that the chance of chargebacks and fraud is higher with transactions where the card is not present, and this is factored into the cost of processing the payment.

Other fees you may (or may not) have to pay include PCI compliance fees, payment gateway fees, and fees for ACH acceptance if you want to offer customers the ability to pay with their bank accounts in addition to cards. To learn more about the complex and relatively opaque world of internet merchant account pricing, read through our Complete Guide To Credit Card Processing Rates & Fees.

Features To Look For In An Internet Merchant Account

Let’s go through some of the features that may be included in your internet merchant account package.

Included Gateway

One benefit of third-party processors like Square is that a payment gateway is included as part of the service so you won’t have to go looking for one yourself. Of course, third party processors have their drawbacks as well, so you’ll be glad to know that some direct processors include a payment gateway in their services as well.

Remember, if you plan to do business online, whether it be through selling goods, offering SaaS, or what have you, you’ll need to be able to accept online credit card payments. To do that, a payment gateway is an absolute requirement.

Multiple Payment Methods

We’ve established that you’ll want to be able to accept credit and debit cards. However, there are other payment methods your customers may want to use, and you want to be able to accommodate them. From mobile wallets like Apple Pay on the web to ACH payments, the more payment methods your payment gateway (and payment processor) supports, the better.

Global Payment Support

With some merchant accounts, you can only accept payments in USD. If you expect to be able to attract any international business, that’s obviously not going to be good enough. Thankfully, many merchant account providers can set you up with a multi-currency ecommerce merchant account so you can expand your global reach. Just be aware that you’ll likely pay currency conversion fees (if they aren’t passed to your customers). PayPal and Stripe do very well in this regard, and Stripe actually supports many localized payment methods across Europe and Asia.

As an added note — some processors offer a feature usually referred to as dynamic currency conversion or localized currency displays. This means that your website will automatically convert the price from USD (or your default currency) to whatever currency is most common in the customer’s region. This can improve the shopping experience for international customers and potentially increase your sales.

Included Shopping Cart (Or Other Software)

An online shopping cart integrates with your website to facilitate ecommerce. The shopping cart enables your customers to look through your available products, select different options for each product (size, color, etc.), select the quantity of the products they want to order, and more.

Most merchant accounts can be integrated with major shopping carts, but if you can find one that includes a good shopping cart already, that’s even better, as you’ll be saving money.

Other handy features to look for include a customer credit card vault that allows you to securely store your customers’ card information while keeping it off your own equipment and subscription tools that let you create and manage customer subscriptions. Stripe is an example of a processor with built-in subscription tools and a card vault. However, you can also opt for a third-party provider to get recurring billing functions.

Developer Tools

Processors with integrated developer tools, like Stripe, allow developers to use APIs (application programming interfaces) to integrate the payment platform using a variety of different programming languages. For the business with developer talent, integrated developer tools can help you build custom solutions for your ecommerce outfit.

Customer Service

Good customer service and availability is critical in an internet merchant account. Your ability to do business is reliant on all your systems working correctly 24/7, so reliability and quick response times are crucial. Do some research on merchant account providers to weigh the experiences of other merchants when dealing with any issues that pop up, and make sure that the available support channels jibe with your preferences.

How To Choose The Right Provider For You

That was a lot to take in, wasn’t it? If you’re feeling overwhelmed, don’t worry! Merchant accounts are Merchant Maverick’s original specialty, and we’re here to help you delve into the nitty-gritty of merchant account pricing, features, and provider options.

Here are some links to help you learn more about merchant account options, features, and more:

The Best Online Credit Card Payment Processing Companies
How To Choose An eCommerce Merchant Account
The Complete Guide To Online Credit Card Processing With A Payment Gateway
How To Accept Credit Cards Online

The post The Complete Guide To Finding An Internet Merchant Account appeared first on Merchant Maverick.

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August 20, 2019

How To Start A Side Hustle: A 7-Step Guide

So you’ve had thoughts of starting your own business for a while now. Unfortunately, life keeps getting in the way. You’ve got bills to pay, a job to perform, and relationships to maintain. Yet you remain unsatisfied by working for “the man” and don’t want your entrepreneurial dreams to wither on the vine.

Your discontent may grow to the point where you’re ready to just ditch your day job and go all-in on your business idea, throwing caution to the wind. While I don’t want to throw cold water over your entrepreneurial dreams, you probably shouldn’t go about following your bliss this way! After all, most new businesses fail, and many successful entrepreneurs have a failed startup (or three) in their past. If you quit your job and bet the farm on a startup that fails, you won’t be in a position to try again — you’ll be too busy picking up the pieces of your life.

The truth is, many successful companies begin as side hustles. Starting small but allowing room for growth gives you a chance at ultimate success while ensuring that if things don’t go according to plan and your side business fails, you’ll still have your primary source of income, setting you up to try your hand at entrepreneurship again.

Let’s go through the seven steps to follow when starting a side business while keeping your day job!

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Step 1: Find A Great Idea

When considering how to start a side hustle, think about the skills you’ve picked up at your current job. You may well have acquired marketable skills in your current position that could form the basis for your new business. With a set of monetizable skills, you can always offer consulting services to those seeking the knowledge you already possess.

Of course, if you’re not passionate about your current job and what you’ve been doing there, you should probably try something else. If your side business doesn’t involve something you love to do, you’re less likely to maintain the commitment you’ll need to see it through. Besides, who wants to start a business doing something that doesn’t bring joy or satisfaction?

As you run through ideas, consider whether or not you know anybody with experience in the field in question — somebody who could possibly recommend your services to others, or perhaps somebody who can give you honest feedback about the viability of your idea for a side business. Whatever it is you want to delve into, you’ll want to get some measure of validation beforehand from people with expertise in the subject.

Looking for some specific examples of businesses you could start? Check out our piece on side hustle ideas!

Step 2: Make A Plan

When laying out a plan of action, commit to setting aside a certain amount of time per week that you can devote to building your side business. This will almost certainly involve some tough choices. If you spend lots of time each week playing video games or reading your Twitter feed, those are obvious places to cut back. However, if you truly want your side hustle to grow and thrive, you’ll likely have to make some harder cuts. Going out with friends, going to the gym, taking a morning jog before work, even sleep — these are all things you may have to reduce if you want to give your business the attention it will need.

Hey, nobody said this was going to be easy!

Depending on the type of side hustle you’re considering, look into the requirements for running a business in your chosen field. Consider whether you’ll need any certifications to establish your qualifications or any insurance for protection. On that last point, check out our article detailing the types of insurance you might need when launching your business.

If you’re considering starting a freelance business, you may want to look into accounting software that can help you with creating contracts, such as AND CO. I should note that Square provides template contracts, free of charge.

Step 3: Seek Financing

Before your side hustle becomes profitable and self-sustaining, you’ll need to cover the costs of getting it off the ground. Inventory, software, a website — these things all need to be financed. You’ll need to set a budget and seek out funding sources.

Getting a business credit card is perhaps the most common means of financing startup expenses. You can also try taking out a loan. If you do, you may find it easier to obtain a personal loan (which can be used for business purposes) than a bona fide small business loan. Just be wary of taking on too much debt at this stage. You’ll have to pay off any debt incurred, lest your business foray result in lasting damage to your personal finances.

Another potential source of capital for your side hustle — a resource more commonly tapped than most entrepreneurs like to talk about — are your friends and family. Again, make sure you can pay them back — you don’t want a business failure (remember, failure is incredibly common in this arena) to imperil your lifelong personal relationships.

One thing that will greatly simplify your taxes and your accounting is to keep your personal and business financials separate from one another. If you’re able to get a loan, consider setting up a separate business bank account for the funds obtained and using the funds exclusively to fund your side business. Separating your personal and business finances is important if you want to avoid getting audited, among other things.

For more on financing a side hustle, check out the following links:

20 Tips To Improve Your Business Loan Application
The Best Business Credit Cards Of 2019
How Much Money Do You Need To Start A Business?
How To Start A Pet Sitting Business
How to Start And Fund An Online Boutique

Step 4: Find The Right Software

Regardless of the sort of side business you intend to start, you’re almost certainly going to need some business software to keep things running smoothly. It’s exceedingly difficult to run a modern business without accounting software, and you’re definitely going to want to start a website to promote your side hustle and advertise its services (and to offer ecommerce if that’s what your business involves).

Other software you may find useful and necessary includes design software and email marketing software. Thankfully, business software is our specialty. When preparing to run your side business, consider the following programs, each of which Merchant Maverick has tested and reviewed for business suitability.

Wave: Cloud-based software for accounting, expenses, and invoices — the base software is free, while the payroll, payment processing, and bookkeeping components are paid services
QuickBooks Online: Cloud-based accounting software with payroll, payment processing, workerâs compensation insurance, and a custom invoice template
QuickBooks Self-Employed: Cloud-based tax software for freelancers
Square: App-based software with invoice, mobile POS, inventory, and website creation features
Weebly: Easy-to-use website builder with ecommerce support — works seamlessly with Square
Canva: Cloud-based design software — easier to use than Adobe products; doesn’t require much design knowledge
MailChimp: Cloud-based email marketing software

Step 5: Launch Your Business

This is when all your preparation comes to fruition. This is the time to kick your promotion into overdrive. Get everyone you know to like your Facebook Business page and follow your Instagram account, take your website live, and try to solicit referrals and reviews through all your promotional channels. If you’ve built an email list, use it to promote your launch. If possible, include a coupon or some other promotional tool in your email. Depending on the nature of your business, you could even offer some kind of special membership to your initial customers.

You’ll want to leverage every contact you have in the field and convince them to spread the word about your new project. Additionally, look for online communities to join to gain visibility for your business. Naturally, to be accepted in such a community, you don’t want to just promote your business relentlessly. Establish yourself as someone who is helpful and genuine, not someone just out to make a quick buck!

If there’s any aspect of your business that you don’t feel equipped to take on, delegate the work to an employee (or business partner, or contractor). Focus on where your strengths lie.

Step 6: Prepare for Setbacks

As I said in the introduction, running a successful business — on the side or not — is quite difficult. So much so that the vast majority of new businesses no longer exist after five years. As such, don’t be discouraged if your side hustle doesn’t find immediate success.

It’s quite common to experience cash flow issues with a new side business. Here are a few articles containing helpful information on the subject:

What Is Cash Flow?
How To Calculate And Analyze Business Cash Flow
10 Strategies To Improve Cash Flow

Step 7: Evaluate & Carry On

At a certain point, it should become easier to see what’s working and what isn’t for your side hustle. Ideally, your “hustle” will grow to the point where you can afford to tell your boss to take their job and shove it (or just politely give your two weeks’ notice). To do that, always be on the lookout for ways your side business can evolve and adapt to modern business realities as you gain a greater understanding of the business world.

Maybe there’s a market you haven’t tapped that you could pursue. Maybe there’s a new product idea you can make real. There will likely be opportunities to take your side business to the next level. Just hold off on quitting your day job until your business cash flow approaches or matches the current income from your day job.

A Side Hustle Is Still A Business

Your side hustle may not be your primary focus. After all, you’ve still got bills to pay and health coverage to maintain, so you don’t want to endanger your day job in the pursuit of a dream. Nonetheless, the same elements that translate to a greater likelihood of business success apply regardless of whether your business is your part-time or full-time endeavor.

Bear in mind that it is entirely possible to launch a side business doing what you love and watch it ultimately grow into something bigger. You don’t need to be some annoying Silicon Valley whiz kid rolling in VC cash to build a successful company. Just keep these tips in mind, and you never know — your side hustle just might turn into a thriving company that actually does give you the freedom to quit your day job. And if it fails, well, at least you kept your day job, giving you a financial base from which to give entrepreneurship another try. Plenty of successful entrepreneurs have had businesses fail, so don’t get discouraged if things go south.

Now get out there and hustle! Here are some ideas to get started.

Square is a great way to accept credit cards for a side hustle

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The post How To Start A Side Hustle: A 7-Step Guide appeared first on Merchant Maverick.

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August 13, 2019

What’s the Difference Between Credit And Debit Transactions?

As consumers, we all have a good understanding of the difference between a credit card and a debit card. For a credit card, we get a statement on a monthly basis, and we can pay off the entire balance or only a portion of the balance while paying interest on the rest. In other words, credit cards work like bank loans.

If we use a debit card, however, the money is immediately taken out of our bank account, and we will not have to deal with additional statements. Debit cards are more analogous to paying by cash or by check.

For a merchant, the cost of processing a debit card transaction can vary quite a bit from that of processing a credit card. Otherwise, a merchant receives the money within the same timeframe, so that there appears to be very little difference between the two methods of payment.

That said, at times, a point-of-sale terminal will ask the customer to choose between credit or debit after they swipe, dip, or tap a debit card. Answering credit does not suddenly turn a debit card into a credit card, but it does affect the merchantâs cost of processing the transaction.

Below, we give a more detailed explanation of how credit and debit transactions can impact a merchantâs costs of doing business.

Understanding How Debit Cards Work

Generally, there are two behind-the-scenes ways a debit card can be processed. The first way is called the debit/online/PIN debit method, and the second way is called the credit/offline/signature debit method. If the customer selects “credit”, the transaction is sent through the credit card processing network. If the customer selects “debit”, the transaction is sent through a different computer network and the merchant is charged a debit-specific rate for the transaction. Both methods will fund the merchant’s bank account in about the same timeframe. The difference is only in the fee thatâs charged per transaction.

In order to better understand how debit cards work, let us first examine how credit cards work.

How Credit Card Transactions Work

Credit cards essentially are revolving lines of credit between the issuing bank and the consumer. When a consumer pays with a credit card, the money is transferred in roughly the following way:

The payment information is transmitted through multiple tiers of financial entities to the acquiring bank.
The acquiring bank asks the issuing bank for payment.
The issuing bank, after it makes sure the consumer has enough credit, authorizes the payment.
The acquiring bank pays the merchant.
Typically, two to three days later, the two banks pay each other to settle the charges.
Now the only money owed is between the consumer and the issuing bank.
The consumer pays the issuing bank on a monthly basis, according to the terms of the credit card agreement.

For the banks, there is some risk involved in credit card transactions because the consumer might default on the loan.

How Debit Card Transactions Work

Debit cards work differently because the consumer has already pre-authorized the bank to take the money from a specific bank account. So, when the issuing bank of the debit card gets a payment request from the merchantâs bank, the issuing bank authorizes payment and then, without waiting for additional authorization, takes the money out of the consumerâs bank account.

There is very little risk of default to the issuing bank on a debit card charge because the issuing bank can make sure the bank account does indeed have the money before authorizing payment and can place a hold on that amount until, in the regular course of business, the money can be transferred out of the account. Again, the distinguishing difference between a credit card charge and a debit card charge is that, with a debit card, the issuing bank is allowed to reach into the consumerâs bank account to take the money right away.

We’ve gone over a high-level view of how a debit charge works, but if we dig a little deeper, debit card transactions can get a little complicated.

The Different Paths A Debit Card Transaction Can Take

As mentioned in the introduction of this article, a consumer might have to select debit or credit after swiping, dipping, or tapping a debit card. Typically, this question is only asked if the merchant is at a brick-and-mortar location and has a PIN pad on their point-of-sale terminal. If the merchant operates online, uses a point-of-sale terminal without a PIN pad, or uses a third-party processor such as Square, Stripe, or PayPal, then the question wonât be asked because there will be only one way to process the debit card–by using the credit method.

With the credit method, the debit card charge is processed like a credit card charge. This method is also called a signature debit or offline charge. For clarity, in this article, I will refer to this type of charge as a credit path debit charge.

If the merchant does have a point-of-sale terminal with a PIN pad, then the consumer has a choice of processing the charge as either a credit path debit charge or a true debit charge. The true debit charge is also sometimes called the PIN debit or online charge. Both the true debit charge and the credit path debit charge will be explained in more detail below.

What Happens When A Consumer Selects The Credit Path Debit Charge Option

When a consumer makes a credit path debit charge, the transaction is sent through the system like any regular credit card charge, except that it is flagged as a debit transaction. The payment request goes from the merchant to the processor to the acquirer to the issuer. The issuer — that is, the bank where the customer keeps the bank account tied to the debit card — puts a hold on that amount of money in the account and then authorizes the acquirer to release the money to the merchant.

The merchant is paid in the same way and in the same time frame as any typical credit card charge. However, from the consumerâs standpoint, there will be a hold on that amount of money in their bank account, usually for up to three business days, until the bank takes the money out.

A hold on the account means the money is still technically in the account but is earmarked to be taken out, so the consumer can no longer use that money to make other purchases. Sometimes, this hold can be larger or smaller than the actual charge. If itâs larger than the actual charge, it can cause non-sufficient funds (NSF) issues on a later charge. If itâs smaller than the actual charge, it can cause overdraft issues on a later charge.

So, with a credit path debit charge, it can take up to three days for the issuing bank to pay the acquiring bank for the money the acquiring bank already fronted to the merchant for the debit card charge. This payment timeline mainly has to do with the way credit card companies, acquirers, and issuers settle charges between themselves.

What Happens When A Consumer Selects The True Debit Charge Option

The behind-the-scenes money movement works differently with a true debit charge. Instead of borrowing the credit card companyâs communications network, the true debit charge uses various other communication networks for interbank money transfers. This is the same path used by ATM networks, wire transfer networks, electronic bill payment networks, or even direct deposit paychecks.

With a true debit charge, when the debit card issuing bank gets the payment request, it places a hold for that amount of money in the consumerâs account and transfers the money through normal interbank money transfer channels to the merchantâs bank. The hold on the consumerâs account is much shorter than it would be with a credit path debit charge because banks settle these transfers much more quickly — sometimes in just a matter of hours, and typically by the end of the business day.

Because money is transferred so quickly, the true debit charge typically requires an added layer of security in the form of a PIN. The PIN is encrypted and serves as additional evidence that the debit card holder has authorized the charge.

A merchant is charged differently when running a debit card transaction as a true debit charge or as a credit path debit charge. The reason is simple: it costs money to send information through these (typically computer) networks, and each network charges a different amount.

Even though the way the banks transfer the money to one other is the only real difference between a true debit charge and a credit path debit charge, the credit path debit charge is subject to different rules (set up by the credit card companies) and is treated differently under the law. We point out the key differences below.

Key Differences Between Credit & Debit Transactions

Whether your customer uses a credit or debit card, the money shows up in your bank account relatively quickly, but there are a few discrepancies between the different types of transactions that can affect your business. Keep in mind that we are actually looking at three types of transactions: (1) a true credit charge, (2) a true debit charge, and (3) a credit path debit charge. The answer will vary slightly for each.

Cost

Merchants are charged per credit or debit transaction, and the charges depend on whether the card is processed through a credit card network or the debit card network. If a cardâwhether credit or debitâis processed through a credit card network, it will be charged the typical credit card transaction fee. If a debit card is processed through the debit card network, the transaction is charged a debit card rate. Some processors, in an effort to compete for your business, might offer a fee for a credit path debit charge that falls between a standard credit card charge and a true debit charge.

For debit cards backed by banks in the US, the federal government has set a standard rate for banks with $10 billion or more in assets. (See the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.) Currently, that rate is 0.05% + $0.21 per transaction ($0.22 if the transaction meets certain fraud criteria). Smaller banks can charge more, and processors who contract with the large banks can add to this government-set base charge. For banks outside of the US, the processing rates can be even lower. Check your processing agreement to see the amount that is applicable to you, and remember that it might be possible to negotiate this rate.

For credit cards, if youâre a frequent reader of this website, you already know that the rate varies, so be sure to check your credit card processing agreement for the precise amount. This charge typically applies to both your true credit card transactions and your credit path debit card transactions.

As between pure debit transactions and credit path debit transactions, the math works out that smaller charges cost less if processed as credit path debit charges. Larger ticket items cost less if processed as true debit charges. We have an article giving a very detailed explanation of the true cost of debit card transactions and credit path debit card transactions. We also have multiple articles comparing credit card rates. Be sure to check them out as you consider your options.

Dispute Process

Credit and debit card disputes are covered not only by different consumer protection laws, but they are also modified by credit company rules if the transaction is run through credit card companies. From a high level, both credit and debit card disputes will first show as a chargeback on a merchantâs statement. The merchant can respond to the chargeback (and pay appropriate fees) according to the procedure set out by the merchantâs processor.

Debit card disputes tend to show earlier in the chargeback cycle. Consumer protection laws covering stolen debit cards give the consumer a specific time frame to report a stolen card, and if the consumer reports outside of that time frame (i.e., more than 60 days after receiving a bank statement reflecting the unauthorized charge), then the consumer must pay for all the unauthorized charges, and the merchant gets to keep the money.

With credit card disputes, a different set of laws govern fraudulent charges, and the consumer is typically liable for only up to $50 of the charge. The consumer also has longer to dispute the charge, so the merchant might have to answer a dispute later into the chargeback cycle.

Minimum Amount/Surcharge

For a true credit card charge or a credit path debit charge, merchants can require a minimum amount a customer must charge for using a credit or debit card. Additionally, as long as a stateâs laws allow it, the merchant can attach a surcharge to the use of a credit card to recover processing fees for the card. Mostly, what the merchant can and cannot do depends on the credit card companyâs rules, and these rules discourage surcharges and encourage the use of the cards for transactions of any size.

With a debit card, the merchant cannot require a minimum amount nor can it add a surcharge for the use of the debit card. Debit cards are regulated by a very different set of laws than credit cards, and current laws forbid requiring a minimum charge or adding a surcharge to a true debit card transaction.

How To Accept Debit Card Payments

From a merchantâs perspective, if you can accept a credit card, then you can almost certainly accept a debit card. Naturally, you should check with your processor first, but even if you do not have a PIN pad at your point-of-sale terminal, you should be able to process a debit card using the credit path debit charge method.

If you do have a PIN pad at your point-of-sale terminal, then you have the hardware needed to accept credit card transactions, credit path debit transactions, and true debit transactions. Double-check with your processor that all three methods are allowed. If so, your customers can swipe, dip, or tap credit or debit cards as normal, and you will be charged depending on the type of card and the transaction path of the card.

As a side note, if you travel to Canada, the UK, or mainland Europe, you will see that having a PIN pad is fairly normal and both credit and debit cards can require a PIN before use.

How To Accept Debit Card Payments On A Phone

With the popularity of mobile point-of-sale devices, you might be wondering if you can accept a debit card with a phone-connected reader from, for instance, Square (read our review) or PayPal Here (read our review). These readers typically do not have PIN pads. In these cases, you can indeed accept a debit card because the transaction can be processed as a credit path debit charge.

Outside of the US, this is not the case. For example, Square can accept Interac debit transactions in Canada. iZettle (read our review) and SumUp (read our review) can also accept debit transactions in Europe.

Is The Difference Between Credit & Debit Transactions Important?

From a consumerâs standpoint, the difference between using a credit or debit card definitely matters because money is taken out of oneâs bank account at very different times after using a card. The dispute process for a credit card is typically less painful than for a debit card. After all, with a debit charge, the money has already been taken out of the bank account and the consumer protection laws for debit cards place a higher burden on the consumer to be vigilant for fraudulent charges.

From a merchantâs standpoint, the difference between a credit and a debit card matters less but still can be detectable because the transactions carry different costs. In fact, because a PIN pad is necessary to initiate a true debit charge, a merchant must invest in purchasing a point-of-sale terminal with a PIN pad before a true debit charge can be processed. For larger ticket items, a true debit charge can cost the merchant less to process than a credit charge or a credit path debit charge.

At the end of the day, a merchant typically wants a customer to have a smooth purchasing experience, which includes an easy checkout when paying for the purchase. This often translates to being able to accept any form of payment that is convenient to the customer. So, while there is a difference in the cost of processing debit and credit cards, this cost is likely minor when compared with keeping a customer satisfied so they come back to your store for more.

The post What’s the Difference Between Credit And Debit Transactions? appeared first on Merchant Maverick.

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