Paying with credit cards is handy, especially in the modern world. Whipping out a credit card can also come with other perks — like points for purchases — and these bits of plastic can help smooth out a business’ cash flow. Unfortunately, many suppliers and merchants don’t take credit cards for bill payments, potentially causing you and your business unnecessary headaches.
That’s where Plastiq comes in. This service allows you to make payments that would otherwise require checks or bank transfers with a credit card. All told, this can help simplify your accounting while letting you take advantage of the benefits a credit card provides. There is a catch, however; Plastiq charges a 2.5% fee on each payment, meaning that this service may or may not work for your bottom line.
Is Plastiq right for your business? Keep on scrolling to find the answer.
What Is Plastiq?
Plastiq was founded in Boston in 2012 to help users pay bills with credit cards. While the company first aimed its sights on consumers, it has since pivoted towards focusing on helping small businesses use credit cards to pay off bills that might otherwise be difficult to pay.
“At first we thought consumers were the most likely to use Plastiq to pay off bills, but over time we saw that many of our customers were entrepreneurs and business owners, and changed our focus,” Plastiq’s chief operating officer Sameer Gulati told PaymentsSource in April 2020.
Plastiq, now based in San Francisco, has a simple service: If you want to pay a bill or invoice that usually would require you to initiate a bank transfer or write a check, you can pay Plastiq with a credit card instead. Plastiq will then directly pay the merchant or supplier to whom you owe money. Plastiq charges a flat fee of 2.5% of the payment amount for making the payment on your behalf. If you use a debit card, the fee drops to 1%; payments made to Canadian recipients incur a 2.85% fee.
You’ll be able to choose from three methods by which Plastiq can pay your bill:
Paper Check: Plastiq will cut a paper check and mail it to the recipient.
ACH Bank Transfer: Plastiq will deposit funds directly into the recipient’s bank account.
Wire Transfer: Plastiq can wire funds to both domestic and international recipients.
Plastiq can be used for a range of bills, from rent to payroll to taxes. It cannot be used for paying off commercial mortgages or other types of business loans. You can also set up automatic, timed payments or pay bills manually.
Those comfortable with mobile banking should note that Plastiq does not offer apps for Android or iOS at the time of writing. If you prefer handling financials on your phone, a lack of a mobile app may make Plastiq more difficult to use.
How Plastiq Can Help Small Businesses
The most obvious way Plastiq can help your small business is by optimizing cash flow. For most bills, you’ll need cash on hand in order to make the payment. With Plastiq, you’ll be able to put those payments on your credit card. This means you won’t have to pay for bills until your credit card’s due date. On top of that, if you sign up for a 0% introductory APR credit card alongside putting payments on Plastiq, you’ll even be able to carry a balance on your card for several months without needing to worry about paying interest.
Using Plastiq can simplify your business’ accounting as well. Instead of having to deal with multiple ways of paying your suppliers, you’ll simply need to pay Plastiq. Depending on your situation, this relief might be worth the 2.5% fee Plastiq charges.
In some cases, Plastiq can also be used to earn credit card points or trigger welcome offers. Note that Plastiq won’t be cost-effective for general point-earning unless your rewards rate is higher than 2.5% of your purchases. If you are merely trying to spend enough to hit a welcome offer’s minimum spending threshold, however, using Plastiq for purchases you would be paying for anyway could be a worthwhile tactic.
How To Use Plastiq For Business Expenses
Plastiq is a simple service that’s easy to use. Here’s a step-by-step guide to getting your business started with Plastiq:
1. Sign Up For A Free Account
To sign up for Plastiq, all you need to do is head over to the service’s sign-up page. Account creation is free — there’s no upfront charge to using Plastiq. To create an account, you’ll need to enter your name, phone number, who you’ll be making payments for (yourself, your business, or both), and your monthly expenses. If you select that you’ll be making payments for your company, you’ll also be asked your business’s name, industry, and zip code.
2. Add Credit Cards
Once you’ve created your account and are brought to the Plastiq dashboard, you can start adding your credit cards. Plastiq makes this part easy too — you’ll simply need to click on the “Add your first Card” box near the top of the screen and then fill out the relevant info.
While you can add as many credit cards as you like, we recommend that you only enter the cards you know you’ll be using with Plastiq. Doing so will limit the opportunities fraudsters have to steal your credit card information.
3. Make Payments
After you’ve added a credit card to your Plastiq account, you’ll be able to make payments. Just like the above two steps, there’s not much of a hassle here. You’ll just need to click “Add a Recipient” and then enter the recipient’s name and country, how you’d like Plastiq to pay the recipient (paper check, ACH bank transfer, or wire transfer), and the recipient’s address, phone number, and services provided. Before you make your first payment to a recipient, Plastiq will verify the information you entered by contacting the recipient. Once you’ve made that first payment to a recipient, you can set up recurring payments as well as manually make additional payments.
Plastiq will charge your credit card the cost of the transaction plus the 2.5% fee (or 2.85% if paying to Canada, or 1% if using a debit card). Plastiq then sends the payment to the recipient using your preferred method — all without the recipient needing to sign up for a Plastiq account.
Is Plastiq Right For Your Small Business?
Plastiq will fit a very specific niche of business, while most won’t find much worth in the service. If you like hunting down credit card welcome offers, Plastiq may offer a boon by allowing you to put more money towards your minimum spend amount. Businesses that struggle with consistent cash flow may also find value in Plastiq. However, most shouldn’t feel the need to plunk down the 2.5% fee Plastiq asks. Plus, your credit card may include a hefty interest rate — potentially minimizing the effect Plastiq might have on a business’ cash flow.
Give Plastiq a try ifâ¦
Your business has cash flow problems
You need to simplify your bill-paying process
You’re wanting to hit the minimum spend requirement for a credit card welcome offer
Skip Plastiq ifâ¦
You can’t afford Plastiq’s 2.5% fee
Your credit card has a high interest rate
You won’t benefit from paying bills with a credit card
Final Thoughts On Plastiq For Businesses
Plastiq can be beneficial for businesses needing a simple cash flow solution or for those wanting to maximize their credit card welcome offers. However, the service’s 2.5% fee should mean the most businesses will want to use Plastiq sparingly.
Wanting more options that can help your business’ cash flow? Check out our guide to improving cash flow. We also have an in-depth look at the best cash flow loans. If you’re curious about credit card welcome offers for small businesses, visit Merchant Maverick’s article on the topic.
The post Plastiq For Business: Could Plastiq Could Help Your Small Business Manage Expenses & Improve Cash Flow? appeared first on Merchant Maverick.
In some ways, the future is already here — at least in the world of credit card technology. Contactless payment enables you to simply tap your credit card to the payment terminal instead of swiping your card or sticking its chip into a reader. Because contactless credit cards reduce the touching of shared surfaces, such a payment method is both faster and — importantly, in the face of the COVID-19 pandemic — cleaner.
Especially in a world now dealing with the terrors of the pandemic, contactless payments are becoming popular. According to an April 2020 survey run by Mastercard, 79% of cardholders worldwide say they are currently using contactless payments, with safety and cleanliness being cited as important factors. Companies are buying into contactless payments, too.
“Contactless offers consumers a safer, cleaner way to pay, speed at checkout, and more control over physical proximity at this critical time,” said the Head of Mastercard Acceptance Solutions, Blake Rosenthal, in response to the above-mentioned Mastercard survey.
Curious to learn if your business’ credit card is contactless-enabled? Want to know which issuers offer contactless credit cards? Then keep reading for the deets!
How To Check If Your Credit Card Is Contactless-Enabled
If you’ve received a credit card sometime in 2019 or later, then you’ve got a good chance that it’s contactless-enabled. Even if you have an older card, you still might have a bit of plastic that can be used just by tapping on the payment terminal.
To determine if your card can be used for tap-to-pay, just look for a four-bar wave-like symbol. You may notice that this wave symbol is similar in appearance to the Wi-Fi logo. The contactless symbol can usually be found somewhere on the back of your credit card.
Here’s an example of what the symbol looks like on the back of a credit card (to the left of the Visa logo):
If your card doesn’t have this symbol, it probably isn’t contactless-enabled. Should this be the case for you, you’ll need to reach out to your issuer to request a contactless card. We’ve outlined methods for requesting contactless cards from popular issuers in the next section.
Note that not all merchants are set up to receive contactless credit cards. You’ll need to look for the wave symbol on the payment terminal when out shopping before you attempt to tap your card. If a payment terminal doesn’t have the symbol, you’ll need to swipe or insert the card to pay instead.
Once you’ve confirmed that you have a contactless-enabled card and the merchant you’re shopping at accepts contactless payments, simply hold your card up to the payment terminal. You just need to wait for a second or two for payment confirmation — which is usually displayed via either a beep or check-mark on the terminal screen — and then you’re good to go!
Issuers With Contactless Business Credit Cards
A number of issuers offer contactless credit cards — in fact, nine of the top 10 US issuers are actively handing out contactless cards to customers as of April 2020, according to Visa. Here’s a look at a few of the bigger issuers that offer contactless cards and how you can get set up with one:
American Express began dabbling in the contactless card game way back in 2012, making the company a fairly early adopter. All of American Express’s small business credit cards are contactless-enabled as of July 2019. The Amex business card portfolio includes these products:
Blue Business Cash
Blue Business Plus
Business Gold Card
Business Green Card
Business Platinum Card
Business Plum Card
If you apply for any of the above cards and are approved, Amex will ship you a contactless version of the card.
If you currently have an Amex card that isn’t contactless-enabled, the issuer states that it will “send you a new contactless-enabled Card on your next renewal date.” You’ll also receive a contactless card if your current one becomes lost or stolen.
Should you desire a contactless card before your next renewal date, Amex suggests visiting its website or the Amex Mobile app to request a new card that is contactless-enabled.
Bank of America
Bank of America started its contactless card push in June 2019 by issuing cards to customers in select pilot cities (specifically New York, Boston, and San Francisco). The bank has yet to formally announce a wider rollout of contactless cards.
There also isn’t an official method for requesting a contactless card from Bank of America. As such, unless you live in one of the three aforementioned cities, you may find getting a Bank of America contactless card difficult.
Capital One’s foray into contactless cards kicked off in 2017 with the launch of the technology in the Quicksilver Cash, Venture Rewards, and VentureOne Rewards cards. While the bank does promote contactless cards as a faster way to pay, there are no details about which current Capital One products do or don’t offer contactless options.
If you find yourself with a Capital One credit card that isn’t contactless-enabled, we recommend calling the number on the back of your card to find out if replacing the card is an option. If you are in the market for a Capital One card, try reaching out to customer service to find out if the credit card you’re interested in offers contactless options.
In November 2018, Chase announced plans to roll out contactless cards across its product lineup. In the time that has followed, numerous Chase-issued credit cards have received a contactless facelift — over 20 of the company’s cards now include the feature.
Chase maintains a list of all its contactless cards on its website. Its stable of contactless business cards includes:
Ink Business Unlimited
Ink Business Preferred
Ink Business Cash
United Business Card
If you want to replace a Chase credit card in your wallet that isn’t contactless-enabled, visit Chase’s card replacement page.
Citi’s history with tap-to-pay cards started with the Costco Anywhere Visa Card receiving contactless technology in 2016. Since then, the bank has rolled the feature out to other cards within its brand. Citi currently offers two business-specific credit cards:
Note that while the AAdvantage card is confirmed to have contactless technology, Citi doesn’t market the Costco Business card as having it. However, the nearly-identical consumer cousin of the Costco card does support contactless payments, so it is likely safe to assume the business version does as well (although your mileage may ultimately vary).
If you have a Citi-issued credit card without contactless technology support, we suggest that you dial the number on the back of your card. Once you reach customer service, ask if you can have the card replaced with a contactless-enabled version.
Other Tap-To-Pay Options
If your current credit card isn’t contactless-enabled, you may still be able to take advantage of contactless technology when checking out. Both Android and iOS have their own solutions utilizing NFC for mobile phone users. Let’s take a look at what they are:
Apple introduced Apple Pay in 2014. This service allows you to attach an eligible credit card to the Wallet App on your iPhone. Once set up, you’ll be able to pay for purchases using your iPhone or Apple Watch at merchants who accept contactless payments.
For more information on Apple Pay, including how to set it up with your credit card, visit Apple’s website.
To combat Apple Pay, Google released Android Pay in 2015 and then later rebranded the service as Google Pay in 2018. Similar to Apple Pay, you can add an eligible credit card to the Google Pay app on your compatible Android phone. Once you’re all squared away, you can use your NFC-equipped phone (or compatible smartwatch) to place payments at the checkout counter of merchants who are set up for contactless payments.
For a deeper diver on Google Pay, visit Google’s website.
Stay Safe While Paying For Business Expenses
Contactless cards offer a simple and safe way to pay for purchases during the coronavirus pandemic. By ensuring that your wallet contains contactless-enabled credit cards, you’ll help keep both yourself and others at less risk throughout this turbulent time. Plus, you may find that paying with just a tap is both easier and faster than more traditional methods.
The post Time To Get A Contactless Business Credit Card? Hereâs How To Get Your Own Tap-To-Pay Card appeared first on Merchant Maverick.
The term friendly fraud is a study in contradiction. Fraud is a malicious act. How can it ever be friendly?
Fortunately, there is another term used to describe the same situation: chargeback fraud. At the very least, the term gives a little better clue to the type of fraud it might be. How can fraud be perpetrated through chargebacks, and is there anything you, the merchant, can do to prevent this type of fraud? Read on to find out.
What Is Friendly Fraud?
Friendly fraud occurs in connection with a chargeback claim. In other articles, we give a more detailed explanation on what a chargeback is and why a cardholder’s bank will allow a chargeback, but a quick summary is that a chargeback is a type of refund from the credit card issuing bank to the cardholder, which the merchant has little to no power to contest.
There are quite a few reasons why an issuing bank might initiate a chargeback. Among these are:
No authorization by cardholder
Goods/services returned or refused
Goods/services not received
Goods/services not as described
Goods/services damaged or defective
As you can imagine, these reasons can be abused, and indeed they often are. These are the reasons typically given by a consumer in friendly fraud or chargeback fraud situations.
Some Statistics Related To Friendly Fraud
There aren’t a lot of recent data about friendly fraud. Many studies we found when researching for this article were from companies whose business is to help merchants to fight chargebacks, so we weren’t sure how well we could rely on those statistics.
We did, however, find one study from a neutral source that should be fairly reliable. The study, in the form of a white paper, was done by the Federal Reserve Bank of Kansas City and published in January 2016 as a working paper entitled Chargebacks: Another Payment Card Acceptance Cost for Merchants. The study is a little old and not completely focused on friendly fraud. Nevertheless, it does give some insights:
Total chargeback rate compared to total transaction volume is 0.016%.
Most common reason for initiating chargeback claim is fraud (i.e. transactions reported as being unauthorized by cardholders).
Study also included chargeback numbers for “non-receipt of goods or services,” and “product quality-related reasons,” both of which can also indicate friendly fraud.
Total chargeback rate and fraud chargeback rate are significantly higher for card-not-present transactions than for card-present transactions.
Fraud related charges overwhelmingly resulted in a merchant loss.
Merchants were only able to successfully dispute 20%-30% of the chargeback claims.
Merchant losses are substantially smaller than other credit card processing fees (e.g. interchange fees, markup fees), but the study is not granular enough to calculate total loss, which includes the merchant’s loss of merchandise, labor, capital, and other time-related costs associated with fighting a chargeback dispute.
What Causes Friendly Fraud Chargebacks?
Chargeback fraud can typically be categorized into two types: one somewhat benign and the other slightly more sinister.
On the benign front, sometimes, the cardholder may simply forget making various purchases; when the purchases show up on the statement, the cardholder thinks someone else stole their card and used it to buy things. The cardholder reports this to the issuing bank and asks for a chargeback. Related scenarios include:
Not recognizing the name of a business because the business’s legal name is different from its d/b/a name.
Giving someone (e.g. a child) the permission to use a card without knowing the merchant’s name and/or the cost of the goods/services and then being surprised by the charges.
Not realizing that calling the issuing bank and asking for a chargeback is different from getting a store refund and has very different repercussions for the merchant.
On the slightly more sinister side of things, some card users make purchases with no intention of paying. After a product is shipped, the cardholder calls the issuing bank and asks for a chargeback, claiming that they received damaged goods, that the goods were not received, that the goods were not as described, or similar. The bank credits them, but they never have to send the goods back to the merchant because they never tried to work with the merchant first, to arrange for a return or exchange. While sometimes this is done because consumers do not realize that a chargeback isn’t the same as a return, other times, this is a deliberate act similar to shoplifting. The consumer intended to do it all along and will do it again and again.
What Can Merchants Do About Fraudulent Chargebacks?
The first thing you can do to prevent fraudulent chargebacks is to keep good records. This way, if you want to dispute a chargeback claim, you will have the evidence you need to submit to your processor. In addition to records of purchases, be sure to keep shipping/tracking information and evidence of delivery as well. Even if, at this moment, you have decided that you do not have time to fight chargebacks, you might feel differently in the future.
When a chargeback is actually presented to you, you can decide whether or not you wish to fight the claim. Because you’ve been keeping careful records, you should at least be able to access the evidence you’ll need very quickly.
Is It Hard To Win A Chargeback Fraud Dispute?
As a rule of thumb, chargebacks of any type are difficult to win. After all, from a total volume standpoint, merchants only win 20%-30% of chargeback disputes.
The issuing bank’s relationship is with the cardholder, so they tend to take on the cardholder’s views because they want their business relationship with the cardholder to remain prosperous and mutually beneficial. Additionally, if the issuing bank does not have enough employees to deal with a high number of chargebacks, they might simply allow the chargeback claim to pass down to the acquiring bank and eventually to the merchant instead of investigating the claim early on in the process.
This doesn’t mean that you should give up entirely. You might still be able to win a dispute, but your ultimate success will depend on specific facts, including what the customer claims and what kind of evidence you have at hand. For instance, if the customer claims that they never received the goods, you can show proof of delivery. If the customer didn’t recognize the name of your company because it’s different from your “doing business as” name, you might be able to win the dispute if you can provide the appropriate evidence. Just be aware that you may not win every case even if you do have the evidence.
The Final Word On Friendly Fraud
Friendly fraud is, sadly, not the only type of fraud you’ll encounter when accepting credit cards. While most people are honest — and even honest mistakes can be called fraud, as we’ve shown above — there will always be a segment of the population who intend to cheat and steal. In other words, no matter what you do, you won’t be able to completely stamp out friendly fraud.
The best approach is simply to keep good records. When you see a chargeback that you suspect is friendly fraud, dispute that claim. But bear in mind that you can’t dispute every claim; if you do, you’ll be forced to spend all day on such disputes — or farm the work out to a third-party company. Neither is likely the best use of your time or money. Pick your battles and dispute some but think about letting others go. There are other aspects of your business waiting for your attention.
Friendly fraud isn’t the only type of credit card fraud. If you’re interested in learning about other types of fraud, be sure to check out our longer article devoted to these topics.
And, as always, please feel free to share your thoughts or stories below. We always like to hear from our readers.
The post Friendly Fraud Survival Guide: How Small Businesses Can Reduce Their Chargebacks & Save Money appeared first on Merchant Maverick.
Venture capital is often touted as the be-all-end-all when it comes to financing a startup. To be fair, you have to admit that wealthy investors showing up to rain treasure upon you because you have a great idea has a lot of appeal. That being said, venture capital isn’t the only way to finance your new business and, in many cases, may not even be the best way to go.
So where do you turn when venture capital isn’t a good match for your business plan? Below, we’ll look at some alternative funding sources if venture capital isn’t the right fit for your startup or small business. But first, let’s talk about venture capital a bit to make sure we’re on the same page.
How Venture Capital Works
There are a lot of myths surrounding venture capital, but the concept is fairly simple and not especially glamorous in practice. Venture capital firms aggregate funds from a number of sources ranging from bored wealthy folks to pension funds. Once they’ve raised an agreed-upon amount, they’ll shop around for businesses in which to invest. What each of these funding sources has in common is the desire to recoup their money, plus a tidy profit, when the business they invested in either A) goes public or B) is sold to another company. A venture capital fund frequently disburses its funding over the course of several “rounds,” the first of which is called the seed round.
Investing in unproven businesses, many of which will fail, is risky. Typically, venture capitalists will hedge their bets by spreading their money out through a number of businesses to increase their chances of scoring a hit. This model works mainly because the payoff from a successful company making an initial public offering (IPO) can generate returns orders of magnitude above what was invested. On average, a venture capital firm is looking for somewhere around a 20% return per year.
How much the firm receives is based on a valuationof the company done both before and after the cash infusion. The difference in valuation is used to determine the percentage of stock the venture capitalists will own in the company. It may also determine the amount of influence the investors have in a company’s decision-making processes prior to the company’s IPO/sale.
When You Should Look For Alternatives To Venture Capital
If you looked at the previous section and thought that arrangement sounds bad, then venture capital probably isn’t for you. For example, if you’re not a serial entrepreneur and would prefer to own and run your business indefinitely, this probably isn’t the funding source for you. Venture capitalists expect you to have an exit strategy.
It’s also quite possible that your type of business won’t fit in well with the venture capitalist model. For better or worse, “venture capital” has become almost synonymous with Silicon Valley. If you’re not a tech company creating some kind of software, you may have some difficulty convincing a fund to work with you. They’ll also be looking for a quick return, so if your business plan doesn’t match that rate of return, you’ll be a poor match.
Keep in mind, too, that most venture capital funds specialize in a particular type of business, so even if your profile is venture capital friendly, you may have to look around to find one that can work with your company at its current stage.
Finally, there’s a geographic component to venture capital investment culture. If you’re not in, or close to, hot spots like New York City, San Francisco, Los Angeles, Atlanta, or Austin, you’ll have to work much harder to wiggle your way into a venture capitalist’s view.
8 Venture Capital Alternatives
If all new businesses needed to rely on venture capital to get off the ground, we wouldn’t have very many businesses. The good news is there are numerous ways to finance your company’s early operations that don’t involve venture capital. Let’s take a look at some of your options.
When you’re talking about raising money, even a zero-interest loan just can’t compete with free money. Grants typically offer small-to-moderate-sized lump sums to companies that fit their criteria, and the best part is you don’t ever have to pay that money back!
So why isn’t every startup running exclusively off grants? Well, as you can imagine when you’re handing out money, there’s going to be a lot of people in line to get some. Grants are highly competitive. Applying for them can be quite involved and time-consuming, and there’s no guarantee that your hard work will pay off. Still, if you target the right grants at the right time, you can score a nice chunk of cash with no debt obligations.
You’ve probably heard of Kickstarter, but the crowdfunding industry is quite a bit larger and more specialized than you might think. In contrast to venture capital, traditional crowdfunding tends to work best when you’re trying to raise money for a tangible, deliverable product–funders are essentially pre-purchasing your product (with some additional funders simply donating smaller amounts of money in the interest of seeing your project succeed).
A newer form of crowdfunding, equity-based crowdfunding, allows investors to purchase equity in your company. These services can be convenient if you’re not plugged into the investor circuit but are still looking for that kind of relationship. Just be aware that this is still a fairly new realm of investing, with many investors still wary.
Keep in mind, any kind of crowdfunding will require a marketing blitz to get your name and product out there, which will likely have its own costs in both time and money.
3) SBA Loans
The Small Business Administration’s loan guarantee programs are designed to give small businesses access to quality rates and terms. In the case of startups, the two most popular programs, 7(a) and 504, may not be the best fit as they usually require you to have been in business for two or more years.
The SBA microloan program, on the other hand, is more geared toward startups. These loans can net you between $500 and $50,000. Interest rates range from around 6% to 18%, with most borrowers falling somewhere between 8% and 13%. You’ll have a while to pay it off too, with term lengths of up to 6 years. The rate you get will depend upon your credit score and any collateral you’re able to put up.
If you need more than that, you’ll also want to check out SBA Community Advantage Loans, which the agency offers through community-based lenders. These loans range from $50K to $250K, with terms lengths of up to 10 years. Interest rates are lower, usually falling between 7% – 9%.
4) Online Business Loans
Wait, why would you be here reading this if you could just go out and get a business loan? Fair point. It can be very challenging for startups to qualify for business loans since most business lenders are going to want to see a profitable business history before they open up their purses.
That said, it’s not impossible. Many online lenders are willing to work with businesses with histories as short as three months. Some of the more creative ones may not care at all. Just be prepared to pay interest rates in proportion to the risk your business represents. Additionally, you can often find better terms if you can put up something valuable as collateral.
5) CDFI Loans
Community Development Financial Institutions (CDFIs) come in a number of different forms, ranging from banks, to credit unions, to–believe it or not–venture capitalists. What they have in common is certification by the federal CDFI Fund, which designates them as being committed to facilitating economic growth within low-income or historically disadvantaged areas.
CDFIs usually carry higher interest rates than comparable bank products, but lower than those of a typical alternative lender. Best of all, many are startup-friendly.
6) Personal Loans
Your business may not have much history, but that doesn’t mean you don’t. Many personal loans are versatile enough that they can be used for business expenses. And since you’re probably not looking at borrowing vast amounts of money, they may be sufficient to meet your financing needs.
Of course, because they are personal loans, you’ll lose whatever protections you would have had with business loans, which typically differentiate between you and your business. Make sure you can still pay them off even if your business fails.
7) Vendor Financing
Don’t feel bad if you haven’t heard of vendor financing until now. Vendor financing is an arrangement where a vendor essentially lends a seller the money to buy the vendor’s products. This can be useful if you’re launching a retail business of some kind or even badly need what they’re selling for your own uses.
So what do the vendors get out of the arrangement? Believe it or not, it can be better to move product with risk than not move product at all. Additionally, the vendor will usually expect to earn interest on the loan or an equity stake in your company in return. No matter the arrangement, you’ll probably need to be on good terms with the vendor to be a candidate.
8) Friends & Family
Depending on your social context, this may or may not be a practical option for you. Still, you may be surprised by how willing your friends and family may be to pitch in and help you succeed and probably at far lower (if any) interest rates than even the most benign lender.
Just use your judgment and don’t burn bridges.
Your Best VC Alternative Offers Funding That Works With Your Terms
Don’t worry about fitting the platonic ideal of an entrepreneur. The best venture capital alternative for your startup will depend greatly on your circumstances and business plan. Work with the resources and connections you have to find the funding you need to carry out your vision.
Look for more startup-related information?
Get The Equipment You Need For Your Startup Business With A Loan Or Lease
The Best Business Credit Cards For Startups & Entrepreneurs
The post 8 Alternative Funding Sources If Venture Capital Isn’t The Right Fit For Your Startup Or Small Business appeared first on Merchant Maverick.
Maybe you noticed the term, along with the fee inevitably associated with it, when you signed up to process credit cards. Or maybe you didn’t notice. Now you’re seeing your first chargeback —Â wondering what it is, how to deal with it, and how to get it to go away.
The good news is that chargebacks happen to every merchant, so you’re not unique. In fact, you probably won’t be able to eliminate all chargebacks as long as you keep accepting credit cards. The best you can do is to contain them and reduce them to a small number. What is left is just a part of the cost of doing business.
To find out more about what chargebacks are and how to best deal with them, read on to find out.
Chargeback Definition: What Is It Really?
To start, let’s define chargeback. A chargeback is a payment dispute initiated by the credit card holder by contacting the card-issuing bank, with the goal of getting the credit card charges reversed. It’s a process in which both the card-issuing bank and the merchant’s acquiring bank are involved. Although you, the merchant, do have the ability to speak for yourself to fight the dispute, the final decision on whether or not to reverse the charge is up to the issuing bank. (There are subsequent legal procedures a merchant can follow, but, considering the time and money involved, it’s probably not worth it.)
The issuing bank’s business relationship is with the credit card holder, so it’s natural that they’d want to please the card holder. Expect the bank to rule in favor of the card holder most of the time, even when the card holder is being unreasonable.
Compare chargeback with, for instance, the refund process. There, the customer deals with the merchant, and the merchant decides whether or not to accept a returned merchandise and refund the purchase. Note, though, that the chargeback process can be initiated after an unsuccessful refund request, so the customer gets two bites at the apple.
There can be many acceptable reasons behind the chargeback, and each card association has its own reason code for each of these reasons. In general, some of these reasons include:
No authorization by cardholder
Goods/services returned or refused
Goods/services not received
Goods/services not as described
Goods/services damaged or defective
Canceled recurring billing
Incorrect charge amount
ACH Disputes VS Credit Card Disputes
One reason a credit card holder requests a chargeback is that there was no authorization for continuing to charge a card in a subscription service. What they mean, usually, is that they forgot to cancel the service in time, and now they don’t want to pay. One way to solve this issue is to make ACH payments available to your customer for monthly subscriptions.
Both ACH payments and credit card charges can be vulnerable to chargeback claims. However, it’s easier for a consumer to be successful in a credit card chargeback claim than an ACH chargeback claim. Flip this around, and it means that, as a merchant, it’s easier for you to keep your money under ACH transfers than credit card charges.
We have a comprehensive article on accepting ACH payments, if you wish to know all the nitty-gritty details. But before going any further, here’s a brief explanation on what ACH payments are:
Compared with credit card charges, ACH payments work more like cash. An ACH payment is taken directly from the consumer’s bank account, and it costs less per transaction than credit card payments. While ACH can be used for one-time payments, it’s more often used for scheduled, recurring payments.
As listed in the previous section, there are numerous reasons for chargebacks, many of which involve authorization issues or goods/services issues. A credit card user has up to 120 days to initiate a chargeback claim.
The rules for chargebacks on ACH transactions are far stricter. In fact, there are only three reasons under which your customer can successfully reverse an ACH transaction:
The transaction was never authorized or the authorization was revoked
The transaction was processed on a date earlier than authorized
The transaction is for an amount different than what was authorized
The customer will typically have only 90 days to initiate a chargeback (or 60 days after the charges show up in their monthly statement).
While paying by ACH is not always the most convenient thing for your customer, because of the differences above, it might be advantageous for you to steer your customers towards paying with ACH whenever possible.
The Chargeback Process: What Merchants Need To Know
If you’ve been taking credit cards for your business for a little while, you’ve probably had to deal with chargebacks already, but only from the merchant’s standpoint. Below is a quick overview. We hope that a better understanding of the entire process can help you orient yourself when you have to deal with chargebacks again.
The Chargeback Workflow
Briefly, the chargeback process is as follows:
The credit card holder initiates the chargeback process by contacting the issuing bank and giving a reason for wanting a refund/refusing to pay for a specific charge.
If the reason given fits within the allowed reasons for chargebacks, the issuing bank assigns a chargeback code to the incident, provisionally refunds the money to the card holder, and then contacts the acquiring bank to notify the bank of the chargeback claim and to pull back the money already paid to the merchant.
Depending on whether the merchant has a direct or indirect relationship with the acquiring bank, either the acquiring bank or the merchant’s processor performs an investigation to see if they have evidence at hand to refute the chargeback claim. If they do not, then they contact the merchant about the chargeback.
The merchant can elect to accept the chargeback or fight it. Either way, the merchant incurs a chargeback fee. If the merchant decides to fight the chargeback, then the merchant submits evidence to rebut the reason for the chargeback.
The evidence is passed back to the issuing bank, which then makes a decision on whether the chargeback is justified. If it is justified, then the card holder gets to keep the provisionally returned money. If not justified, while the merchant gets to keep the bulk of the money, a chargeback fee is nevertheless assessed against the merchant.
If either the merchant or the credit card customer is not satisfied with the decision, they can escalate. Typically this means some sort of arbitration, but, because a lot of time and money must be invested in the process, probably most people do not pursue this path.
Why Small Businesses Get Hit With A Chargeback Fee Per Incident
A chargeback fee is considered a markup fee. This means that the fee is charged by your processor, so, technically, it’s negotiable. However, smaller businesses have less leverage when negotiating with processors, so they might not always get the best deals.
Chargeback fees typically cost $25. We have seen more, and we have seen less. Often, the fee is assessed against you even when you win a chargeback dispute, on the theory that any chargeback, no matter the outcome, means extra work out of the typical credit card processing flow. Extra work typically means an extra charge.
If you’re worried about chargeback fees eating into your profit, the next time you think of changing processors, be sure to ask about the charge. It can’t hurt to ask if they will reduce the fee. After all, the worst they can say is “no.” You’ve got nothing to lose.
Chargebacks Aren’t The End Of The World, But You Still Need To Be Wary Of Them
If you take credit cards, you will have to deal with chargebacks. There is really no way around it, even if you have happy customers. It’s just a cost of doing business. Don’t sweat it too much if you get one once in a while.
But, if you have too many chargebacks, you do need to be wary. An excessive number of chargebacks could destroy your business. Your processor might force a reserve fund on you so that it takes you longer to get paid when a customer uses a credit card. If things don’t improve, your processor might terminate your contract altogether and put you on the MATCH list. Once you’re on the MATCH list, it would be very difficult for you to find another processor for five years.
So, whenever possible, get a dissatisfied customer to contact you directly for a refund, instead of calling their bank for a chargeback. Be friendly and accommodating. Hopefully, you can resolve the issue directly instead of pushing the customer to try a chargeback.
If you have questions or interesting stories about chargebacks, leave us a comment below. We’d love to hear from you.
The post What Is A Chargeback? Everything You Need To Know About Payment Disputes appeared first on Merchant Maverick.
As the COVID-19 pandemic continues its attack across the globe, the financial world has experienced a brutal setback. Small businesses have been particularly affected in this downturn; roughly 70% of owners had applied for Paycheck Protection Program loans by April 9, according to the NFIB Research Center.
With such danger looming overhead, credit card issuers have begun to reign in customers’ spending limits. These decisions can cause headaches for business owners who rely on credit cards: Besides dropping the amount of usable credit available, a lower credit limit can impact all-important credit scores.
Have you been hit by a lower credit limit recently? Or are you concerned about having your card’s credit line decreased in the future? Continue reading to find out how you can help manage your situation and keep your business financially healthy.
Why Issuers Are Lowering Credit Limits & Why It Matters
As mentioned above, several card issuers are known to have tightened credit limits in recent days. The Wall Street Journal specifically attached Citi, Discover, and Synchrony as issuers that have lowered spending limits due to concern over “millions” of credit card customers being unable to pay their bills.
Synchrony Bank is one of the few issuers to publicly comment on lower credit limits, stating that it has been using internal and credit bureau data to “dynamically reevaluate” its customers’ creditworthiness. Discover has also revealed that it is decreasing limits for new customers but added that it isn’t dropping spending limits for current customers directly due to COVID-19. There are also reports that Chase has recently tightened limits for current customers, although the bank hasn’t officially commented on the situation. It’s possible that other issuers have done the same as the above banks or are planning similar tactics for the future.
Such decisions aren’t unprecedented, even if the times we live in are. At the start of the 2008 recession, roughly 20% of banks dropped credit line limits for credit cards of prime borrowers, according to a senior loan officer survey by the Federal Reserve. Sixty percent of subprime borrowers, meanwhile, saw their credit limits tightened during the same time.
Issuers cut down credit limits for a very simple reason: They want to lessen their risk. With the current financial instability swirling around the world, more and more accounts will miss payments and potentially even default. Such situations could wind up being costly for issuers, and lower spending limits can minimize any potential damage.
For you, a lower credit limit on your card can be detrimental to your credit score — a metric that issuers and lenders use to determine how trustworthy of a borrower you might be. You’ll want to have a higher credit score because it can affect your business’ ability to qualify for loans, credit cards, and other sources of credit.
A key component to having a healthy credit score is maintaining alowcredit utilization rate, something that can impact up to 30% of your score. Credit utilization is calculated by taking the amount of credit you’re using and dividing it by the amount of credit you have access to. When an issuer lowers the limit on a credit card you have, your credit utilization will, of course, rise — potentially decreasing your credit score.
Credit limit decreases to your card can also happen stealthily. While most credit card changes require 45-days’ notice, no such restriction is in place for credit line changes. That means you’ll need to stay on your toes and take note of any changes to your card’s credit limit.
With all this said, plenty of issuers are working with customers impacted by the pandemic. In fact, some have stated that credit line increases might be a potential solution if you are struggling financially due to the coronavirus.
What You Can Do To Protect Your Financials & Credit Score
If you do find yourself with a suddenly lower credit line on your credit card, there are a few avenues you can take to minimize the damage to your financial health. We’ll take a peek at several of your options below:
Talk To Your Issuer
The quickest fix could be simply to reach out to your issuer and ask them to reconsider your new credit limit. Not all issuers will be happy to reverse a recent change, though. Still, setting out for a credit line negotiation is worth a shot. In some cases, you may also learn that your credit line decrease was due to other reasons not directly related to the financial downturn, such as a change in spending habits or a previously missed payment.
However, do note that with the current pandemic crisis, many issuers’ customer service lines are experiencing high call volumes. In some situations, this means that you may wind up being on hold for an hour or even longer.
It’s also worth a try talking to issuers of other cards you might have. While you might have seen a drop in available credit on one card, a different issuer might consider you due for a credit line increase. Plus, many issuers, such as American Express and Chase, offer the ability to request increases through their online portals. Asking for an increase online can save you the time spent and headache of calling customer service.
Check Your Credit Score Regularly
Something worth getting into the habit of doing even if your credit line hasn’t decreased is checking your credit score frequently. By monitoring your credit score regularly, you’ll be able to grasp where your overall credit health stands.
Luckily, there are a few websites that offer free credit score services. Here are some of Merchant Maverick’s favorites:
Discover Credit Scoreboard
For a more in-depth look at free credit score-checking websites, read our guide.
As another note, each of the three major credit bureaus (Equifax, Experian, and TransUnion) are now allowing every American to check their credit report once per week for free. Previously, individuals were only allowed to look up free credit reports once per year from each bureau.
While these reports don’t display credit scores, checking them often can give you an overview of what lenders and issuers are looking at when you ask to borrow money. On top of that, regular peeks at your credit report can help stop problems before they get out of hand.
Apply For Another Credit Card
A possible remedy to a lower credit line is simply to increase your overall amount of credit available. You can do this by applying for a new credit card. If you get approved, your new card’s limit will be added to your overall amount of credit available, potentially offsetting the dip from one of your current cards.
Keep in mind, though, that you’ll want to make sure you get a new card that makes financial sense for your business. Some cards carry costly annual fees that won’t be worth your time, while others offer rewards that won’t suit your spending habits. Of course, there are plenty of worthwhile cards out there, such as those that dole out cash back or those with limited balance transfer fees.
You’ll also want to practice proper credit card habits. That means you’ll only want to spend what you can afford, keep your balance to a minimum (unless you find a great 0% APR credit card), and make your payments on time. Just because you have a new credit card doesn’t mean you have free cash at your disposal. Instead, consider the new card as a way to keep your credit healthy during this period of financial instability.
Pay Off Your Balance Consistently
One of the most obvious ways to keep your credit utilization low is to only make purchases you know you’ll pay off. This way, you’ll be able to keep the amount of debt you owe to a minimum.
Unfortunately, in these turbulent times, you may find your business struggling to pay off your credit card bill. Or perhaps your business lacks a cash flow right now and needs to buy on credit to carry a balance. If these situations match your business’s profile, only make necessary purchases on your credit card. Your credit utilization rate will thank you down the line.
All told, dealing with a lower credit limit on your card is a frustrating endeavor. By taking the above steps, you may be able to protect your credit score — potentially benefiting your business into the future.
The post Was Your Credit Card Limit Lowered Due To COVID-19? How To Minimize The Damage To Your Financials & Credit appeared first on Merchant Maverick.
Travel-focused cards are some of the best credit card options for small businesses. These plastic bits come with invaluable perks, such as travel credits, Global Entry/TSA PreCheck application fee waivers, and airport lounge access. Plus, many feature tantalizing welcome offers and unique rewards that help businesses save cash regularly.
Unfortunately, these premium cards often come with premium price tags — their annual fees can reach into the hundreds of dollars. And with travel becoming less of a routine for many businesses due to the COVID-19 pandemic, these cards’ perks and unique rewards just aren’t usable right now. As such, you may be wondering if it’s time to cancel your company’s premium travel card.
However, you should know some issuers are lending a helping hand by offering cardholders incentives for sticking around. Called “retention offers,” these special incentives are meant to stop cardholders from canceling their credit card. While retention offers are nothing new in the world of credit cards, they have become more popularly requested because of the current crisis.
Should you seek out a retention offer from your credit card issuer? Want to learn more about what retention offers are? Then keep reading for a primer on what retention offers are and how they can help your business.
Types Of Retention Offers For Small Businesses
Traditional retention offers have been around for a while, with protocols varying from issuer to issuer. We’re also seeing some types of offers become more popular in the face of the current coronavirus pandemic. Let’s take a look at how issuers might incentivize you to keep your card.
Bonus Points Or Statement Credits
The most common type of retention offer you’ll see is an issuer granting extra points or statement credits. In many cases, these types of offers are intended to help offset your annual fee. For example, you may receive a $100 statement credit to counteract your card’s $99 annual fee.
In some situations, these bonus points/credits are given without you needing to spend anything extra. However, it’s also possible that your issuer will require you to spend a certain amount within a set number of months before you pick up the extra rewards — similar to a welcome offer. So this means you might see an offer such as 3,000 bonus points after you spend $1,000 in three months.
Annual Fee Reduction
You may also be able to get your annual fee reduced (or even completely waived) if you call in and ask. This might wind up being a little better for you because you won’t have to worry about paying all or part of the annual fee before you get credits added to your account.
Occasionally, these reductions are made in the form of targeted statement credits. For example, Chase recently handed out a $100 annual fee credit to select users with the Sapphire Reserve card, which has a $550 annual fee. This credit helped soften the blow during the coronavirus pandemic and especially so because Chase had upped the Sapphire Reserve’s annual fee from $450 to $550 in January.
Extended Welcome Offer Windows
In the face of the current pandemic, issuers have been extending welcome offer windows for select users. A lot of premium travel cards come with meaty welcome offers. However, with the recent downturn, many aren’t using their cards as frequently — potentially harming a cardholder’s chance of hitting their welcome offer’s minimum spend requirement. By lengthening the time to meet this requirement, a card issuer gains goodwill with customers while also encouraging continued spending with eligible credit cards.
American Express was the first major issuer to announce such a change. Early in April, Amex allowed those who were approved for card accounts between the beginning of December 2019 and the end of May 2020 to receive an extra three months to trigger their minimum spend requirement.
Issuers We Know That Grant Retention Offers
A few card issuers have been pretty aggressive with providing retention offers on their premium credit cards. Below is a quick rundown of some examples you may get from popular issuers.
Note: The offers below are examples of temporary offers in response to the coronavirus pandemic and of more general retention offers. For a consistently updated and fresh list on how credit card issuers are providing aid during the coronavirus pandemic — both with temporary offers and otherwise — check out our article on credit card assistance. For more exhaustive lists on retention offers specifically, visit the FlyerTalk forum or MilesToMemories.
American Express has some of the best premium credit cards on the market. Its cards come with great rewards, but Amex also packs in some hefty annual fees — making the cards ripe for retention offers.
Amex has also been one of the most responsive issuers to the coronavirus. As noted earlier, the issuer has lengthened welcome offer windows for card accounts approved between the beginning of December and the end of May. If you qualify as one such user, you get an extra three months to spend the minimum amount for your welcome offer.
Additionally, cardholders enrolled in Amex’s Membership Rewards program are eligible to earn one extra point for purchases made via the Grubhub and Seamless delivery services. This bonus rate began in April and will run through the rest of 2020. You can add this offer to your eligible card through the Amex Offers portal.
Beyond its coronavirus response, American Express has been known to provide retention offers when cardholders call and ask. Example potential offers if you ring up Amex include:
The Business Platinum Card From American Express: $595 annual fee — 5,000 points immediately, plus 25,000 more after $10,000 spent in 90 days
American Express Business Gold Card: $295 annual fee — 5,000 points immediately, plus 5,000 more after $3,000 spent in three months
While we haven’t seen instances of Capital One offering bonus points or statement credits, the Virginia-based bank has still been doling out new perks to encourage users to keep and continue using their cards during the pandemic.
All of Capital One’s first-party travel cardholders (so those with Venture, VentureOne, and the business-focused Spark Miles and Spark Miles Select) can now redeem their miles for delivery service and restaurant takeout purchases up through June 30. Capital One includes DoorDash, Postmates, and Uber Eats among the eligible delivery services. Both consumer travel cards can also have miles redeemed for streaming services (including Netflix, Hulu, Spotify, Disney+, and Kindle Unlimited), while the business bits of plastic can have miles cashed in for purchases from wireless phone service providers (including Verizon, AT&T, and T-Mobile).
Additionally, some cardholders have chimed in that Capital One is willing to extend welcome offer windows for business cards, according to MilesToMemories. Per one user who called Capital One, the bank is reportedly allowing until December 31 for them to hit the minimum spend requirement on their Spark business credit card. Note that this extension is not automatic — you’ll need to reach out to Capital One to see if you can get a similar deal.
Citi hasn’t made any widespread tweaks in response to the coronavirus pandemic. However, the bank is still known for dishing out retention offers on its premium credit cards. Here are a couple of example retention offers from Citi:
Citibusiness / AAdvantage Platinum Select Mastercard: $99 annual fee — $99 statement credit after $3,000 spent in three months
Citi Premier Card: $95 annual fee — $95 statement credit, plus 1,000 points after $1,000 spent monthly for three consecutive months
Between its first-party credit cards and those offered in conjunction with travel brands, Chase has a number of premium credit cards. With such a deep stable of cards, Chase has been fairly receptive to handing out retention offers in the past. The bank has also distributed several perks for those impacted by the coronavirus.
Most notably, Chase has extended welcome offer windows for those who signed up for a card between January 1 and March 31. If you qualify, you get an extra three months to reach your offer’s minimum spend requirement.
As mentioned earlier in this article, Chase also dished out a $100 annual fee credit to Sapphire Reserve cardholders who have a renewal date between April 1 and July 1. This credit effectively knocked the card’s $550 annual fee down to $450 (although the card previously had a $450 annual fee last year, so it basically winds up a wash for those who qualify).
For those stuck at home, Chase has additionally enabled 5x rewards (up to $500 spent) on delivery and takeout through DoorDash and Tock for Sapphire Reserve, Sapphire Preferred, Freedom, and Freedom Unlimited cardholders. This bonus rate runs through May 31.
Those above perks are automatic — no need to dial Chase if you qualify. You might still be able to find some savings if you call in, however. Other example retention offers you might see by contacting Chase include:
Southwest Rapid Rewards Premier Business Credit Card: $99 annual fee — $100 statement credit for keeping the card, no spending required
Marriott Bonvoy Boundless Credit Card: $95 annual fee — $50 or $100 statement credit for keeping the card, no spending required
How To Get A Retention Offer
As seen above, issuers have been announcing offers without cardholders needing to reach out. These temporary offers are intended to placate cardholders during the financial downturn that has occurred amid the health crisis. In most situations, if your issuer has announced some sort of perk due to the coronavirus pandemic (such as an extended welcome offer window or bonus points for certain categories), you won’t have to do anything proactively — the perks will be available automatically.
However, for most traditional retention offers, you’ll need to give your card issuer a call on the phone. While this may be more problematic than in the past — issuers are experiencing high call volumes in the pandemic’s wake — the best way to receive a retention offer is by reaching out.
When looking for a retention offer targeted around your annual fee, give your issuer a call via the number on the back of your credit card. Note that you’ll want to do this after your card’s annual fee is posted to your account but before your monthly payment’s due date.
Here’s a couple of tips to help you with your request:
Come Up With A Game Plan Before You Call: As is the case with most customer service calls, knowing what type of offer you want as well as crafting a script in your head can help immensely. You’ll also want to know what you’re willing to concede and how weak of an offer you’re prepared to take.
Make Your Request Short & Sweet: There’s no reason to beat around the bush. Simply stating what you’re looking for and how you’d like the card issuer to handle your situation should be enough. Retention offer requests are commonplace for most customer service agents, and any offers available to you will likely be auto-generated by the issuer’s computer system — coming with a detailed sob story probably won’t help much.
Know That You May Have To Cancel: Some issuers, such as Chase, have instituted new policies where the customer service agent won’t see a retention offer until after they’ve begun the cancellation process.
It’s also worth noting that the offer may depend on how much money you’ve spent on your credit card in the past months and years. Those who have used their card more frequently will have a better shot at actually receiving a retention offer as well as potentially earning a better offer than someone who might’ve spent less.
Should you wind up without a retention offer — or an inadequate one — don’t hesitate to cancel your credit card if you can’t afford its annual fee. Especially with the financial woes facing numerous businesses right now, it’s just not worth throwing away money on a card you won’t be taking full advantage of for the next several months at least. However, hopefully, your issuer will provide some sort of solution. With the right offer, you may be able to keep hold of your card until it becomes valuable again in the future.
If your business is still struggling with its credit card due to the coronavirus pandemic, check out how else issuers are providing assistance. We’ve also written up a guide on how to best use your credit card throughout the financial downturn. For more general guides and resources to help your business during the current crisis, visit Merchant Maverick’s coronavirus hub.
The post Get Waived Fees Or Bonus Points With A Retention Offer For Your Small Business Credit Card appeared first on Merchant Maverick.
There are many different types of entrepreneurs, and just as many types of startup businesses, but they all have one thing in common: the need for capital. Their business ideas may be valuable, but most aspiring small business owners don’t exactly have the funds in their own bank accounts to cover startup expenses. Sound familiar? Fortunately, a lack of capital doesn’t mean that you have to push your startup dreams to the back burner. There are plenty of startup business loan options that allow you to fund a new business without emptying your personal bank account.
There may be one thing that’s holding you back from submitting that loan application, though. If you lack collateral to back the loan, you may be hesitant to move forward with a lender. If this is a problem you’re facing, keep reading. In this post, we’re going to discuss your startup business loan options when you can’t put up collateral. We’ll look at what collateral actually is, why some lenders require it, and funding options that don’t require collateral.
What Is Collateral? A Short Primer
Collateral is a physical asset that is put up to secure your loan. It shows the lender that you’re serious about your loan and plan to make all payments as agreed. If you fail to meet the terms of your loan, you default on the agreement and the lender can seize the collateral, which is then sold in order to pay off the debt.
There are several things that can be used as collateral. Business equipment, vehicles, property, and inventory are common forms of collateral when seeking a business loan. Any property of value that can be sold by the lender can qualify as collateral, even accounts receivables.
Still scratching your head over collateral? Check out our post What Is Collateral & Do I Need It For A Business Loan to learn more.
Secured VS Unsecured Loans: Know The Difference
In your search for a small business loan, you’ve likely encountered the terms “secured” and “unsecured.” If a loan is secured, it is backed with some form of collateral. The lender will put a lien on the pledged asset and will have the right to seize it and sell it if you default on the loan. Failure to pay your loan as agreed will also negatively impact your credit score. A home mortgage is a type of secured loan, where the property being purchased is the collateral for the loan.
An unsecured loan, on the other hand, does not require you to put up specific collateral to back the loan. If you do not pay your loan as agreed, the lender can’t seize your property. However, the lender may seek a judgment against you in court if you default on your loan agreement. As with a secured loan, defaulting on an unsecured loan will affect your credit score negatively.
Do Personal Guarantees Count As Collateral?
Some lenders require you to sign a personal guarantee as a condition of receiving a loan. By signing a personal guarantee, you are making a promise to the lender that you will repay the loan. This personal guarantee takes some of the risk off the lender. If you don’t fulfill that promise, the lender has the right to liquidate personal assets, including personal real estate, vehicles, or even your personal bank accounts.
Because a personal guarantee isn’t attached to a specific asset, it doesn’t count as collateral. It does in some cases take the place of collateral when a borrower doesn’t have an asset to secure the loan. One important thing to note is that both secured and unsecured loans may require a personal guarantee. This varies by lender, so make sure you do your research before signing on the dotted line.
Most lenders require all borrowers with at least a 20% stake in the business to sign a personal guarantee. If you have a co-signer for your loan, the co-signer will typically be required to sign a personal guarantee. In some cases, your spouse may also be required to sign even if they aren’t listed on the loan. This is to eradicate any conflicts over jointly-owned property.
If you’re unsure about moving forward with a loan that requires a personal guarantee, check out our post Should I Sign A Personal Guarantee? to learn more about the benefits and drawbacks of signing.
Why Creditors Ask For Collateral On Startup Loans
So, why do most creditors ask for collateral for startup loans?
For lenders, it’s all about risk. Borrowers with good personal credit, an established business, and solid revenue are seen as less of a risk. These borrowers receive lower interest rates, higher loan limits, and loans that don’t have to be backed with collateral.
On the other hand, risky borrowers are more of a challenge. Lenders may be willing to loan money to these borrowers, but they want to mitigate risk as much as possible. This is why riskier borrowers receive lower loan limits, higher interest rates, and may be required to put up collateral. If the lender is unable to collect what is owed if the borrower defaults, the collateral can be seized and sold, allowing the lender to recover their funds.
Startup businesses are seen as a risk by lenders because they haven’t yet established a track record of success. There is no annual revenue or business credit history to consider. In other words, the lender is unsure if the borrower is willing or able to make their loan payments on time as agreed. With an asset backing the loan, lenders feel more confident in loaning to newer businesses and startups, business owners without perfect credit, and other high-risk borrowers.
The Downsides Of Getting A Startup Loan With No Collateral
If you don’t have collateral to secure a startup loan, you’re not completely out of luck. There are some lenders that will work with your situation to help you get the funds you need. Unfortunately, there are a few drawbacks to getting a loan without collateral. It’s important to fully weigh out the pros and cons of these loans before making a commitment.
Higher Interest Rates
Without collateral, your loan may come at a higher cost. Some creditors are willing to fund startup businesses with a higher interest rate than more established businesses or business owners that have collateral. These increased interest rates can add hundreds or even thousands of dollars to what you owe, so make sure you have a grasp of exactly how much your loan will cost. Then, decide if the expense is worth it, or if you’re better off taking another funding route.
Shorter Repayment Terms
Typically, loans with the most favorable repayment terms are reserved for the most creditworthy borrowers (i.e., established businesses). If you need a startup loan and don’t have collateral, you may have to take a short-term loan. Instead of paying back funds over a longer period of time, you’ll have to repay your loan more quickly — for example, three or six months. You may also be required to make more frequent payments depending on the lender you choose (such as weekly or bi-weekly instead of monthly). Again, it’s important to fully evaluate the pros and cons of repayment terms of any loan you’re offered to decide whether it’s right for your business.
Fewer Lender Choices
Look through the Merchant Maverick website, and you’ll find just a fraction of the lenders ready to work with small business owners. To qualify, though, you must meet all lender requirements. Though these requirements vary, many lenders exclude startup businesses and require a minimum time in business, such as one year. Others may be more willing to work with startups but require collateral to secure the loan. If you don’t meet these requirements, you’ll have to find another lender.
Lower Borrowing Limits
Putting up collateral means you have some skin in the game. This allows lenders to feel more confident when lending to you. With many lenders, you’ll be able to borrow more funds than you would without collateral.
In order to receive a startup loan without collateral, your application needs to be strong in other areas (i.e., a high personal credit score). We’ll go into this a little more later, but for now, just know that you may face much stricter borrowing requirements if you lack collateral to secure your loan.
Where To Get Startup Loans Without Putting Up Collateral
If the drawbacks of a collateral-less startup loan haven’t deterred you, you’re one step closer to starting the loan process. Like many new business owners, though, you may be unsure of where to acquire a loan. There are several lending options to consider.
There are a number of online lenders that are willing to give loans startups without collateral, provided that the borrower meet all other requirements. There are several benefits to working with an online lender. The process is quick, easy, and can be done online from your home or office. Many online lenders also have more lenient requirements than banks and other traditional lenders. One thing to note, however, is that most online lenders do require you to sign a personal guarantee before you’re funded.
Take Out A Personal Loan For Business
If you have a good credit score and enough annual revenue, you may qualify for a personal loan that can be used for business purposes. Depending on how strong your application is, you may qualify for lower rates and longer terms than small business loans. You can apply for personal loans through an online lender, bank, credit union, or other financial institution.
Have a new product idea or an interesting business that you’re ready to launch? If so, crowdfunding may be the answer to your capital problems. When launching a crowdfunding campaign online, it is your job to convince others to give money to fund your startup. You do not need collateral, but in some cases, you may want to offer a perk to get people to donate. For example, if you’re launching a new product, you could offer first dibs or a steep discount to someone that donates. In other instances, you may work with fewer lenders and offer equity in your business in exchange for funding. Crowdfunding doesn’t have many of the hassles of traditional lending, but you do have to put in more work to get funding, such as sharing your campaign on social media.
Community development financial institutions (CDFIs) are private lenders that provide funding and other resources for community development. These lenders work with borrowers that may not qualify for funding elsewhere. This includes minorities, women, and startups. CDFIs can provide affordable, long-term finance options for startups, but this isn’t the right option if you’re looking for fast funding, as the application process can be quite lengthy.
Friends & Family
Maybe you didn’t realize it, but you may already know a lender that’s willing to take a chance on you. You can ask a friend or family member for a loan or even an investment in exchange for equity in your business. Even though you know this lender personally, it’s important to keep everything professional. Make sure that you approach the friend or family member as you would any other lender. Don’t forget to make sure that all contracts are drawn up and signed to legalize the transaction. Most importantly, don’t fail to meet your end of the bargain. Plenty of good relationships have gone south due to a business deal gone bad.
How To Improve Your Chances Of Being Approved
Qualifying for a business loan for your startup can be difficult even with collateral. But taking collateral out of the equation entirely may make it seem nearly impossible to get funded.
It is possible to get funded, however. But it can be a challenge. If you plan on applying for a loan sans collateral, you have to make sure that you provide the lender with a strong loan application to show why they should lend to you.
How do you know if your application is strong enough? Start off by taking a look at the 5 Cs of credit.
Character:Â Do you responsibly make payments on time? Lenders want to work with low-risk borrowers of high credit. Lenders will learn more about your character by looking at your personal credit profile and references.
Capacity:Â Will you be able to pay back the loan? Lenders will look at financial documents, annual revenue, and even projected revenue to see if you can financially handle the responsibility of a loan. When evaluating capacity, lenders will also look at your debt-to-income ratio and debt service coverage ratio.
Capital:Â How much of your own funds will go into your business? Lenders will consider how much capital you’re willing to put into your business. Borrowers that are willing to invest their own funds are seen as less of a risk.
Conditions:Â Lenders also look at conditions before deciding whether or not to approve your loan. This includes the state of the economy, your industry, your competitors, and current interest rates.
Collateral: Collateral, of course, is what we’ve been covering in this post. If you lack collateral, you’ll want to bolster the other 4 “Cs” as much as possible.
Before applying for a startup loan, make sure you’ve taken the steps necessary to strengthen your application. Order your free credit report, evaluate it for errors, and dispute any errors that you find. Consider paying off (or at least paying down) current credit cards, loans, and other financial products to lower your DTI. Make sure you have strong, reputable references. Finally, make sure you have all of your documentation ready. This includes financial statements and your business plan.
Final Thoughts On Collateral-less Startup Loans
You don’t have to be intimidated by collateral-less loans, but you do need to be prepared. Knowing what to expect, taking steps to strengthen your application, and being prepared to explore different lenders and funding avenues are key to successfully acquiring a collateral-less startup loan.
The post How To Get A Startup Business Loan If You Canât Put Up Collateral appeared first on Merchant Maverick.
Are you passionate about education? Do you love working with students? Do you have a specialized skill that you want to pass on? If so, you might be a good candidate for establishing your own tutoring business.
Becoming a tutor allows you incredible job flexibility, while also giving you an opportunity to do meaningful work in your community. When you tutor, you make an impact on students’ lives and help guide them toward educational success. And at the same time, tutoring allows you to manage your own schedule and set your own rates. What’s more, when you set up an online tutor business, you can even work from home!
Have you been considering starting a tutoring business, but you aren’t sure where to start? In this article, we’ll walk you through a step-by-step process for planning your tutoring business. And, we’ll also give you some ideas for where you can turn for the funding you might need to get set up.
Ready? Let’s go!
Why Start An Online Tutoring Business?
Tutors start their own businesses for a number of reasons, but one of the primary reasons is the ability to be your own boss. When you operate an online tutoring business, you are able to set your own hours, determine your own hourly rates, and take on as many or as few clients as fit your schedule. The flexibility that comes with tutoring is one of its biggest advantages.
What’s more, becoming a tutor is an excellent way to support students and parents. When you step in as a tutor, you help students learn the skills they need to succeed in the classroom, and you relieve some stress on parents. For many students, a tutor can change the outcome of their educational career. So if you have a heart for students, and a desire to see them grow and succeed, tutoring could be your passion.
In addition, over the past few years, online tutoring has been increasing in popularity. According to IBIS world, the market size of online tutoring services in the US (as measured by revenue) is expected to increase by 4.1% in 2020. There is always a need for educators, especially during the school year and around standardized testing time, and when you become a tutor you help fill that need. If you want to join a growing market, now is a great time to open our own online tutoring business!
When To Sign Up With A Tutoring Service Instead Of Starting Your Own Business
There are a couple of routes you can take to begin tutoring online. You can choose to sign up with an existing online tutoring network (such as Care.com), or you can start your own independent online tutoring business. Your choice between these two options depends on your available resources, your timeline, and your intentions for your business.
In general, you should sign up with an existing tutoring network if the following applies to you:
You Have A Limited Social Network: If you don’t already have a number of potential students in mind, it might be best to join a tutoring website. These sites help connect tutors with students, which can reduce some of the demand that comes with building an entire client base from scratch.
You Need To Start Working Immediately: Finding clients and establishing a presence in the tutoring market can take significant time, energy, and money. If you want to skip over this process, signing up with a tutoring site is a great option. You’ll be able to find clients and get teaching much sooner.
You Don’t Mind Paying A Fee: Most tutoring sites charge tutors a percentage of their earnings. You should have room in the budget for this expense in order for a tutoring site to be an advantage.
You Don’t Want To Set Up The Technical Tools On Your Own: In order to successfully tutor across the internet, you need access to a variety of tools. At minimum, you need a video conferencing tool, a way to share your computer screen, and a virtual whiteboard. Many tutoring sites that specialize in online tutoring (such as Varsity Tutors) offer these tools built into their platforms.
Here are a few tutoring sites you might consider: Chegg Tutors, Care.com, VIPKid, and Varsity Tutors.
Alternatively, you should consider building your own business if:
You Already Have Potential Students: If you have a wide social network full of school-age children and college students, you may not need any help building a client base.
You Want To Keep All Your Earnings: This is a huge factor. If you resent the amount that tutoring sites charge for their services, you should build your own business. You’ll have to cover other expenses, but you get to decide how much those other expenses cost.
You Have The Time To Get Set Up: As I mentioned above, building your own business takes time. Make sure you have the time (and available income) to build your business before you begin.
Before You Start Your Tutoring Business: Essential Prereqs
As you might imagine, education is a major requirement for starting your own tutoring business. In general, most tutors need to have earned at least a high school diploma or a GED. This is especially true if you are signing up with an online tutoring site.
The level of education you have earned plays an important role in determining what content areas you can teach. Here are the grade levels and subjects you can tutor with each level of education:
High School Diploma Or GED: At this education level, you are able to tutor elementary and middle school students. You are also able to tutor high school students, although you may need to demonstrate your knowledge in other ways (using transcripts or standardized test scores to demonstrate content area knowledge).
Undergraduate Degree: With a Bachelor’s degree, you are able to tutor elementary, middle school, and high school students. You are also able to tutor college students in your area of specialization. This is especially true if you have work experience post-college that relates to your specialization.
Post-Graduate Education: You can tutor elementary, middle school, high school, and college students. Depending on your area of specialization (if you have a degree in education or in teaching English for Speakers of Other Languages), you might also consider teaching adults who are finishing their GED or who are looking for a way to develop their English fluency.
As you look into tutoring, you should also consider working towards a Tutoring Certification. These certifications require you to go through a few hours of training, pass a background check, and submit a couple of letters of recommendation. Earning a Tutoring Certification enhances your credibility, and it also demonstrates to parents that you are safe around their students. Many tutors also benefit from the training included in earning a Tutoring Certification. These certifications are available from the National Tutoring Association and the American Tutoring Association. Depending on the certification, you may have to pay for training, membership fees, a background check, and application fees. These expenses total around $200-$250 for certification, but I think this expense is worth it for the amount of credibility you gain.
Finally, in order to begin tutoring, you need to identify your area of specialization. Think about where you can add value, and consider the experience that you have under your belt. Is there a particular grade level or content area that you are skilled in?Â As you look for your specialization, consider the subject areas in which tutors are in high demand: English, Math, Science, Test Prep, and Study Skills. And remember, each of these subjects can be broken down into sub-categories like Algebra, Chemistry, reading comprehension, SAT and ACT preparation, etc. Once you have identified one or two specializations, you’re ready for the next step.
8 Steps To Starting Your Own Tutoring Business Online
Step 1: Make A Business Plan
Strong businesses start with a strong plan. A business plan is a written description of your planned business and business strategy. It’s your vision of how your business will be organized, how it will operate, and how it will be profitable. You can find lots of information online about writing a business plan. Your local chamber of commerce and government economic development agencies likely also have resources you can use.
A typical business plan includes:
Sales & Marketing Strategy
Organizations & Management Team
Once you have a basic idea of how your business will operate, it’s time to calculate your starting costs. Do you need to purchase materials or teaching aids? Will you be paying for website building software or a web host? Do you need to purchase any hardware or software, or perhaps buy business insurance?
Since your business is just getting started (and since you will probably be the only employee for a while), your business plan does not have to be incredibly in-depth. Mostly, you should use this plan as an opportunity to set goals, create your marketing strategy, and predict your business expenses.
Step 2: Perfect Your Computer Setup
Your next step is to set up your classroom. Find a place in your home to conduct your online tutoring. You should look for a location that’s away from the noise of the house and has plenty of light. Then, position yourself so that there is a clean, neutral background behind you in video calls.
You should also make sure that you have all of the technology you need to begin online tutoring. You, of course, need a computer and a strong internet connection. You should also have a webcam and a functional microphone (even if it’s just the microphone built into your laptop). In addition, we recommend purchasing a tablet or digital drawing pad and stylus that you can use with a virtual whiteboard software. These tools make it easier for you to illustrate and share concepts with your students from a distance.
Step 3: Find The Right Tutoring Software
Once you have your hardware figured out, you should select your software. You should consider purchasing the following types of software:
Video Calling Software: Find a video calling software like Zoom or Google Hangouts that allows you to schedule meetings in advance and then send meeting links to your attendees via email. You should also look for the ability to share your screen as you will likely want to use this tool to make demonstrations in your tutoring.
Virtual Whiteboard Software: Virtual whiteboard software allows you to draw, write, and diagram on a digital whiteboard. All you need to use the software is a mouse, but using a tablet or a digital drawing pad and stylus (like Wacom Intuos) gives you even better control. A few virtual whiteboards you should check out include Ziteboard, Â IDroo, and Scribblar.
Document Sharing Software: Consider using the free tools that Google provides to your advantage. Google Docs is an excellent tool for sharing documents, editing simultaneously, and making comments on specific pieces of a document. Google Classroom further expands these tools. Using Google Classroom, you can create a central hub of information for your students. Here, you can add resources, assignments, and rubrics. You can use quiz features to help students assess their learning. Google Classroom stores students’ work indefinitely, making it a great way to keep track of student progress over time.
Step 4: Set Your Rates
As your own boss, you get to decide on the rate you charge for your services. Rates vary dramatically from tutor to tutor, and they typically depend upon your education level, the subject area that you teach, and your students’ specific learning needs.
Typically, tutoring rates fall somewhere between $20–$80 an hour.
Tutors who charge the highest rates are those who teach in-demand subjects that require significant experience and familiarity, like SAT prep, and high school and college-level math and science. Tutors who have training and experience working with students with special education needs also typically charge higher rates.
Unfortunately, hourly rates tend to drop when you tutor online instead of in-person. This is primarily because tutors are not limited by location, which makes the online tutoring market much larger with more available tutors. On the other hand, when you tutor online, you eliminate any expenses related to travel and you don’t have to rent out a space for tutoring.
I’ve seen information that suggests that the average rate for online tutoring is $20–$30 an hour, although you can certainly charge more based on your education level and experience.
As you think through your pricing rates, you should look into the rates that other tutors in your content area charge. Then, you should take into account your anticipated business expenses (pricing for any required software, self-employment taxes, and the time you spend preparing for each tutoring session). Using this information, you can set your own pricing range.
Step 5: Register Your Business
In many cases, registering your business is technically optional.
Tutors who decide to operate as a sole proprietorship or partnership do not need to do anything to register their business. Essentially, the business is an extension of its owner. Sole proprietorships are easy to set up, and typically in a sole proprietorship, taxes are simpler than they are with other forms of incorporation. In a sole proprietorship, when you go to file taxes, you file your business taxes and personal taxes together. You will have to pay self-employment taxes on your earnings. In addition, sole proprietorships do not come with the liability protection that is part of many other types of business structures. You are personally liable for any debts your business takes on.
Other forms of incorporation require more time to set up and come with their own advantages and disadvantages.Â Here are the most popular ways to incorporate:
Limited Liability Corporations (LLCs): Aside from setting up a sole proprietorship, many tutors find that establishing an LLC is their next best option. LLCs offer limited liability protection for their owners, and they are not as complex as a corporation. Each state has its own rules for what it takes to start an LLC, and you don’t necessarily have to register your LLC in the state where you’re doing business (although you generally should). Like with a sole proprietorship, LLC owners report their business earnings and losses on their personal taxes.
C-Corp:Â In a C-corp, shareholders are considered the owners of the company, and they receive limited liability protection. However, at the same time, business decisions are made by corporate officers who may or may not be shareholders. In a C-corp, taxed are filed separately from personal taxes, and shareholders pay income tax on dividends. In order to form a C-corp, you have to file articles of incorporation with your state.
S-Corp:Â S-corps are very similar to C-corps, but with a few additional restrictions: You have to have fewer than 100 shareholders, and they have to all be U.S. citizens or residents. Profits and losses are reported on personal taxes. Finally, in addition to filing your articles of incorporation, you also have to file IRS Form 2553.
Even if you decide to operate your tutoring business as a sole proprietorship, we suggest setting up a plan for separating your business finances from your personal finances. The easiest way to keep your finances separate is to create separate business checking and savings accounts. These additional accounts make it easier to track your profits and losses, and they can save you a ton of headaches when it’s time to pay your taxes.
You should also consider filing a DBA (Doing Business As), Trademark, or Entity Name for your business. Filing a business name allows you to operate your business under its own name, instead of your legal name (Math Works as opposed to Sandy Davis, for example).
Step 6: Establish A Web Presence
As an online tutor, it’s crucial that you have a strong online presence. There are a few ways you can go about building your web presence:
Create A Website: It never hurts to have a sleek, attractive website. Developing your own website adds credibility to your business and can help build hype for your services.Â Luckily there are user-friendly and cost-effective website builder tools that you can use to set up a site in a matter of days. Some of these tools (such as Wix) even provide appointment scheduling tools that you can use to allow your clients to book–and pay for–their tutoring sessions online.
Set Up Social Media: Set up business accounts on the social media sites that your clients use most frequently (Facebook and Instagram are good places to start). Make sure you include important information like your subject areas and a link to your website. You should also encourage reviews on your Facebook page, so parents and students can leave testimonials, improving your credibility.
Create A Yelp Page: If your business doesn’t already have a Yelp page, now is a good time to set one up. Adding a page on Yelp encourages more clients to leave reviews, and it can help direct new potential clients to your services.
Check out these top website builders:
Hosted or Licensed
Templates & Themes
Compatible Credit Card Processors
$14 – $179/month
Go to Site
Free – $29.90/month
Go to Site
Free – $25/month
Go to Site
Go to Site
Step 7: Choose A Payment Processing Solution
In order to accept payments online, you’ll have to integrate with a payment processing solution.
Payment solutions fall into two categories: Payments Service Providers (PSPs) and merchant accounts. PSPs are typically easier and faster to set up, but they are also known for having account stability issues. Many PSPs accept merchants almost immediately, and then upon review decide that certain merchants are too high-risk to use their platform and freeze their accounts. Merchant accounts, on the other hand, take longer to set up because there is an initial review process. This makes merchant accounts more stable (you are less likely to have your service revoked). Merchant accounts also allow you to negotiate the rates that you pay for payment processing. In order to process online payments with a merchant account, you need to find a payment gateway, which is an integration that allows you to connect your website and your merchant account.
Here are a few payment processing solutions that might work for you:
Payment Service Providers: PayPal is one of the most widely accepted PSPs out there, and it is a familiar payment option for your clients. Another good PSP is Square. In fact, Square includes appointment scheduling features, so your clients can schedule sessions and pay for services at the same time.
Built-In Payment Processors: Some website builders come with their own in-house payment solutions. One of these options is Wix Payments for Wix users. Built-in payment solutions are great options for quickly setting up a payment method.
Merchant Accounts: Although merchant accounts often take longer to set up, for some merchants the initial investment is well worth it. We particularly like Fattmerchant and Payment Depot.
Step 8: Market Your Business
Once you have your website and payment method set up, it’s time to start marketing your tutoring business! Your marketing strategy should take into account your current network and your intended audience. Here are a few methods you can try:
Email Marketing: If you already have a large personal network, make sure to notify them of your new business. Use email marketing software like Constant Contact or Mailchimp to reach out to family and friends with information about your tutoring services.
Social Media Marketing: Use your personal and business social media accounts to announce your business. One great way of gaining new clients with social media is to put out free content that anyone can view or download. Upload or link your favorite learning resources, and create a few videos to show how you prepare for a tutoring session. Sharing these resources and videos demonstrates your personality and teaching style. It can help build your reputation and make you appear more approachable.
Post In-Person Flyers: Place fliers with tear-off tags on bulletin boards in libraries, churches, schools, gyms, and daycare centers. Think about where parents of school-age children might be, and get your fliers out there! Be sure to always check with management before posting your fliers, of course.
Offer Free Consultations: Consider giving new potential clients an opportunity to meet with you for a free initial consultation. It’s a good idea to include parents in this initial conversation.
Share Customer Testimonials: Ask happy clients for a positive customer review, and then use that testimonial to your advantage. Word-of-mouth goes a long way. Make use of it in any way you can.
How To Fund Your New Online Tutoring Business
New businesses often find themselves in need of capital. If you’re facing startup costs and wondering how to address them, here are a few options:
If you have some liquid assets saved up, now might be a good time to use them. By using the money you’ve already saved, you eliminate the risk associated with debt and you ensure you won’t be losing additional money on interest. That said, you take a risk by using your personal money to finance your business. If your business fails, you lose that money.
One of the easier–and riskier–ways to fund your startup expenses is with personal or business credit cards. Credit cards allow you to access credit quickly and apply it to many different types of purchases.
You should keep in mind, however, that credit cards charge high-interest rates on any balances you carry from month to month. This makes credit cards a good option for purchases you can pay off quickly, and a potential problem for ones that you can’t.
Note: Avoid taking out cash advances on your cards unless absolutely necessary. They come at a very high cost.
Although traditional business loans are not an option for some new businesses, you can often use a personal loan to cover some of your startup expenses. These loans can be easier to get when you’re first starting out.
The downside of a personal loan is that you don’t get the liability protection you’d have if you applied as a business. You may also be more limited in terms of the amount of money you can take out. Still, if you need a little money to get started, it’s not a bad option.
Grants might be the closest thing to “free money” we have in the real world. Grants are often highly competitive, and they require businesses to complete a fairly involved application process. As you consider your options, you should factor in the amount of time you spend applying for a grant. And, you should take into account the likelihood that you will not be selected for that grant.
If you need some advice on where to look for grants, check out our feature on the topic.
ROBS stands for Rollovers as Business Startups, and they areÂ extremely niche products for entrepreneurs with retirement accounts like 401(k)s.
For a fee, a ROBS provider allows you to use money from your retirement account to pay for startup costs without incurring any tax penalties for accessing retirement funds early. Like with personal savings, with ROBS, you are risking your own money. ROBS is probably overkill for most new tutoring businesses, but it is a good option to keep in mind.
Go Out & Start Your Online Tutoring Business
Does tutoring from the comfort of your own home sound like your dream job? Tutoring can be one of the most rewarding and profitable small businesses to start. And with minimal start-up costs and very few steps to getting started, you can get begin tutoring in very little time!
That said, as with all new business ventures, you should approach your online tutoring business with a strategic mindset. Take your time, decide on a niche, gather all the tools you need, and work towards building a positive reputation in your social network. Now is a great time to enter the tutoring market. So get out there, and get teaching!
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The post How To Start An Online Tutoring Business: Prerequisites & 8 Steps To Success appeared first on Merchant Maverick.
When was the last time you used your Wells Fargo card? How about your USAA card?Â
No, this isn’t a trick question.
If we asked when was the last time you used your Visa or Mastercard, you’d probably be able to answer right away. Given that the banks’ names are printed on the cards at least as prominently as the brand names Visa or Mastercard, why is it that people think of these cards by their brand names instead of the banks’ names? Especially–at least for Visa and Mastercard–since cardholders only deal with the banks that issued these cards instead of the card brands themselves. And why is it that Discover and American Express work differently? (Do they work differently?)
These questions probably don’t keep you up at night.
But, if you’re ever curious about what these card networks, card associations, or card brands are and what these entities actually do (other than make you pay fees of various sorts), you’re at the right place. We’ll explain what card networks are, give you a little history about each, and provide a general framework for understanding how they fit into the business of credit card processing.
At the end of the day, we hope that this article will at least explain why merchants are charged pesky fees for taking these cards. So, grab some coffee and read on!
What Is A Credit Card Network Anyway?
Major credit card networks around the world include Visa, Mastercard, China UnionPay, American Express, Discover, and JCB (Japan Credit Bureau). But this doesn’t really help you understand what a credit card network is. So, let’s go into a little more detail below.
What Do They Mean By “Network”?
Let’s clarify the term “network” before we start. Typically, a network is just a group of entities that have some sort of relationship with each other–think social networks or computer networks. For this article, by default, we use the word network to mean a group of entities that participate in the credit card processing workflow. Usually, this means each entity has some sort of contractual obligation with another entity in the workflow.
Note, though, that the credit card associations also maintain advanced computer networks, which they rely on to process credit card transactions. In fact, some of them even want to be known as technology companies that just “happen” to work in the payments space.
A Credit Card Network Can Be Analogized As A Franchisor
If you’re familiar with the franchise business model, then you already have a fairly intuitive understanding of what credit card networks do. In this analogy, Visa and Mastercards are like franchisors, the banks that issue the cards are franchisees, and the consumers who use the cards are the customers. Following this analogy, American Express and Discover would be like franchisor-owned stores that work with customers directly.
In the franchise model, both the franchisor and the franchisee enter into a long contract setting out a complex set of rules for the franchisee to follow; the same goes for card networks and issuing banks. The franchisor changes these rules from time to time and enforces them, just as card networks change and enforce guidelines. The franchisors also have other obligations, such as marketing their service to the general public –that’s why they are better known to the general public than the franchisees. You know there’s a McDonald’s in your town, but you probably don’t know or care who’s running it. Likewise, you know you have a Mastercard, and that’s the most pertinent piece of information; the issuing bank may seem irrelevant.
Of course, real-life is far more complex, and this analogy doesn’t cover a lot of what the card networks do. But, hopefully, it gives you a quick, general framework to go back to if you get overwhelmed. For a more detailed explanation of what a card network does, read on to find out.
How Does A Credit Card Association Fit Into The Credit Card Processing Work Flow?
There are a lot of players in the credit card processing business, and each player occupies a unique spot in the overall business model. Here are the major players:
The issuing bank
The acquiring bank
The card networks/card associations
Once a consumer uses a card to make a purchase, whether at a physical store or online, the following process begins:
The card information is encrypted and transmitted from the merchant to the processor.
The processor determines which acquiring bank is associated with the merchant. Note that sometimes the processor is the same as the acquiring bank, but often it is not.
The payment information is sent to the correct acquiring bank.
The acquiring bank sends the information to the correct credit card association–i.e. Visa, Mastercard, Discover, or American Express.
The card association matches the consumer with the correct issuing bank and often performs some fraud checks. If the card purchase is a tokenized purchase, the association further matches the token to the actual, primary card number (PAN) and forwards the information to the issuing bank. With Discover and American Express, they are their own issuing banks, so this step is skipped.
The issuing bank checks the credit availability of the cardholder (and potentially performs additional identity verification checks), and either authorizes or declines the purchase.
This message is transmitted to the acquiring bank directly. If the purchase is authorized, the acquiring bank releases the funds to the processor, which, in turn, releases the funds to the merchants in a proscribed time period.
The money owed between the issuing bank and the acquiring bank is settled later.
The cardholder pays the issuing bank back at a later date.
As you can see, card associations do have a role in the transaction process flow. And for this, they wish to be paid.
Are Credit Card Networks The Same As Debit Networks?
This is actually a fairly tricky question. We have an entire article explaining how debit and credit cards are related, but below is a quick summary.
There are two types of debit transactions: PIN debit and credit-based debt. For a PIN debit, once the transaction information reaches your processor, it’s routed through a different computer network than a credit-based debit, and a different payment procedure is followed. A credit-based debit transaction is routed through the credit card network, but the money is pulled out of the cardholder’s account almost immediately (much like a PIN debit transaction), instead of waiting for the cardholder to pay at the end of a credit card statement cycle.
Just to complicate matters, some card associations own debit networks too. For instance, Discover owns the PULSE network, which is an ACH debit network. But, to answer the question posed by the subheading, under some circumstances, a credit card network can indeed be used as a debit card network.
Meet The Major Credit Card Brands
For this article, we’re going to focus on the four major credit card brands in the US: Visa, Mastercard, American Express, and Discover. We limit our discussion to these four US brands because they all have a substantial international presence and our readers are mostly in the US. Just be aware that there are other card brands doing business in other parts of the world, the most noteworthy of which is China’s UnionPay (it’s the third-largest card network in the world, behind Visa and Mastercard).
Regardless of the actual name of the card brand, they all work in a substantially similar way as the card process flow presented above.
Visa is the oldest modern credit card brand. It started in 1958 as a part of Bank of America, and it was called the BankAmericard. Bank of America operated the business exclusively until 1966, when it started to license the program to other banks. In 1970, Bank of America transferred control of the program to a consortium of banks. In 1976, the entity was renamed Visa, and the name continues today.
Visa started to electronically authorize and then clear and settle payment card transactions in 1973. Today, Visa has four data centers around the world handling credit card transitions in Virginia, Colorado, London, and Singapore. In 2018, it processed over 188 billion transactions through its worldwide computer network. Its products include debit, credit, and prepaid cards, all under the Visa brand name.
Mastercard traces its origins to 1966, when a group of bankcard associations joined together to form the Interbank Card Association. At first, this was a loose association with weak brand recognition, so in 1969, the association rebranded itself as Master Charge. The brand became a global brand when it entered the European market in 1968. In 1979, the association changed its name to Mastercard.
In 2018, Mastercard processed 73.8 billion transactions. In addition to its credit card processing business, it also has debit and prepaid cards under the brand. Mastercard prefers to be known as a payments technology company, and, as such, has invested heavily in its computer network around the world.
American Express started as an express mail company in 1850. A little over 100 years later, in 1958, it started its charge card business. Today, charge cards are only a portion of American Express’s business, but, because this article focuses on payment card brands, we will limit our discussion to charge cards only.
Somewhat different from the other card brands, the American Express card is a charge card. This means that the cardholder must repay the entire charged amount by the due date instead of having the option of only paying a portion of the amount at the end of the billing period, like a credit card.
American Express is the fourth largest card brand in the world based on purchase volume, behind China Union Pay, Visa, and Mastercard. The American Express business model differs slightly from the Visa and Mastercard models. American Express typically acts as its own issuing bank and acquiring bank. There are some exceptions, however.
Under the OptBlue program, merchants who process under a specific dollar amount can sign up to process American Express through a processor. Once they process over that limit, though, they must enter into a direct contract with American Express, so that American Express becomes both the processor and the acquiring bank for the transactions. Recently, American Express has also started to allow a small number of banks, like the Bank of Hawaii, to issue American Express cards. So, while there are some exceptions to the rule, American Express continues to be its own issuing bank and acquiring bank under most circumstances.
Of the major branded payment cards, Discover is one of the youngest. It was introduced by Sears in 1985, and even from the start, it had just one issuing bank: the Greenwood Trust Company (now called the Discover Bank). Discover issues its own cards and maintains a direct relationship with most of its customers, servicing them through the Discover Bank. There are some third-party issuing banks that work with Discover, but these are in the minority.
Generally, for small and mid-sized merchants, Discover works through third-party acquirers/processors to process card charges. However, it does maintain a direct relationship with large merchants, and in those cases, Discover serves as both the issuer and the acquirer in the payment card process flow.
In 2018, Discover processed 6.8 billion transactions, 2.5 of which were on the Discover Network and 4.4 on the PULSE Network (ATM debit transactions). In addition to its credit and debit card business, Discover is a full financial services company, providing traditional direct banking services (e.g. student loans, mortgages) as well as payment processing services.
Credit Card Brand VS Credit Card Issuer
So are the credit card brands the same as credit card issuers? From what’s already been covered above, the answer necessarily must be: maybe.
A credit card issuer is typically a bank that works with a consumer to get a credit card–in a way, giving the consumer a personal revolving line of credit that can be paid back immediately or later (if later, typically with interest). It is the issuing bank that lends the money to the consumer for the card purchases. The card brands typically have nothing to do with lending (this is always the case with Visa and Mastercard).
The card brands set certain pricing (i.e. interchange fees and card brand fees) and make certain rules that the issuing banks, acquiring banks, processors, and merchants must follow. Failure to follow the rules means that the card brands can stop doing business with you, effectively shutting you down.
Things are slightly different with American Express and Discover. Each of these companies is a large financial services company that owns both a card network business and a bank business. In most cases, they use their own banks to issue cards and lend money to consumers, but they also use their own network (business network and computer network) to process the card transactions. So, American Express and Discover are both their own card brands and their own issuing banks.
What Do The Credit Card Associations Do?
Now that we’ve generally described the credit card associations’ place in the payment transaction workflow, let’s look in a little more detail of the major duties of credit card associations.
Determine Individual Card Brand/Network Rules
You may or may not know that each card brand has a thick book of rules and regulations you must follow as a merchant. Your contract with your processor typically will say that if you do not follow these rules, they can terminate your contract. You might even be put on the MATCH list for violating some of these rules.
What is alarming is that these rules are not uniform, so the Visa rules can differ from the Mastercard rules which can differ again from the Discover rules. These rules are there to ensure that all merchants who accept a particular brand of card act in the same way, with the same level of service. Naturally, this doesn’t always make your life easier.
The rules aren’t all bad, though. The financial services industry is highly regulated by governments around the world. As a small business owner, it’s very difficult for you to keep up with changes in these laws. However, generally speaking, if you follow the card brand rules, you should be able to stay well clear of any legal violations, at least as far as payment processing is concerned.
Though these rules can be complicated, the one big thing you should always keep in mind is to always treat the card brands the same–whatever procedure you use when taking one type of card should be used for all card brands you process. Other than this, do some quick research on the internet before you make any process changes, to stay on the safe side.
And be sure to search our site. We try hard to point out anything in the rules that may pertain to things you might want to implement, things like a minimum charge or a convenience fee. Reading our articles might save you time and headaches in the future.
Determine Data Security Standards
Another fairly important thing the card brands do is to make and implement the data security rules that govern the secure storage and transmission of payment card data. To do this, the four card brands, plus JCB of Japan, started the standards-making organization called the PCI Security Standards Council. Today, the council includes many other members, and they meet periodically to improve on existing rules and agree on new rules.
The PCI security standards cover only the transmission and storage of cardholder and/or sensitive card authorization data, but they do this from end-to-end. So, the standards cover things like what sort of data encryption schemes to use when transmitting card payment data, what sort of hardware security minimums are required on a credit card machine, what security requirements are needed for a physical payment card, and even what sort of employee access restrictions should be instituted if a merchant wishes to store card information on-premise.
While these security standards cover a lot of ground, there are items that they do not cover. For instance, the standard does not mandate any sort of technology to actively detect fraud. Instead, fraud detection software is privately run by processors or the card associations, and if fraud is found, the merchant would be notified.
In addition to the PCI Security Standards Council, the card networks also participate in other standards-making organizations related to data security, organizations like EMVCo, which we will cover in a separate section below.
Set Interchange Rates
If you are familiar with the credit card processing business, then you know that the interchange rates are rates that you cannot negotiate with your processor–it’s their cost for processing each card, passed down from their own service providers. A large portion of the interchange rates go to the banks, but it is the credit card associations that set them. This way, the multiple banks that take part in the payment card processing business are all compensated in the same way.
Even in the earliest days, computer and computer networks held prominent roles in the credit card processing workflow. Starting with VisaNet in 1973, a lot of the authorization, clearance, and settlement was processed over networks privately operated by the various card brands. Today, computer networks are so important in the payment processing workflow that Visa and Mastercard think of themselves as technology companies instead of financial services companies.
If you read their websites, you might think that the card brands built and operate the entire credit card processing network, but that’s not true. The fact is, while credit card associations do operate and maintain a very important part of the processing network, other entities (like the banks) also own and maintain hardware and software connected to this network. Still, the portion owned by the card associations directs traffic and routes different information to the appropriate banks, so they do function a little bit like the nerve center of the network.
Today, a processing request can be transmitted from the merchant to the issuing bank (and go through all the entities along the way) and back again in the blink of an eye, all thanks to the payment processing computer networks that the card associations helped build.
Preventing & Detecting Payments Related Cybercrimes Through Technology
As touched on earlier, the card associations form the PCI Security Council, but the council’s job is limited–it only works on rules that would prevent unauthorized access to the payment processing network. The card associations, however, do a lot more than that. They each have sophisticated hardware and software that help detect and prevent cybercrime. To do so, they analyze large sets of data to detect patterns that suggest fraud, data breach, use of stolen cards, and other unusual activities.
Tokenization is another example of how the card associations use technology to prevent cybercrimes. Every card association has its own way of generating a token, but lately Visa, Mastercard, and American Express have worked together on a standard for creating tokens. They have submitted a preliminary proposal and are working with EMVCo. to finalize the standard. (Discover has not joined this standard-setting effort.)
So, in addition to the more visible PCI security rules, the card associations work on other security matters as well.
Last, but not least, the credit card associations advertise their cards to increase consumer awareness, as well as use. As a result, consumers know the card brand names better than the issuing banks’ names.
As an example of marketing decisions that affect how a card network operates, Mastercard/Master Charge only came into being because consumers were confused by the weaker trademark Interbank card. When the association learned that the consumers didn’t see Interbank as a strong, unified brand, they changed their name to Master Charge for better uniformity. Today, the brand name Mastercard is known throughout the world.
Accepting Different Credit Card Brands Through Your Merchant Account
Years ago, some merchants only accepted Visa or Mastercard. Restaurants often only accepted American ExpressÂ because restaurants were given a lower interchange rate in exchange for taking American Express exclusively. Discover card, being the newest card, seemed to simply have had trouble with market penetration so that many merchants didn’t take the card.
This is no longer the case. Today, a merchant can accept all four major brands through most processors. Still, this is not always desired. For instance, some government agencies take only Visa or Mastercard because these brands offer an easy way to set up a convenience fee charge. If you are a merchant who wishes to take all four major credit cards, to be safe, be sure to confirm with your processor before you sign the contract.
How Do The Credit Card Networks Affect My Small Business?
By now, you should have a fairly good general idea of what credit card associations do, and how they affect your everyday business operations. The fact is that you, as a small business owner, probably have no direct contact with these entities — but what they do and what they decide directly affects you. Sometimes, these decisions force you to tweak the way you must run your business, but other decisions could benefit you or even keep you safe from violating financial services laws and regulations around the world.
At the end of the day, credit card associations are vital to how credit card payments work. We hope this article has given you a better understanding of what they do, and how they do it.
Credit card associations are not the only players in the credit card processing flow, however. If you’re curious about how other entities fit into the credit card process flow, we’ve provided links to other explanatory articles throughout, so be sure to check them out.
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