This question comes up often from many merchants “Why do I have to sign a personal guarantee?” and it’s a valid good question. In this blog post I will try to shed some light on this merchant account subject matter.
Basically all merchant account providers will require that a personal guarantee be signed by the owner(s) before approving an account for credit card acceptance. Now I do know providers that will accept applications, but it requires 2 years worth of accountant ready financials (which most new companies obviously do not have) so any new company does not have this as an option and will have to make a personal guarantee to get approved on a merchant account.
Some business owners are justifiably reluctant to sign a personal guarantee, and I get that (and hear you loud and clear)… that is the point of having incorporations and limited partnerships, or other legal entities that are set-up to protect your personal assets from the business’s liabilities.
So what’s the big deal, right?
Well, what most Merchants do not understand is that these merchant accounts are consider short term loans (only with higher risk associated to them). A merchant account provider is at risk for every dollar that passes through the merchant account during a 6 month peroid.
Look at this scenerio:
Company ABC comes out with a new… I dunno… lets say a… MP3 Player for $50 bucks. During their first month, sales are over $50,000 and everyone in the company is excited. Because ABC Company feels they have a hit on their hands they take all remaining capital and toss into advertising to try to drive more sales to their new MP3 Player. Only 2 weeks later ABC company finds out their is problem with their player, a manufacturing bug that is causing almost all their MP3 Players to stop work a couple months after working.
ABC Company doesn’t have the cash to replace them because they dumped all their capital into the extra advertising so they tell customers that they are sorry, they won’t be able to honor the six month warranty that was included.
What do you think these customers who bought the MP3 Player are going to do…? That’s right – issue a chargeback. Then the merchant account provider will try debit ABC Companies bank account to recover the chargeback amount only to find out there is no money to be able to debit. Guess who is on the hook for all these chargebacks…? The merchant account provider, if… they don’t have a guarantee.
Hence why Merchants have to give a “Personal Guarantee” for approval on a merchant account.
You see Merchant Account underwriters have to determine what the risk factor is for each company and business. They look at projected sales and multiply that by 6 months because that is how long a card holder has to issue a dispute a charge (a.k.a. chargeback).
Yes the above example is a Merchants honest mistake, but it is still the merchant account provider that does not want to stuck holding the bag, if Merchant’s businesses goes bust. The above example even though the business made an honest mistake it could be taken the wrong way and they could end up on the TMF Match List. Merchant Accounts are very serious stuff – it’s not just as simple as apply for a credit card (which I think a lot of newbie business owners think).
These procedures are also set-up to prevent your typical fraudsters too. This is where they try to set-up a merchant account, sell stuff (or so they say), get paid by the merchant account provider within 48 hours and then skip town. The “Personal Guarantee” is to try to prevent fraud.
I hope this has shed some light on why a “Personal Guarantee” is required when applying for a merchant account. If not, please let us know your questions by using the comment section below.
