Also known as third party credit card processors, third party credit card companies act as a go between for companies that wish to avoid the expense of setting up a merchant account with their bank or financial institution. Read on to learn who this affects.
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If you are a small merchant, a third party credit card company may be just the thing for you to handle your credit card transactions. You should examine what they do, and the pros and cons of using one before signing up though. Sometimes they are a good fit for your small business, sometimes not.
What does a third party credit card company do?
Third party credit card companies accept credit card orders on your behalf, do the processing, collecting, and makes sure your company gets paid. The merchant account they own has special rights to do this kind of business and they pay an extra fee to the bank they use.
Why would I need one?
If your small business cannot afford the monthly expense of having your own merchant credit card account, this can be a way to establish your business and accept credit card orders much more cheaply than you normally would be able to. It is a good tool for the startup company looking to minimize expenses starting out. Keep in mind that you will generally have to apply to different institutions when using your own merchant account for different cards you wish to use beyond the basic Visa and MasterCard. The merchant account your financial institution offers may not cover a Discover card for example.
What are the benefits and costs associated with using one?
In addition to giving you a major payment option to offer your customers, the third party company takes care of all processing fees the bank or financial institution levies each month. All the overhead associated with the bookkeeping is also something you avoid. You will not have to buy and maintain a secure server to handle the credit card transactions, nor would you have software costs or additional gateway fees your Internet provider will charge you.
They will be able to immediately allow you to accept debit and credit card transactions for your goods and services. These companies vary in what they offer in the way of extras, they tend to focus on a particular type of small business and offer perks to the users they are trying to attract. It pays to check out the extras and see which companies have things that benefit you the most.
On the down side, you will be paying more per transaction than you would be if you had your own merchant account. This will always be an option for you down the road as your business grows and you can better afford to have your own merchant account. Typical costs per transaction range from 2 – 3% for some companies, others will charge more, sometimes as high as 15% of each sale. The fee structure usually involves a set fee per a set amount of monthly transactions and the small per transaction fee.
Additionally, charge-back disputes are more of a problem with these companies than if you had your own merchant account.
If I need something like this, do I need it long term and when would I be better off not using one?
Third party credit card companies are best suited for long-term use by a small merchant who plans to stay small. If your business is doing less than about $5,000 per month, you will probably be better off using a third party company. In addition, they are better suited for merchants whose products have a high profit margin per unit and thus absorb the higher per sale cost that the third party company entails.
Above $5,000 per month in sales would be a good point to do a cost benefit analysis and see what it does to your company’s bottom line to switch over to a merchant account of your own. The larger you are, the more money there is to be saved by having your own merchant account.
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