[meanguy]

I can echo the same treatment with two different merchant account providers across three companies. Didn't matter if it was a $10k month or a $1MM month or if the company was new or old--it was a constant battle. In one case it was only my personal credit rating (which happened to be spotless) that saved my business.

Yes, think about that. A merchant account -- where they hold your company's money -- relies on your personal credit score.

Anecdata: I had two chargebacks in five years of web software sales. Both claims were buyers ripping me off. I provided signed FedEx receipts for boxed software shipments and IP addresses/dates/times when the customer registered the software and downloaded updates. I ate the full cost (plus investigation and chargeback fees) both times. (This is "cost of doing business" and not an opportunity for a blog post, IMHO.)

From the post: "And thank god I made that [five figure] withdrawal when I did, because yesterday came the second phone call, informing me that a reserve would indeed be placed on my account."

I believe this action is what actually triggered the issue. If he paid the costs of running his business out of his PayPal account and took consistent monthly paychecks, it would have been far less of a flag.

Sucks that you have to do it, and we software types are famously short-tempered when it comes to dealing with real-world bureaucratic nonsense, but sometimes a bit of careful planning and playing the game wins the race.

[ios84dev]

Why would a merchant account provider have your personal social security number/be doing credit checks? Assuming its an incorporated C corp?

[dangrossman]

No merchant account provider will open a new account without the personal social security numbers of the principals. Otherwise you could defraud one bank then the next your whole life by simply forming a new LLC/corp each time for $100 a pop.

When a merchant is terminated for fraud, breach of contract or excessive chargebacks, they can be placed on the TMF (Terminated Merchant File) and MATCH (Member Alert to High-Risk Merchants) lists which all Visa/MC member banks have access to. The social security numbers of all the principals are added to that list, so that if they apply with a new business somewhere else, the bank knows they've previously been a principal of a business some other bank terminated, and the reason.

[tptacek]

Because merchant banks require them. Anyone can create any number of C corporations at any time. Merchant accounts are one of several business services that young companies can't set typically set up without somehow binding the contract to the business owners themselves.

[Silhouette]

Merchant accounts are one of several business services that young companies can't set typically set up without somehow binding the contract to the business owners themselves.

I've noticed a disturbing trend in this respect recently, with seemingly everyone from law firms to banks wanting personal guarantees from someone to back up the company. This practice should, IMHO, be prohibited by law, and this should be impossible to override via any contract.

The entire point of a limited company (in UK terms) structure is that you know you are running a legally separate entity, and everyone else knows they are dealing with a legally separate entity. Everyone should judge the risks they are willing to take and offer terms that factor in those risks accordingly. This is done to incentivise people to start new businesses where there may be some degree of risk, without having to risk literally the roof over their heads to do it, and is universally acknowledged to be in the interests of economic development, which is why every major economy in the world has a concept analogous to that limited company.

Checking the credibility of the principals and asking for things like business plans and company financial statements is all perfectly reasonable so that a potential business partner can judge the level of risk. However, allowing piercing agreements is simply a completely one-sided deal: the little guy is now back on the hook for all of the risk, yet still takes the hit on all the bureaucracy associated with running a formal company.

If such agreements were banned, the banks and lawyers and other high-powered services would still have to deal with other businesses or they'd have on customers. They'd just have to be more realistic about what they charged if they wanted to continue working with profitable customers in the long run.

[Edit: Incidentally, piercing agreements do not seem to be completely universal. We've seen some fairly unpleasantly one-sided terms while investigating payment services, frequently including things like requiring direct control of your main bank account so they can grab whatever they feel like whenever they feel like it, but not everyone has asked for personal guarantees (as opposed to a personal credit check) at least at the stage we've got to with them.]

[tptacek]

Banks already do ask for financials and corporate track record. You're required to stake your own credit when your financials are inadequate. You want that to be illegal? It's better than those companies not be able to obtain merchant accounts?

[Silhouette]

Banks already do ask for financials and corporate track record. You're required to stake your own credit when your financials are inadequate.

As far as I can see, those providers who require personal guarantees usually do so as a standard condition for almost any new business. Effectively, they consider everyone's financials to be inadequate.

You want that to be illegal? It's better than those companies not be able to obtain merchant accounts?

Someone would still offer the merchant account services to businesses who could demonstrate a reasonable business plan, because on balance they would make money from doing so. Most new businesses are not, in fact, going to experience a 30% chargeback rate four months after the original sale.

The banks obviously know that, they just want (as usual) to privatise the profits but externalise the risks/losses. I have no problem with prohibiting that kind of predatory behaviour. It's a potentially significant barrier to starting a new business, and with the global economy in its current state, allowing absurdly risk-averse banks to inhibit new businesses is exactly what we shouldn't be doing.

If the banking industry had a track record of assessing its clients responsibly and lending (or not lending) based on the results of those assessments and reasonable assumptions, I would be happy to cut them some slack. But we all know damn well that they aren't doing that. And if governments are going to pressure them just to lend to small businesses, they should certainly pressure them to provide basic services to businesses that are viable without relying on loans as well.

[tptacek]

If someone could make money by offering merchant services to businesses with no credit history, they'd already be doing it. No law requires banks to require personal credit checks for merchant accounts.

[marshray]

You're begging the false dichotomy here.

Insisting on personal liability for a corporate account is equivalent to denying the account to the corporation.

Bankers would prefer to have you sign away your first born children too (sounds like something out of Dickens). But we've made such practices illegal and there's no evidence that the money supply is suffering for it.

[tptacek]

Help me understand. What you're suggesting is that, simply by having paid a couple hundred bucks to incorporate, regardless of my personal credit, I should be able to establish a merchant account?

[ArbitraryLimits]

> one of several business services

Could elaborate on the other ones?

[tptacek]

Depending on the market, leases are another example.

If you think about this for just a second, you can see that incorporation can't possibly be a "get out of credit checks free" card.

[meanguy]

Requested it as part of the application. Perhaps I could have avoided the disclosure, but since a merchant account is effectively offering you credit (think about it) leveraging my personal rating yet incurring no liability was a pragmatic win.

The issue is that fraud prevention--like terrorism prevention--means the side that's doing the groping isn't going to tell you exactly what they're doing and why. This leads to a lot of confusion.

[rscale]

If you're a relatively small or young company, the merchant account providers often demand that a principal signs a piercing agreement and personally guarantees the account.

For the first few years I was in business my corporate credit lines were effectively personal credit lines that happened to have my company name on them.