[Silhouette]

If someone could make money by offering merchant services to businesses with no credit history, they'd already be doing it.

They are already doing it, every time a new business opens an account with them.

No law requires banks to require personal credit checks for merchant accounts.

I'm not talking about credit checks, I'm talking about a personal guarantee, of the "taking your house" variety.

[tptacek]

If it's possible to build a viable business offering merchant account services backed by absolutely nothing other than the creditworthiness of a brand-new corporation, why is nobody doing that already?

[Silhouette]

Because they don't have to. The negotiating positions are entirely one-sided, and since they command all the power, they can essentially impose arbitrarily harsh terms to any extent the law permits.

[tptacek]

I'm not sure you're following what I'm saying. That's probably my fault, for being terse. Even if the negotiating positions are "entirely one-sided" right now, that position leaves the door open for a competitor to capture market share by offering accounts without personal credit attachments. And yet nobody does that. That suggests one of two things: either (i) you can't capture much market share by offering easy terms for a merchant account (unlikely, to my mind) or (ii) you can't stay in business offering those terms.

[Silhouette]

Even if the negotiating positions are "entirely one-sided" right now, that position leaves the door open for a competitor to capture market share by offering accounts without personal credit attachments. And yet nobody does that.

Are you sure about that?

That suggests one of two things:

No, there are other possibilities. One is that the merchants assume that you're right and everyone is going to screw them the same way. Another is that they simply don't understand the profound legal implications of a couple of lines of small print and one more signature because, like most start-ups, they're trying to build a company and not paying lawyers thousands to review dozens of pages of terms sent by every financial service provider they've contacted.

[Spooky23]

Why would expose themselves to such obvious fraud?

The personal guarantees go away once your business is a going concern.

[Silhouette]

Sorry, what obvious fraud?

And if the personal guarantees are going to go away once the business is a going concern, there's no problem with writing a shut-off date into the contract to make this explicit from the beginning, is there?

[Spooky23]

You can anonymously acquire a Nevada shelf corporation in a week or two. If you were able to just setup a merchant account without a personal guarantee, you could then trivially rack up a significant volume of fraudulent charges without any recourse. (The bank would literally not know who you are)

If you are a real business, you will almost certainly change credit card processors anyway to get better payment terms as your volume increases. The last startup I worked for changed at least three times as our volume grew.

[Silhouette]

I think we're talking at cross-purposes here. I don't think any of us are suggesting that merchant accounts should be made available without any checks at all.

It's reasonable to ascertain the identities of those running the company. While I'm no expert on US law, certainly here in the UK company directors have some basic responsibilities for acting responsibly and so forth and could be on the hook if they've been severely negligent, so you have that the moment you're dealing with the company itself.

But the point of a piercing agreement seems to be to put the company's controlling people on the hook personally even if they aren't grossly negligent and the business just doesn't work out. The fundamental point of setting up an independent legal entity is to sever that connection, and I personally believe that everyone should treat negotiations accordingly.