For your small HVACR business, plastic - credit cards, that is - may be the key to future growth. Today's consumer expects to pay for home repair items and services with plastic.

Here's the bad news. If your small business doesn't accept plastic, you've probably got more dissatisfied customers than you realize. Whether for convenience, security, loyalty awards, or just plain habit, today's consumers prefer to pay with plastic. They are ditching checks in favor of credit cards in record numbers.

Not offering your customers the option to pay with plastic means fewer customers and ultimately fewer sales for your contracting company. If your competitors accept credit cards and you don't, your customers may soon start doing business with your competitors.

Here's what is driving the trend towards plastic:

  • Credit card company muscle. MasterCard and American Express aggressively court consumers and small businesses with corporate card programs that offer tremendous benefits, like cash flow flexibility and bookkeeping support.

  • Instant credit approval. Businesses that pay with plastic can avoid lengthy credit approval processes. A valid credit card carries instant credibility and a credit line. There is no need to fill out a credit application.

  • Rewards programs. Credit card loyalty programs have become a big-time consumer addiction. Pay with a check and you get nothing. But, depending on the card, put the purchase on your card and you can receive frequent flyer miles and/or other rewards.

    From the perspective of a small business, accepting credit cards increasingly makes as much sense as using them for purchases. True, you have to give up a transaction fee to the credit card companies, causing less money to hit your bank account. The average fee usually runs between 2.5 percent and 5.5 percent of your sales. But the risk of getting stiffed on a receivable goes away. Once the credit card transaction is authorized, you know you will get your money. You don't have to wait 30 days to get it, either!

    If you're bummed out because you have been losing customers because your company doesn't accept credit cards, here's the good news. It's easier than ever to start accepting credit card payments.

    How To Accept Plastic

    The process of setting up your contracting company to accept card payments is neither mysterious nor costly. Here's what you do:

    Step 1. Get ready to apply for merchant status. You must establish merchant status with each of the credit card companies you want to accept. American Express and Discover issue their own cards, so you need to apply for merchant status directly with them. Simply visit their Web sites for application details.

    Visa and MasterCard are effectively brand names backed by an association. Their association membership consists of all the member banks who issue Visa and MasterCard credit cards.

    So, to start taking Visa or MasterCard, you must establish a merchant account with one of the several thousand banks that issue those cards, called "acquiring banks." You can do this either by going directly to the bank or by working with an independent credit card processor - a company whose only service is processing credit card transactions for small businesses like yours.

    Establishing a merchant account isn't always a slam dunk. When you approach a bank or an independent credit card processor, its fundamental concern is whether your company will go out of business before merchandise is shipped, in which case it would have to absorb the losses. Therefore, they will thoroughly evaluate your product or service to determine the potential for "chargebacks" - credit card terminology for funds returned to customers.

    If they don't deem your company worthy, sorry - no merchant account for you! Alternatively, they may ask you to put down a security deposit - money in the bank that you won't touch that they can tap into just in case your chargebacks outpace your account balance.

    Given that issuers are selective in allocating merchant accounts, it's important to approach your application as if you were applying for a loan. Be prepared to convince the bank that you are a good risk. You need to provide trade references, estimate the credit card volume you expect, and what you think the average transaction size will be. Bring your business plan, financial statements, and any marketing materials (catalogs, Web screen captures, and/or print advertisements).

    Be especially prepared to provide a reasonable estimate of how many chargebacks are likely. Satisfied customer testimonials and a demonstration that your product or service is priced at fair market value will help lessen their chargeback exposure concerns.

    Step 2. Shop around and compare. All merchant accounts are not created equal. Even though they may be the best for establishing a merchant account, don't limit your choices to the bank that you currently do business with. Do your homework and shop around. Taking charge of this process by knowing what is expected and knowing your options will put you into position to recognize and negotiate a better deal.

    If you find that nobody is offering you a merchant account, find companies that are similar to yours that accept credit cards and ask them how they do it. If they can do it, you can, too.

    When an issuer's representative offers to set you up with a merchant account, compare the services, fees, and terms they offer with those of other independent credit card processors and banks. Evaluate the hardware or software they provide; would it work for your business?

    Always ask, "Is this the best deal you can give me? Is there anything I can do to get a lower rate?" You'd be surprised how willing some issuers are to negotiate.

    In some cases, great terms really are too good to be true. The Internet is littered with "Accept Credit Cards!" offers from questionable firms, so ask other small businesses and your accountant for referrals.

    Step 3. Don't forget your backend accounting system. A very important aspect to consider is whether the transaction equipment or software you will use to accept credit cards will integrate into your company's computer system and accounting procedures.

    Most card acceptance equipment is easily linked with small business accounting software. In some cases, software vendors will even set you up with a merchant account, usually via a third-party relationship they have in place. For example, small business management software vendor MYOB offers a Merchant Account Service that makes it easier to process credit card sales directly from its software. Credit card transaction settlements are automatically and accurately reflected in daily cash flow and invoicing procedures. Peachtree and Intuit's Quickbooks - two other desktop accounting software vendors - offer similar services.

    Avoid a scenario in which you start accepting credit cards and then have to manually key credit card sales into your accounting system. That is a recipe for disaster; the potential for error is very high.

    Step 4. Start accepting credit cards. Once you've established your merchant accounts and wired up the equipment and/or software that you'll use to process the cards, you're ready to let your customers know. Put appropriate credit card logos on your business's front door, invoices, and Web site. You can get those logos from the processing companies.

    The bottom line is that all customers expect to pay via plastic. Focus on the core goal of your business - giving customers what they want - by letting them pay the way they want.

    Charlie Jolie is founder and president of Small Biz Advisor, a small business consultancy based in Chicago. He has been involved in the accounting industry for more than 20 years and is an MYOB Certified Consultant (

    Sidebar: How The Plastic Process Works

    1. When a merchant makes a sale, swiping the card or keying in the numbers, the card number, the purchase amount, and the merchant identification code travel over the card processor's computer network. The card processor can either be a bank or a company that does nothing but provide card processing services.

    2. The transaction information then goes to a credit card computer network. If the customer is using Visa, for example, the transaction will go to Visa's network.

    3. From there, the transaction information goes to the bank that issued the card. The bank then checks the account and verifies that the customer has adequate credit to cover the purchase. The bank sends the merchant an authorization over the network.

    4. The sale is then complete, but the transaction is not - no money has changed hands yet. At the end of the business day, the merchant sends that day's charges, called a batch, to the card network for processing. Individual transactions are sorted out and sent back to the individual cardholders' banks.

    5. In a process called settlement, banks debit cardholders' accounts and make appropriate payments to the merchant's credit card processor through the Federal Reserve Bank's Automated Clearing House.

    6. The card processor then credits the merchant's bank account for the transaction amount, minus its fees for the transaction. Those fees also go toward paying transaction fees to the issuing bank and the credit card network.

    Despite the use of computers, it can take a few business days before your merchant account is credited for credit card purchases.

    - Charlie Jolie

    Sidebar: What About Debit Cards?

    Debit cards, also called check cards, look exactly like Visa or MasterCard credit cards but function differently. Debit cards draw money from a bank account, rather than receiving a line of credit like a credit card.

    Debit card transactions are processed via different computer networks and thus usually require slightly different point-of-sale equipment. But, in contrast to credit card transactions, the money arrives in your account right away.

    - Charlie Jolie

    Sidebar: How To Evaluate Processing Fees

    When evaluating whom to work with to set up your merchant account, you want to examine rates, fees, and equipment costs.

    Transaction rate. Each transaction costs a little bit of money to process. But the "merchant discount rate" - the percentage taken from each transaction - can vary markedly. The bank or processor will base this rate primarily on projected card sales volume (high sales = lower rate) and their calculation of the risk you pose for chargebacks. Make the case that you deserve a lower rate.

    Other fees. These details can be devils. Banks and processors often load their agreement with fees that seem insignificant when you are deal shopping but may prove painful later. There may be chargeback fees of $50 per returned transaction, startup fees up to $200, per-transaction communications costs of 10 to 20 cents, batch fees up to $10 per month, a postage fee for sending statements, a voice authorization fee, and even a supply fee for charge slips.

    Also, don't forget that your telephone company may charge you to set up a phone link for the authorization and processing equipment. Be ready.

    Equipment costs. The equipment necessary to accept credit and debit cards varies in complexity and price, and small business owners must decide whether to lease or buy. Equipment can range from the most basic array of a telephone and a $30 printer, up to state-of-art, point-of-sale equipment that provides instant authorization. Generally, most firms buy point-of-sale card swiping equipment that provides instant authorization and costs up to $1,500.

    Leasing that equipment is costlier in the long term, but allows the company to better evaluate whether it meets their needs and also upgrade as the technology improves.

    - Charlie Jolie

    Publication date: 02/14/2005