Best alternatives for a high risk merchant account’s personal guarantee are the business’ financial strength, a letter of credit and a reserve.
It is hard for a business to acquire a merchant account especially when the business is dealing with risky financial transactions or dealings. Most merchant account providers require lots of requirements to check if the business is really suitable to have a merchant account. Applicants may also notice that in order to set up a merchant account, a personal guarantee is mostly required by an account provider. A personal guarantee is an important requirement for high risk merchant accounts simply because the providers only want to protect themselves from any financial burden brought about by high risk businesses.
There are times that business owners don’t want a personal guarantee when applying a merchant account. Below is a list of alternatives for a high risk merchant account's personal guarantee. All of these alternatives really work but it greatly depends on how it is used and the business' type or financial strength. Some merchant account providers may allow applicants to use most likely one of these alternatives.
Business’ financial strength
High risk merchant account applicants can use their business’ financial strength to support their business when setting up a high risk merchant account instead of utilizing their personal financial strength. This is most likely the first option of a personal guarantee. This is most applicable to business institutions with more experience doing business. That means that the business has been operating for a year or more, and with good documentation, prepared by a third party, about the business’ financial strength like the business’ financial statements and balance sheets.
Letter of credit
Providing a letter of credit is the second option for a personal guarantee. It is actually a document issued by the applicant’s acquiring bank (when requested) that will provide the account provider an assurance that they will receive an irretrievable payment from the acquiring bank at the time when the merchant account holder cannot fully meet his financial obligations of having a high risk merchant account. The account provider will only have to invoke this letter to receive the money which in turn makes up a loan in the account owner’s personal bank. The letter of credit will never be invoked as long as the account owner does not owe any money to their merchant account provider.
A reserve is the last option whenever the above two mentioned are not possible. To allow the applicant to process a merchant account without a personal guarantee, he may have to allow his account provider to hold some of his funds in reserve. In this way, the account provider already has the applicant’s money and they can get it whenever needed. The amounts of money the provider will hold depend on many factors and are held for six months or more after termination of the merchant account.