Ever sold old clothes or furniture on eBay or Facebook Marketplace? That makes you a merchant… at least technically. When most people use the term, however, they’re almost always thinking of retail businesses.
Regardless of size, any entity that sells goods or services could be considered a merchant. A small-scale solopreneur dropshipping items on Shopify is a merchant. A two-person bakery that takes in-store payments through Square is a merchant.
Of course, large businesses are also merchants. Defined by the US Small Business Administration as companies with over 500 employees, these firms range from regional enterprises like your city’s electric company to global distinct ways. Today, we’re taking a closer look at what merchants are and what they do. We also address merchant costs, and what it takes to become one. We also explain merchant accounts, risk management tools, and other parts of the process.
Before going any further, though, let’s start with a basic merchant definition:
[noun]/mər • CHənt/
A merchant is a business entity that sells goods or services, either directly to consumers or to other businesses.
In the broadest sense, a merchant can be any person or business that sells or trades goods or services for profit. A merchant may operate online, in the brick-and-mortar space, or a combination of the two. Essentially, if you take payments for goods and services, you can call yourself a merchant.
You don’t need a business entity to be a merchant. If you sell things for profit, you’re automatically in business as a sole proprietor. Technically, that would also include someone who sells an unwanted couch on eBay. But for our purposes, we’re going to focus on entities who sell on an ongoing basis.
Being a sole proprietor is the simplest form of merchant. As an unincorporated entity, you don’t have to file any paperwork, and you can use your social security number (SSN) to do business.
Your SSN may suffice if you’re running your business out of your personal checking account. However, to qualify for a merchant account or a business bank account, you will often need an employer identification number (EIN) – basically, an SSN for businesses.
As a best practice, however, you should consider separating your personal and business legal and financial obligations. You’ll want to establish a legal entity, which is like a box you use to put your business-related things in. Types of for-profit entity types include:
By default, corporations are taxed as a C corporation, which is double-taxed: both the shareholders and the corporation itself are taxed separately. Conversely, you can elect to file for S corporation status. This allows profits and losses to flow directly onto your personal tax return, avoiding double taxation.
Partnership arrangements, whether unincorporated or incorporated, are pass-through in nature. This means that profits and losses are not taxed at the partnership level. The same holds true for LLC businesses.
As a merchant, you’ll also be responsible for collecting and remitting sales taxes. These will differ at the city, county, and state levels. Certain items, such as cigarettes, also involve federal taxes.
Some states exempt certain professional services from these taxes, but if you sell physical goods, you should be prepared to collect and remit sales taxes. Many eCommerce platforms, like Shopify, for instance, offer sales tax solutions as add-on arrangements. Opting to sell through a merchant of record like Amazon or Etsy may allow you to automate sales tax collection.
The merchant of record is a provider that allows businesses to accept credit cards without having a merchant account. Its sole purpose is to hold credit card payments from your customers until the transactions can be cleared. A merchant without a merchant account is limited to accepting cash transactions only. Partnering with a merchant of record essentially hands over these chores to a third party, who will also be responsible for things like data security.
Alright. So, now that we’ve defined our terms, let’s dive into a bit more detail. Over the next chapters, I’ll take you through merchant responsibilities, costs you can anticipate being responsible for, how to get a merchant account, and more.
Merchants primarily exist for one reason: to sell products or services for a profit. Success depends on your ability to serve your customers. At the same time, you’ll need to forge mutually beneficial relationships with your buyers, suppliers, acquirers, and others in the broader marketplace.
Part of being a merchant is accepting the responsibility to treat all stakeholders fairly. That responsibility also extends to members of your community who aren’t associated with your business (but may be in the future!).
Read MoreIt’s nearly impossible to operate a modern business without accepting credit or debit cards. That capability, however, comes with a large array of processing expenses.
These include setup fees, transaction-based interchange fees, and various costs from acquirers. There will also be processor markups and potential early termination fees for merchant accounts. Finally, you may be looking at chargeback fees and other losses.
Read MoreWhether you do business in-person, online, or both, you’ll need the right technology. This includes hard- and software to help you with operations, plus manage your supplier, vendor, and customer relationships. Critical components of your tech set-up include point of sale (POS) systems, payment gateways, and processors for handling card payments.
Customer-facing eCommerce platforms will be required up front. On the backend, you’ll need to invest in inventory management software, fraud prevention tools, and reporting solutions. These will enable you to fulfill orders, keep your checkout environment secure, and confidently make data-driven decisions.
Read MoreA merchant account isn’t a bank account. It’s more like a sort of temporary holding account where money from credit and debit card purchases sits until the associated transactions are cleared. At that point, the funds are transferred to your regular bank account.
All businesses that accept card payments will need to have (or have access to) a merchant account. They’ll also need to comply with the strict standards and risk control that accompany such accounts.
Read MoreMerchants face a wide range of financial, operational, and reputational risks. Lost revenue, supply chain disruptions, and negative word-of-mouth, for example, can harm your prospects. Being labeled a low-risk or high-risk merchant can significantly impact the payment processing fees and merchant account restrictions you may face.
Using fraud prevention tools like 3-D Secure and machine learning — along with chargeback management tactics such as using alerts and clear billing descriptors — is key to preserving revenue and customer trust.
Read MoreWhile every business is different, the process for becoming a merchant is fairly universal. Assuming you’ve already decided on a business model and arranged for suppliers and shippers, you’ll need to consider your operational structure. This includes sources of financing, along with tax and operational challenges. Legal issues and technology decisions will also have to be handled.
To get off on the right foot, merchants should strive to avoid common pitfalls and make use of valuable mentorship opportunities and online resources.
Read More
The benefits of being a merchant are easy to see. Before getting started, however, you’ll need to do extensive research on the less obvious elements that also come into play.
Examples of merchants include consumer technology companies like Apple, wholesale clubs like Costco, and eCommerce merchants like Amazon. Smaller, locally owned businesses also qualify.
Other names for merchants include retailers, traders, wholesalers, vendors, suppliers, operators, or sellers.
Merchant services encompass a number of financial products and services that allow sellers to transact. Some examples include payment gateways, physical and virtual point-of-sale (POS) systems, credit and debit card processing services, mobile payment systems, and loyalty programs.
Being classified as a merchant means that you operate a business where you sell (either online or in-person) goods or services to other individuals, businesses, or both.
