We have been contacted recently by two of our merchants who have expressed concerns about when they should process a “backup guarantee”. A backup guarantee credit card is a credit card left on file with the agreement that if an invoiced account becomes delinquent, the credit card on file as a backup will be charged. Why not just charge the credit card at the time services are rendered?
Why You Should Not Invoice
The fact is, most Chosen Payments merchants operate small to medium sized businesses. Inc. Magazine characterizes 99.7% of all businesses in America as a small businesses. Small business is the backbone of the American economy. What this means is that most businesses are not in a financial position to be loaning money to their clients. Extending payment terms to your clients is considered loaning money. Loaning money is risky business. A risky business that should be left to banks, credit unions and savings & loan companies that specialize in loaning money.
Why Is It Considered Loaning?
Many Chosen Payments merchants are in the ground transportation industry so we will use that industry as an example to explain the loaning process. While it might not be the same as loaning your nephew $500 for a down payment on car, you are parting with your cash and waiting to get it back. Once a ride is complete, the ground transportation operator must pay to replace fuel in the gas tank. He must pay chauffeur wages, Worker’s Comp premiums, employer payroll taxes, a car wash and if the magic mileage number comes up, an oil change or other maintenance that must be paid for at the time service is rendered. All these expenses will be paid from the operator’s pocket and he will wait to be “reimbursed” when his client decides to pay. This is where tremendous risk is faced. When will the client pay? What happens if the client can’t pay? What happens of the client closes his business doors forever and disconnects his phone?
From The Funeral Industry
The funeral industry is another large market Chosen Payments serves. Many merchants should take heed from the way funeral directors operate. It may seem harsh but, Grandma is not going to be put in the ground until everything is paid for upfront. It is a common and reasonable method of doing business. They are never left “holding the bag” and sustaining a loss as they simply won’t complete the job until they have their money in hand.
Your Client Demands You Invoice
First of all, you run your own business so you get to make the rules. However, you stand to lose the account to someone who will invoice the client if you won’t. In this day of a rapidly growing cashless society, everyone has some form of credit card, debit card or PayPal. If they don’t, many credit card issuers such as Capital One can create a branded credit card program for your business. That means the credit card is issued to your client with your company logo. Instead of filling out a credit application from your company (you should have a completed credit application) they complete Capital One’s application and your client can simply use the branded card for all transactions and get a statement at the end of the month from Capital One. You don’t need to carry the debt or the risk. An example of a branded card would be a Shell Oil card. The card is actually owned by Citibank. Payments made on the account actually go to Citibank.