How does credit card processing work?

A full service merchant services provider will offer both credit card processing and cash advance solutions. Here are some simple points to help you understand how they work together. When a merchant signs up for an account, he or she uses their business checking account as the source of funding for the money they receive via credit cards. The funds are sent by the card-issuing bank (the bank that provided the customer's credit card) to the merchant services provider, who then deposits it into the merchant's checking account. Fees for this service vary depending on the provider, but are usually a percentage of each transaction plus a flat fee.

In order to offer credit card processing, a merchant needs to be approved by both the card-issuing bank and the merchant services provider. The provider will check the applicant's credit history and business financials to make sure they are a viable, low-risk customer. The provider also sets rates and fees that the merchant will be charged for each transaction.

Merchants who offer credit card processing can also offer cash advances to their customers. This is a short-term loan (usually no more than 60 days) that the customer can take out against the value of an approved credit card transaction. The merchant services provider fronts the money to the customer, and then takes the proceeds from the credit card transaction once it clears. Cash advance fees are typically higher than card-present rates, because there is additional risk associated with the loan.

Merchants who offer credit card processing without having an established relationship with their customers (those that don't usually need to perform a credit check) can also offer cash advances. This is ideal for businesses like beauty salons, spas and sports bars where customers don't have a pre-established relationship with their merchants. Businesses like these can earn extra revenue by having customers take out short-term loans instead of waiting to send the merchant their credit card transactions.

Merchants who offer cash advances and don't process credit cards (i.e., they only offer cash advances) typically don't have to go through a credit check. This is because the merchant services provider is assuming all of the risk by loaning the customer money.

Now that you understand how credit card processing and cash advances work together, you can see how they can benefit your business. By working with a reputable merchant services provider, you can offer your customers the convenience of credit card processing and extra cash while you earn interest on it until it's paid back.