If you've ever shared your merchant account with another company, even for a single transaction, you've taken part in credit card factoring. Although it may seem like a harmless practice, it's actually a form of fraud that could jeopardize your business and even result in felony charges.
Find out why law enforcement agencies consider credit card factoring a form of digital money laundering so you can stay on the right side of state and federal regulations.
What Is Credit Card Factoring?
Credit card factoring may occur when:
- A company has grown to the point where it requires a second merchant account but continues using the first account for its transactions.
- Someone processes credit card transactions for illegal, risky, or unapproved activities through a company's legitimate merchant account.
- A company can't afford an independent merchant account so they share another business's account.
- Someone uses an approved merchant services account to sell unapproved products or services.
- A company changes its legal business name but keeps the same merchant account without updating the information.
Business owners who become involved in this type of fraud have usually been approached by a friend, family member, business partner, colleague, or acquaintance. The person may say they have bad credit and can't get their own account, then offer you a portion of their sales if you let them process transactions through your business's merchant account.
If this happens to you, you might not even be aware that the person's plan is against the law. You can share a credit card machine with another business (if you share an office, for example), but it must be able to run multiple merchant accounts so each company has its own.
Why Is Credit Card Factoring Illegal?
Credit card factoring causes serious issues for consumers, banks, and businesses. Since you lent out your account, you'll be responsible for money laundering charges that result from a legal investigation. You might also need to repay customers who experienced financial damages resulting from these actions.
You can avoid credit card factoring scams by using a trustworthy merchant service provider. These companies carefully check their clients to ensure they only process approved transactions for legitimate products and services. You break the terms of your contract if you lend your merchant account to an unauthorized person who hasn't been vetted, which is against the law.
If you're approached about this type of scheme, remember that the person couldn't get a merchant services account for a reason. The bank found they posed a significant financial risk because of excessive chargebacks, fraudulent activity, or other red flags. Getting involved will put your company in jeopardy as well.
How Credit Card Factoring Can Affect Your Business
If your business gets caught up in credit card factoring, the authorities consider you a "signer." That means you illegally used your merchant services account to take money for unauthorized transactions. Even if you didn't know the request to use your account was part of a scheme, you'll still be responsible in the eyes of the law.
Consequences may include:
- Responsibility for the fraudulent charges, which can result in tens of thousands of dollars in chargebacks to your merchant account
- Suspension of your merchant services account
- Placement on the "Match List," which prevents you from getting a future merchant account
- Legal action from your credit card processing firm for breaching the terms of your service contract
- Felony fraud charges, which carry jail time and/or substantial fines in most states
- Loss of your business reputation
You can avoid these legal and financial issues by refusing to allow anyone else to use your merchant services account. Even an innocent request by a neighboring business when the power is out could expose your company to fraudulent activity.
Legal Alternatives to Credit Card Factoring
Merchant cash advances are sometimes categorized as credit card factoring. However, it's legal to engage in this practice, which involves borrowing against your future credit card sales. You get a lump sum of money now and pay the lender back with a percentage automatically deducted from your transactions.
You might want to consider a merchant cash advance if you have steady credit and debit card sales but lower-than-average credit. They usually offer easier approval than other business loans, but tend to charge higher interest and fees.
How to Choose a Merchant Service Provider
When shopping for a merchant services provider, pay attention to recommendations from other business owners. If you don't have local contacts, you can read online reviews to get a sense of a company's reputation.
You can also use these questions to evaluate merchant service providers before signing up:
- Can your customers choose from multiple ways to pay?
- Do they have an app or online dashboard where you can keep track of transactions on the go?
- Do you understand their fee structure? Do they have a transparent billing system?
- Do they have security measures to protect sensitive financial data and private information?
Pay.com puts these features and many more in your hands, with an easy-to-use platform that you can customize with your own checkout system, branding, and payment options. Click here to get started now!
The Bottom Line
Credit card factoring could seem like a way to make easy money, but it can actually put your business and your finances at risk. You could even end up facing felony charges. Fortunately, you can easily avoid involvement in money laundering by keeping your merchant services account private and never letting anyone else use it.
Reputable merchant services providers have processes in place to protect you and your customers from fraud. Pay.com even offers support for an additional layer of authentication, 3D Secure 2.0, for extra protection during certain transactions. Click here to request more information.