THIS ISSUE'S HEADLINES

Credit and Debit Card Transaction Fees: Who Bears the Burden?

The Importance of First Impressions When Getting a Company Ready for Financing or a Sale

Crowdfunding as an Alternative Way for Small Businesses to Raise Capital


CREDIT AND DEBIT CARD TRANSACTION FEES: WHO BEARS THE BURDEN?

If you are running a small business, you’re likely all too familiar with processing fees for debit and credit card transactions. In today’s world, cash payments have largely fallen by the wayside, and it is increasingly commonplace for consumers to buy goods and services using credit or debit cards. As a result, business owners have faced the burden of an additional fee to consider when pricing their goods or services.

Processing or transaction fees are charges that small business owners pay to credit card companies or payment service providers to authorize and complete card transactions. These fees can be costly, ranging anywhere from 1.5% to 3.5% of a transaction’s total value. Therefore, some businesses seek to pass this cost onto the consumer by imposing a surcharge, effectively adding the transaction fee to the total cost of the product or service. However, this practice can be legally risky.

In most states, merchants are allowed to charge credit card surcharges. Rhode Island is part of this majority that permits such surcharges. In states like California, Georgia, and Michigan, surcharging is allowed, but the legislature imposes strict limits on merchants imposing these charges. In contrast, surcharging is prohibited in states such as Massachusetts, Maine, and Connecticut. Therefore, if your business’ main customer base is located in New England, you must take great care to comply with each state’s varying rules on this matter.

The laws are even more stringent when it comes to debit card transaction fees. In a majority of states, merchants are prohibited from imposing a surcharge on customers for a debit card transaction. This is the case even when the debit card is run as a credit transaction.

While small businesses are largely permitted to charge customers credit card surcharges, it is important to stay compliant with state law on the subject, especially if your customer base is largely in New England. For further guidance on credit and debit card transaction fees, please contact Attorney Paige E. Macnie at 401-824-5100 or pmacnie@pldolaw.com.

[back to top]


THE IMPORTANCE OF FIRST IMPRESSIONS WHEN GETTING A COMPANY READY FOR FINANCING OR A SALE

If you are considering applying for a substantial bank loan for your business, seeking capital from equity investors or potentially selling your company, the very first step in the process should be conducting a thorough review of your company.

Any well-advised lender, investor or potential buyer will perform their own thorough “due diligence” review of your company before they make a final decision to lend, invest or buy. Most often, this starts with a due diligence checklist, to which you will be expected to respond with both accurate information and documentation. The initial impressions created by your response to this due diligence checklist can have a profound impact on the terms, price and sometimes, whether the transaction closes at all.

PLDO Partner William F. Miller discusses common problems that arise in due diligence reviews and ways to avoid them in a Client Advisory that can be accessed by clicking here. If you have questions or would like to receive a complimentary sample of a due diligence checklist that you might expect to receive in an equity financing or acquisition, please contact Attorney Miller at 508-420-7159 or email wmiller@pldolaw.com.

[back to top]

Securing financing for the growth of the business when it is in its initial stages of development can be a significant challenge for small business owners. Sometimes, it is necessary to seek alternative financing sources in addition to, or in place of, traditional lending models, such as bank loans and venture capital.

One such alternative is “crowdfunding,” which leverages online platforms to raise capital through the collective efforts of a large number of individuals. Crowdfunding emerged in the 1990s and has grown into an attractive means to raise money for many reasons, especially for businesses that might not have the resources or established record that banks and other traditional lenders require.

One advantage is that crowdfunding allows the business owner to showcase their company, project or ideas to a new and expansive network of potential lenders, called “crowdfunders” or “the crowd”. It starts with an individual or organization creating a funding campaign on a platform like GoFundMe or Crowdcube, with set goals and deadlines for raising money. Determining the type of campaign is extremely important. Typically, campaigns are either donation-based, reward-based, equity-based or debt-based. Each has their advantages and disadvantages for enticing investors to commit their money. Debt-based crowdfunding involves borrowing money you will pay back with interest, whereas equity crowdfunding involves offering a percentage of the business to the donors in exchange for capital to move the business forward.

Another reason crowdfunding is popular is that it’s a relatively inexpensive way to raise capital. However, there is always a cost and that varies depending on the platform. For example, many platforms will keep a portion of the funds raised. Once the business owner has researched and selected the platform that best suits their needs and the campaign is organized and posted, the creator will need to leverage social media, email and other marketing platforms to raise awareness. One of the challenges in using crowdfunding as a source of capital is that it’s highly competitive. A successful crowdfunding campaign relies on the creator’s ability to capture the interest of potential donors or investors with a unique and compelling “elevator pitch.”

While crowdfunding can provide a business owner with fast access to cash, it does require a well-thought-out plan, marketing strategy, and also a higher level of transparency. Regulatory issues and the potential for fraud is another challenge prompting regulators to increase transparency and accountability to the lender or investor. Funds raised must be used for the purposes stated in the campaign and the donee should provide doners with updates on the campaign, project and/or company.

Crowdfunding isn’t a magic bullet. There is always a risk of falling short of achieving one’s fundraising goals. Some crowdfunding platforms require an “all or nothing” method. Meaning, if the goal is reached, then the funds are collected and issued to the donee. If the goal was not reached by the deadline, all funds are returned to the donors.

Conclusion

Crowdfunding has enabled entrepreneurs and business owners, particularly in the areas of technology, arts and entrepreneurship, to market their ideas and projects to a wider universe of potential investors or lenders. As an alternative funding mechanism, it has fueled new product innovation in a rapid fashion. Suffice it to say, some products might have never made it to market had traditional financing methods, which take significant more time to develop and close, been pursued.

The more that this vehicle is used for raising capital or debt, the greater the need for transparency, accountability and security. Crowdfunding represents a dynamic and evolving financing tool that will continue to push innovation. As this landscape evolves, the stakeholders will have to navigate the challenges and opportunities of leveraging crowdfunding as a funding mechanism.

If you have questions or would like further information, please contact PLDO Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.

[back to top]