Should a Small Business Use a Third-Party Merchant Account? Updated Guide (2025)

Third-party merchant accounts and related products still help startups accept payments quickly when banks won't onboard them. Common options include payment facilitators (Stripe, Square, PayPal), aggregators, and merchant cash advances. They offer fast access but often bring higher fees, reserves, holds, and repayment mechanics that can stress cash flow. Compare fees, contract terms, and alternatives (bank accounts, SBA loans, business credit) and model the real cost before committing.

Many startups and small businesses still struggle to qualify for a traditional merchant account from a bank: limited credit history, low processing volumes, or perceived industry risk can block approval. Third-party merchant arrangements - including aggregated/partner merchant accounts, payment facilitators (PayFacs), and merchant cash advances - remain common ways to get accepting card payments quickly. They can solve an immediate cash-flow problem, but they also carry trade-offs you should weigh carefully.

What a third-party merchant solution does

Third-party providers let you process payments without a direct merchant account at a bank. Modern PayFacs (for example, Stripe, Square, PayPal) onboard merchants rapidly and handle underwriting, compliance, and settlement. Aggregators and resellers do similar work but may place restrictions or holds on high-risk accounts. Merchant cash advances (MCAs) are another product: a provider buys a portion of your future sales for an upfront lump sum and recovers by taking a fixed percentage of daily receipts.

Costs and risks to evaluate

• Fees: Expect higher effective costs than a traditional merchant account. Pay attention to per-transaction rates, monthly fees, and fixed charges. For MCAs, check the factor rate and convert it into an equivalent APR to compare costs.

• Reserves and holds: Aggregators commonly use rolling reserves or holds on settlements for high-risk or new merchants. That ties up working capital.

• Personal guarantees and contract terms: Some providers require owner guarantees or long roll-off periods and charge heavy termination or remediation fees for chargebacks.

• Impact on cash flow: Repayment structures (daily pulls or percentage splits) can strain daily operations and make it harder to scale.

When a third-party option makes sense

• You need to start processing immediately and can't get a bank merchant account.

• You expect a clear, short runway to profitability and have modeled cash flow under the provider's repayment terms.

• You can accept higher fees in exchange for faster onboarding and lower upfront requirements.

How to protect the business

• Read the contract thoroughly: look for reserve, hold, termination, and chargeback clauses.

• Convert MCA factor rates to an APR or run scenarios to see the true cost over time.

• Compare alternatives: PayFacs with transparent pricing, bank merchant accounts once you qualify, small business loans (SBA microloans or fintech lenders), or using business credit cards for short-term needs.

• Keep a conservative growth plan: avoid expanding too fast when repayment obligations reduce operating liquidity.

Bottom line

Third-party merchant solutions remain a practical option for many small businesses. They buy speed and access at a price. Understand fees, reserve practices, and how repayment mechanics affect day-to-day cash flow before you sign.