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Chargeback Fraud: What Small Businesses Need to Know

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Chargeback fraud occurs when a customer disputes a credit card charge with their bank without following proper procedures or by giving reasons that are false. A chargeback is a process by which a customer requests reimbursement for a disputed credit card transaction that meets certain criteria under federal law; the merchant who received payment from the disputed transaction loses the money from the transaction and also has to pay a chargeback fee, typically $20 or more. When consumers request chargebacks for false reasons or accidentally, the impact on small businesses can add up quickly.

But small businesses can fight suspected chargeback fraud, and there are a few practices you can put into place to try to avoid chargebacks that result from simple confusion.

Nerdy tip: While illegitimate chargebacks are colloquially referred to as chargeback fraud, they often don’t quite fit the legal definition of fraud because it’s difficult to prove intent, and in some cases, the dispute might be accidental. In this article, chargeback fraud is referring broadly to all types of chargebacks that aren’t legitimate or don’t follow proper procedures.

How chargeback fraud happens

Chargebacks are a way for people to refute unauthorized transactions through their banks rather than directly with a merchant. Under federal law, there are three valid types of credit card disputes:

  1. Unauthorized use, when someone charges a person’s credit card without their permission.

  2. Billing errors, when a merchant incorrectly charges a consumer or charges them for a product they didn’t receive.

  3. Right to withhold payment, when a customer has attempted to address a complaint with the merchant but hasn’t been able to resolve the issue.

But people sometimes use these protections to circumvent merchant refund policies and get their money back for illegitimate reasons. In these cases, merchants can file a counter-dispute. Reasons that consumers commonly give for chargebacks include not receiving an item, a transaction being unauthorized or a service continuing to charge them despite their attempts to cancel. But a buyer’s actual reason might differ: Maybe they want to keep the item without paying for it, they regret making a purchase, they waited too late to return the item or they honestly forgot they made the purchase.

How it can affect small businesses

Regardless of which type of fraud occurs, when people bypass merchants to request an illegitimate chargeback, it affects small businesses in many ways.

Lost revenue

The most obvious loss is the potential profit from the product or service. With a chargeback, the customer is essentially refunded the cost of the product, which means a merchant is out an item without being paid for it.

Merchants often have to pay chargeback fees as well. When a bank processes a chargeback, they often charge the merchant a fee to penalize them for what the bank views as an illegitimate transaction. Fees can start out around $20 but can grow if a small business frequently experiences chargebacks. Small businesses are also paying the transaction fee for processing the payment, which is more money out of their cash box.

Higher risk category

A high frequency of chargebacks can lead a merchant to be labeled as a high-risk business. Small businesses that are classified as high-risk often pay higher per-transaction fees and might be canceled by their current payment processor. This can lead to a bigger cut in profit and complicate payment processing options.

What small businesses can do

Successfully disputing chargebacks is difficult, but possible. A 2021 survey of more than 400 merchants from Chargebacks911, a company that helps businesses reduce their chargebacks, found that while businesses respond to around 43% of chargebacks, an average of only 12% were recovered successfully. To improve your odds of success, try this:

Respond quickly

Chargeback responses have deadlines, and you’ll be out of options if you wait too long to respond. Gather your information and respond to the chargeback in a timely manner. But not so quickly that you overlook information. Give yourself time to be thorough.

Talk with the customer

Try to identify the issue and learn what is going on beyond what the card issuer or bank tells you in the chargeback notification. Keep the conversation friendly, and report the conversation in your documentation to the card issuer or bank to inform them of any relevant information the customer explained to you to support your case.

Prove your point

Merchants are able to write a rebuttal letter for a chargeback. If you have time, craft a letter that clearly states your evidence for why the chargeback is fraudulent and why the charge is legitimate. Keep a professional voice and provide evidence of your argument, including pictures and screenshots.

 

How to avoid chargeback fraud

Small businesses can take steps to decrease their odds of experiencing illegitimate chargebacks, including:

Ensure the charge on a statement matches your business name

Some people will report a charge as unauthorized if they do not recognize the business name on their financial statement. You can avoid this by ensuring that your business name appears correctly on transactions. If you need to update this information, contact your payment processor. If you can’t update it and it’s not identical to your business name, notify the customer within the email confirmation so they know what to expect.

Track shipments

Using tools and services that track shipments and show when a product is delivered gives you more leverage to dispute a chargeback when a customer asserts that a product was not delivered.

Make it easy to return items

By relaxing your window for returns, you make it simpler to return items for a refund. Customers might be more inclined to work with you if they know they can still return an item instead of calling their credit card issuer after a short window has passed. Making contact methods easy to locate and responding to upset customers might help the process as well.

 

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Finance & Accounting

Business Loan vs. Line of Credit: Which Is Right for You?

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Business loans and business lines of credit are different forms of business financing. With a business loan, you’ll receive a lump sum of money and pay it back over time. A line of credit is a pool of money that you can keep dipping into, up to a limit.

In general, business loans are the better choice when you need a significant amount of financing for a major purchase or expansion. Business lines of credit are better suited for evening out gaps in your cash flow or floating your finances through an emergency.

What is a business loan?

A business loan is a lump sum that you receive from a small-business lender and then pay back over time with interest. Business loans are best when you need financing for a specific project, investment or acquisition that will help grow your business.

  • You can usually borrow more with a loan than you can with a line of credit.

  • In most cases, you’ll receive all your loan funds in one upfront payment.

  • You’ll typically need to secure a loan with collateral like real estate, inventory or cash savings.

  • Some types of business loans can only be used for specific purposes — for instance, if you take out an equipment loan, you can’t use it to pay your employees during a lean month.

What is a business line of credit?

A business line of credit can help you get access to working capital whenever you need it. Lines of credit work in a similar way to credit cards — you can borrow as much money as you need up to your credit limit, and then pay it back over time. Lines of credit are best for businesses who want ongoing access to financing to even out their cash flow or to tap in emergencies.

  • Lines of credit can be used for any business expense.

  • Some lines of credit are unsecured, meaning you won’t have to provide physical collateral.

  • Lines of credit tend to be smaller than business loans.

Business line of credit vs. loan: How to choose

In general, business loans are best suited for financing specific projects. Lines of credit are more like business credit cards, making them useful if you want to tap into working capital on an as-needed basis.

The best choice for your business depends on how much financing you need, what you want to use it for and what you can qualify for.

Business loan

Business line of credit

How much financing do you need?

Varies widely, but loans usually offer more financing than lines of credit.

Varies widely, but lines of credit are usually smaller than loans.

What do you need financing for?

A specific purpose. In your loan application, you’ll have to explain what you plan to do with your loan funds.

Can be used for any purpose.

How do repayments work?

Installment credit — you receive a lump sum and pay it back in regular installments over time.

Revolving credit — you can carry a balance that accrues interest and pay it back as you’re able, then borrow more.

Do you have collateral?

Almost always requires collateral.

Unsecured lines of credit do not require collateral.

What product can you qualify for?

Tends to require good credit, multiple years in business and more annual revenue.

Usually easier to qualify for than business loans.

Where to get a business loan or line of credit

Many banks and online lenders offer both business loans and business lines of credit.

Bank business loans and lines of credit

In general, bank loans are the hardest to qualify for, but they also tend to offer the lowest interest rates and most favorable terms. If you have multiple years in business and good or excellent credit, seek bank financing.

National banks offering business loans and lines of credit include:

  • Bank of America: Business loans and lines of credit. Bank of America offers a wide variety of business loan products with competitive interest rates, but they can be difficult to qualify for, and the application process requires a meeting with a lending specialist. Read NerdWallet’s Bank of America business loan review.

  • Chase: Business loans and lines of credit. Chase offers small loans — business loans of as little as $5,000 and lines of credit with limits as low as $10,000 — which can be easier to qualify for than large loans and help you build business credit.

  • Wells Fargo: Business loans and lines of credit. You can get a secured or unsecured line of credit from Wells Fargo. The bank has discontinued many of its term loan products but still offers SBA loans.

Online business loans and lines of credit

Online lenders can be a good resource for newer companies or business owners with fair or bad credit. They also tend to fund loans more quickly than banks can, sometimes within a day. But their interest rates tend to be higher than those offered by banks.

Online lenders offering business loans and lines of credit include:

  • OnDeck: Business loans and lines of credit. Business owners with fair to good credit may be able to qualify for OnDeck loan products, but their interest rates can be high. Read NerdWallet’s OnDeck review.

  • Kabbage: Lines of credit only. Kabbage lines of credit are a good fit for business owners with fair credit who want fast access to capital, but their fee structure is complex. Read NerdWallet’s Kabbage review.

  • Funding Circle: Business loans only. Funding Circle tends to offer lower interest rates than other online lenders, but loans are more difficult to qualify for and take slightly longer to fund. Read NerdWallet’s Funding Circle review.

  • Bluevine: Lines of credit only. Bluevine lines of credit are available to business owners with as little as six months in business, but you may need to make frequent repayments. Read NerdWallet’s Bluevine review.

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Finance & Accounting

5 financial tips for millennial business owners

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Money matters

This content should not be construed as financial advice. Always consult a financial professional regarding your specific financial situation.

In 2017, I wrote an article about financial tips for millennial business owners. Five years later and two years into the ongoing COVID-19 pandemic, I was surprised to find that most of the original advice still holds true today. However, some changes are worth noting that will better empower millennials to succeed personally and professionally with their finances.

Five financial tips for millennial business owners

Here are five things today’s millennial business owners should consider. We will look at each tip in more detail.

  1. Pay down and pay off outstanding debt.
  2. Work alongside a financial adviser.
  3. Observe the money moves of Gen Z.
  4. Build an emergency fund.
  5. Establish Plan B.

1. Pay down and pay off outstanding debt

My original article emphasized the importance of getting out of student loan debt. I mentioned suggestions for managing that debt, like lowering student loan bills through better repayment or refinancing plans and making loan payments on time. Hopefully, doing these things would make it easier for millennial business owners to financially plan to start a business.

However, according to Bank of America’s Better Money Habits Millennial Report, student loans now only account for 25% of millennials’ debt. The Winter 2020 report examines the precarious balancing act that millennials have with outstanding debt. And this debt is no longer limited to student loans.

The reason? Millennials are no longer twentysomethings. Millennials began turning 40 in 2021. The report shares the various types of debt that millennials carry in middle age, including auto loans (40%), credit card debt (37%) and mortgages (36%). Each makes up a higher percentage of debt than student loans.

Further, the report addresses the worries that millennials have surrounding their debt. Those surveyed say that having debt keeps them from reaching professional and personal milestones. Millennials today feel like they can’t or can’t yet fulfill the following goals:

  • Buy a first or nicer home (42%).
  • Save for the future (40%).
  • Welcome children or grow their family (21%).
  • Get married (21%).
  • Start their own business (19%).

Despite these grim percentages, millennials are not giving up.

The COVID-19 pandemic has impacted the American workforce with the Great Resignation. Millions of workers are quitting their jobs, with a January 2022 study from Cengage Group citing 38 million workers who resigned in 2021.

Quitting does not mean millennials do not plan to work again. Instead, they are taking back their power. Ninety-one percent quit their jobs to make more money, 82% are reconsidering priorities amid the pandemic and 81% wish to pursue another passion or career path and are reskilling appropriately.

For many millennial business owners, relying on traditional financial tips like refinancing, budgeting, and making on-time payments isn’t enough to get entirely out of debt. Resigning from a job where you feel stagnant, or experience stagnating wages is a critically important next step for paying off debt and revitalizing your career trajectory.

2. Work alongside a financial adviser

Couple holding hands with a contract and pen on table in front of them

No matter your stage in running a business, every small business benefits from working with a reliable financial adviser.

What can a financial adviser do for you? These advisers assist millennial business owners in making sound financial decisions. An adviser is well-versed in financial literacy and understands planning in certain and uncertain times of economic stability. Many also work with niche-based entrepreneurs, like those within the FIRE (financial independence, retire early) and HENRY (high earner, not rich yet) communities.

Best of all, millennials can even work alongside a millennial financial adviser if they choose.

If you’re currently on the hunt for one, check out this roundup on Business Insider of the 23 most influential financial advisers for millennials.

3. Observe the money moves of Gen Z

Millennials and Gen Z “allegedly” don’t like one another very much. Something about a TikTok dance? I digress. Millennials can learn from individuals at all stages of entrepreneurship, including the class of creators that makes up Gen Z.

How exactly does watching the entrepreneurial moves of Gen Z translate to financial advice?

Gen Z came up in a world where many cheaper tools are at their disposal. They are natural social natives that utilize digital platforms to build their brand.

Watch which tools they use to build their business and how they save money through using them. A good example is observing the platforms they use, like Square to accept payments and Etsy for creating an ecommerce presence. These tools are cost-effective and allow Gen Z to focus on their business. Take a few notes if you haven’t started already, millennials.

4. Build an emergency fund

If business owners have learned anything from the COVID-19 pandemic, it is the importance of having and maintaining an emergency fund.

Emergency funds are exactly what they sound like: three to six months’ worth of expenses set aside to be used in the event of an emergency. This emergency can be anything from a pandemic to a natural disaster. Having an emergency fund means having the ability to cover an unexpected expense without taking out a loan or using a credit card with a high-interest rate.

Three additional pro tips I have for building an emergency fund are below:

  1. If you withdraw a certain amount from your emergency fund, remember to pay it back. Ideally, do this as quickly as possible.
  2. Use this fund only in the event of an actual emergency.
  3. Add to an emergency fund regularly. Treat it as you might a retirement fund. Strategize with the help of a financial adviser as to what this fund’s maximum contributions might look like every year. Then, add to the fund accordingly. Too often, emergency funds are viewed through a one-time lens. Business owners should set up the fund in a safe space like a high-yield savings account and keep contributing funds to it over time.

5. Establish Plan B

Plan B was in the original version of this article, and I’m using it to conclude this updated list of financial tips for millennial business owners.

Having a Plan B is essentially creating a backup plan for your life. The phrase is often used negatively as if to say that because a particular business venture didn’t work out, you can’t be an entrepreneur again. That’s not true. Having a Plan B means having a safety net for every good and bad “what if?” scenario.

If something doesn’t work out now, you have options, and Plan B will help you find and pursue them.

This content should not be construed as financial advice. Always consult a financial professional regarding your specific financial situation.



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Banking

Are Small-Business Loans Installment or Revolving?

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A small-business loan provides funds to purchase supplies, expand your business and more. This type of funding can be either installment or revolving. Reviewing the credit terms of your loan offer will help you determine whether you’re being offered an installment loan or revolving credit.

Both types of loans can be found in the Small Business Administration, or SBA, loan program and at banks, credit unions and online lenders. While each can provide much-needed funding for your business, there are some key differences to keep in mind.

Installment loans vs. revolving credit

Installment loans provide a lump sum of money

An installment loan is a credit agreement where the borrower receives a specific amount of money at one time and then repays the lender a set amount at regular intervals over a fixed period of time. Typically, each payment includes a portion for interest and another amount to pay down the principal balance.

Business term loan is another common name for this type of loan. After the loan is paid off, the borrower typically must apply for a new loan if additional funds are needed.

Revolving credit provides flexible funds

A revolving loan is a credit agreement where the borrower can withdraw money as needed up to a preset limit and then repays the lender a portion of the balance at regular intervals. Each payment is based on the current balance, interest charges and applicable fees, if any. You pay interest only on the funds that you use — not the maximum limit.

A business line of credit is a common type of revolving credit. Revolving credit gives the borrower flexibility in determining when to withdraw money and how much. As long as the credit balance remains within the preset limit and you continue to make timely payments, you can continue to draw from the line again and again.

Differences between installment loans and revolving credit

The terms of a loan can vary depending on the type of loan, lender and your business’s credentials. Your loan may be a unique combination of terms. However, the following are some common differences between installment and revolving loan programs.

Installment loan

Revolving credit

Loan amount

Fixed amount.

Maximum limit.

Withdraw as needed.

Payment amount

Fixed amount.

Minimum amount based on balance and interest with option to pay more.

Interest calculation

Based on loan amount.

Based on current balance, not maximum loan limit.

Ability to renew

Not renewable, typically.

Renewable, typically.

  • SBA loans.

  • Business term loans.

  • Commercial real estate loans.

  • Equipment loans.

  • Microloans.

  • SBA lines of credit.

  • Business lines of credit.

  • Business credit cards.

When to use an installment loan

Set loan amount is needed

If you’re confident in the loan amount you need, then an installment loan may be the right fit, especially if you need the money in a lump sum. For example, if you’re using the funds to make a one-time purchase, you’ll likely want an installment loan.

Long-term financing needs

Some term loans can offer you more time for repayment when compared with revolving credit. When you stretch your payments out over a longer period of time, it can mean a lower monthly payment. However, that trade-off typically means you’ll pay more in interest costs over the life of the loan.

Larger funding needs

If you’re looking to purchase property, equipment or other large-ticket items, there are a number of installment loans that can be used for this purpose. Revolving credit limits are often less than term loan maximums.

Preference for predictable payments

With a set monthly payment amount, it can be easier to budget for an installment loan compared with a revolving loan, where the payment varies depending on how much of the credit line you use.

When to use a revolving loan

Short-term financing needs

Revolving credit can be good to handle short-term cash shortages or to cover unexpected expenses. Some businesses use lines of credit as an emergency fund of sorts since they’ll pay interest only on the funds they use.

Fluctuations in cash flow

Businesses that experience major fluctuations in their cash flows may benefit from revolving credit. For example, seasonal businesses that don’t have consistent revenue throughout the year can use lines of credit to cover operational costs during their slow season.

Preference for flexible loan amount and payments

If you don’t know exactly how much money you need, then revolving credit will give you the option to qualify for a maximum amount but only withdraw funds as you need them. This way, you’ll pay interest only on the current amount owed.

Compare small-business loans

To see and compare loan options, check out NerdWallet’s list of best small-business loans. Our recommendations are based on the lender’s market scope and track record and on the needs of business owners, as well as rates and other factors, so you can make the right financing decision.

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