When processors offer high-risk merchant account services, they’re accepting a tremendous risk. To lessen their exposure, most processors require retailers to fund a reserve. The processor then has money to cover refunds that stem from legitimate chargebacks and fraud. There are multiple ways to fund a reserve, but the most popular are the rolling reserve approach. Here’s a look at why merchants ought to be wary of agreeing to allow their processor to set up a rolling reserve.
A high-risk merchant account agreement details the terms of a rolling reserve arrangement. Within the contract, the processor lists the percentage of your gross sales from certain credit cards that it will keep in reserve and how long it will hold the money. On average, the percentage that processors keep is anywhere from 5 to 10 percent. Bear in mind that the reserve account doesn’t accumulate interest, and it’s not accessible to the merchant until the time noted in the agreement. After the specified period, typically ranging from 120 to 180 days, the funds in the reserve account are released to the merchant and the processor no longer holds back a percentage.
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To begin with, the money is held in an account where it can’t collect interest. That means the money isn’t growing; it’s just sitting. As you struggle to establish your business, you need all the cash flow you can get. Cash flow helps you pay your bills, cover employee wages, and buy inventory. Having to sink a percentage of your income from credit card payments into a reserve fund has a severe and adverse impact on cash flow. The more you rely on credit card payments, the bigger the impact the rolling reserve requirement has on your business.
When you’re giving up a percentage of every credit card payment to the reserve fund, albeit on a temporary basis, you’re getting less profit each month. As a result, you may find it’s harder to offer discounts and lower prices. An inability to provide competitive prices may have a long-term detrimental impact on your company.
With a portion of your company’s money sitting in an inaccessible account each month, you have less working capital. That means it’s harder to grow your business through advertising, marketing, and expansion.
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With rolling reserves having so many drawbacks, it’s important to know that there are other options. Capped reserves allow processors to take a percentage of each transaction until the reserve reaches a pre-determined amount. With this approach, the reserve depends on sales rather than time.
Another alternative is the up-front reserve arrangement. For business owners who can provide a reserve amount in advance, this is the best option. Those who are unable to fund the reserve can present the processor with a letter of credit saying they have access to enough funds to cover it. Finally, companies can allow the processor to hold back all credit card transactions until they meet the reserve threshold.
When signing an agreement for a high-risk merchant account with a processor, be sure you understand the reserve requirement and how you will fund it.