As you are probably already aware, in order to accept credit cards for your business, you have to open a merchant account with a bank or other merchant processor. It’s generally easy to open a merchant account, but that doesn’t mean everything will go smoothly over the long haul. Many businesses end up in a situation where a significant amount of their revenue processed by credit card gets frozen for 6 months or a year. It can be devastating to have the bank hold onto the funds that you may need to pay your affiliates, vendors, employees, or other expenses.
So why would your processor hold your funds? Your funds can be held for a variety of reasons. It basically comes down to whatever the bank feels is fair based upon what they estimate your chargeback and refund rate could be in the future and the overall risk they perceive your business to be in general. There are many clients that I’ve worked with in the past that had 25%-50% of their funds held for 6 months because they were perceived by the processor as being high risk because they processed a lot more volume than they were originally approved for. It was a nightmare to my clients who had to deal with these issues, although I was thankfully able to help them get funds released sooner than scheduled. You sure don’t want to be in that situation if you can avoid it.
Here are some steps you can take to minimize this risk:
1. Before opening a merchant account, find out what rules and processes your bank or merchant processor has in place for determining when to hold funds. Most merchant processors will tell you in advance that if you ever run a certain volume through, then they will hold a certain percentage as a reserve for a set period of time. You can then pick a merchant processor to work with that has a policy for holding funds that you are comfortable with.
2. When you open your merchant account, make sure you get pre-approved for a higher volume than you may need in the beginning. This can help give you some room for growth without it automatically looking like you’ve exceeded the pre-approved limits.
3. Communicate with your merchant processor in advance when you’re expecting to see large spikes in credit card volume. For example, if you are launching a new product and know that you may have 3 months out of 12 months where the majority of the volume will happen for the entire year, you should communicate that fact to your merchant processor. Find out how they plan to handle the reserves from such sudden spikes so you can plan your cash flow and expenses accordingly (or still have time to open another merchant account if what your current merchant processor plans to do isn’t acceptable).
4. Consider having two merchant accounts with separate processors/banks and rotating half of your sales through each account. This can help you reduce the risk of having one bank control all of your funds in the event there is a problem. Just make sure that if you open two merchant accounts, that one of them doesn’t prohibit you in their terms from having a separate one.
What to do if some of your funds are frozen:
If you have some funds frozen, you or your attorney should work with your processor to determine a release schedule that is fair. You don’t have to just accept what they offer the first time. Make them justify how they are calculating their risk and show you why it’s fair. But the processor has the leverage because their agreement always gives them the sole discretion in determining reserves.