I received a phone call today from a prospective client who was looking for a Pay Pal alternative, irate that PayPal instituted a rolling reserve as a condition for credit card processing.  Although he did not understand the particulars of the rolling reserve, he balked as soon as he heard that some of his funds would be held.  “I’m not letting anyone tamper with my cash flow,” the merchant declared.”  He added, “Just how much profit do they think I’m making?”

This merchant’s sentiment is widely embraced by the business community.  Rolling reserves are viewed in a disdainful, distasteful manner – something to be avoided at all costs.  Here, the processor chooses not to fund the total amount of the transaction (minus processing related costs) in its entirety.  Indeed, a percentage of the amount due the merchant is held at the processor’s bank and will only be reunited with the merchant at a later time

Let’s take an example.  Suppose a credit card processing company requires a 60-day, 20% rolling reserve.  The first day the merchant processes $100; the second day the merchant processes $200; and the third day the merchant’s credit card processing transaction amount is $500.  On the 61^st day, the merchant will get back 20% of the $100 or $20.  On the 62^nd day, the merchant is entitled to receive 20% of $200 or $40.  On the 63^rd day, the merchant is due 20% of $500 or $100.

In essence, the merchant has to wait 60 days after a given day’s transaction to collect on the 20% that was placed in a reserve account.  In the example above, the merchant “lost” $20 + $40 + $100 = $160 for the first three days of processing and only recouped this amount two months later.  (I did not factor in processing costs in order to demonstrate this rolling reserve principle.)

Some merchant account providers institute a minimum reserve that is not necessarily time-based.  For example, a $5,000 minimum reserve means that the merchant may have, say, 20% of his funds held after each day’s batch until the reserve figure reaches $5k

The question arises: Why do merchant account providers sometimes demand rolling reserves?  Don’t just say, “Because they can.”  Risk analysts impose a reserve condition because they are concerned about potential chargebacks.  If the merchant’s customers dispute charges, the credit card processors want to ensure that the merchant has ample funds in his/her account to cover chargebacks and reversals.  If the merchant does not have enough money in the account, guess who has to pay back the customer? – yes, the processor.  (Of course, the processor may then take collection and/or legal action against the merchant.)

Fortunately, the vast majority of merchants will not be affected by a rolling reserve.  PayPal even estimates that less than 1 percent of its customers will have to deal with this stipulation.  The next question then arises: Whose funds will be held?

In general, any business owner who presents a high risk may be hit.  For example, new business owners, those with a very high processing volume or high ticket amount, individuals who run certain types of high risk businesses, those who have “borderline” credit, etc. may all have a percentage of funds held.  While this is not a happy circumstance, it may be preferable than having no merchant account at all.

In an effort to alleviate any concern, the decision to withhold funds varies from processor to processor.  For example, I’ve been working for IntelliCollect for years, and I only remember a handful of merchants who received conditional approval, based on their decision to allow their funds to be held.  New business owners are not necessarily subject to any reserve as well.

Therefore, perform your due diligence and try to find a credit card processing company that will not compel you to have a reserve or rolling reserve.