Tuesday, February 15. 2011
Rolling Reserve - Its Relationship to Bank Account Balance
Business owners must always keep a vigilant eye on the amount of funds that flow in and the amount that flows out. An incessant infiltration of negative cash flow (where expenses exceed profit) can cripple a business or even put it out of its misery. Particularly in today's volatile economic market, merchants must be extremely knowledgeable about operation costs and its impact on the operation. Similarly, business folks must be acutely aware of the ledger of positive cash flow because what's anticipated may not actually materialize in real life. Think of the scenarios where a merchant receives a number of bounced checks ... or is hit with a rolling reserve by their credit card processor.
What is a Rolling Reserve?
In simplest terms, a rolling reserve is when the merchant account provider holds back a certain percentage of the merchant's gross processing volume. The percentage of the hold-back varies, typically anywhere from 5% to as high as 50%. If a reserve is placed, the percentage may be determined by the type of business the merchant owns, how he/she accepts credit cards, the average monthly processing volume, the owner's credit rating score, the history of chargebacks or bank rejects, etc. A rule of thumb: The higher the perceived risk, the higher the rolling reserve percentage.
The rolling reserve is set for a period of time, generally imposed from three months to six months. Let's take an example: Suppose a merchant processes $1,000 for the month and has a rolling reserve of 10% for a six-month duration. Therefore, the merchant will not be eligible to collect $100 (or 10% of $1,000) until six months has elapsed (specifically, six months from the day that the transaction took place).
Now it's easy to discern how this would gravely affect a struggling business owner. While one may rationalize that a reserve is a type of forced savings, most would argue that any delay in funding can easily jeopardize day-to-day operations. How can merchants roll with the punches when bills have to be paid, and funds that can be used are not accessible?
Fortunately, most business owners are not encumbered by rolling reserve merchant accounts although they're becoming more commonplace. And those that are impacted by rolling reserves typically know about them before the account is open.
However, there are merchants who may unwittingly be responsible for the introduction of rolling reserves -- even after processing for years. Let's take a merchant who consistently does not have ample funds to cover processing-related expenses. The processor tries to withdraw the owed funds but such attempts are not successful. The processor's own cash flow becomes jeopardized as they are not receiving the money that is owed to them.
The problem becomes compounded when chargebacks arise. The merchant without sufficient funds cannot cover the chargeback so the processor, at least initially, must return the funds to the customer. Processors do not want to outlay money on behalf of their merchants, especially when there exists a possibility that they may not get it back. (No processor wants to take expensive, time-consuming legal steps to try to secure the money from the merchant as well.)
Merchants who have acquired a history of bank rejects (i.e., the processor often cannot collect on entitled funds) may very well find that their merchant account has been closed ... or changed to a rolling reserve merchant account. This situation could have been avoided and the merchant must take some responsibility for this development. Indeed, being a professional business owner demands that you run your business professionally, and that includes taking care of all accounts payable.
All in all, it's clear that a rolling reserve will adversely affect a merchant's bank account balance. However, please understand that a low, insufficient account balance can also lead to a rolling reserve.