Bicycle Retailer recently profiled a Michigan bicycle shop that went out of business not only due to rough economic times, but rough policies by his credit card processor.  Bikesport Michigan was in business for 17 years until owner Tom Demerly was hit by a surprise from his processor.

Demerly had not read the fine print on his processing contract (most businesses don’t) which stipulated that the processor had the right to require a reserve as a means of protection. The reason why processors do this is if customers dispute charges, the merchant is responsible to pay up. However, if the merchant for some reason cannot pay up, the processor bears responsibility for the return.  Many times the reserve is a substantial sum, and in the case of Demerly, helped make his business go under.

Last January, Demerly’s processor established a reserve for $60,000 which was completely off limits to the business citing. The processor began collecting on the reserve right away. Demerly appealed to the processor saying the reserve would put him out of business, and the processor responded by lowering the reserve time from one year to six months.  Attorneys who Demerly went to shook their heads and told him they could do nothing since the contract stipulated that the processor could institute a reserve whenever they felt was necessary.

Demerly advises all merchants to carefully read processing contracts before signing them. Unfortunately, we have seen merchants hit with reserves before. In fact, Sean dealt with the situation himself and describes the ordeal here. FeeFighters recommends the following steps if you ever find yourself hit with a reserve:

1)  Cancel right away and switch credit card processors-This way the processor stops collecting to the reserve. Use FeeFighters to get unbiased and apples-to-apples comparison from top quality processors.

2) Demand your money back and threaten to sue- Most likely the sum will be small enough (since you cancelled immediately) that processor will be unlikely to take legal action.

3) Always read contracts in the future- And stipulate (in the contract) that the processor cannot have reserves on the account.

Image thanks to http://www.flickr.com/photos/9495733@N05/2269593579/