This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started FeeFighters.
One of the toughest things that happened to me with a previous business was that I got hit with what I called a Surprise Reserve on my merchant account. Our sales had been steadily increasing over our first 10 months in business when a very hot new product was released in our industry in October of 2005. Combined with holiday demand, our sales that October were 4x higher than September. We were ecstatic but also incredibly busy and stressed out fulfilling that demand. We went a few days without looking in our bank account and were suddenly surprised by having one of our checks to our main supplier bounce. We knew we were selling more than we were buying and didn’t understand what had happened. Upon looking at our bank account we found that we had gone 5 days without any transfers to our business checking account from our merchant account. Where was our money?
A Horror Story
After waiting on hold for hours, talking to the tech support people at our merchant account provider, talking to their managers, etc, we found that they had placed a “reserve” on our account without telling us and were withholding all of our money until they had accumulated a $30,000 reserve. We told them that if they did that we would go out of business and they agreed to return all but $10,000, so long as they could keep 5% of every transaction in the future until we had reached $30,000. We agreed because we had no choice. With a negative balance in our checking account we couldn’t pay our suppliers for the goods and couldn’t deliver the products to our customers. The reason why merchant account providers require a reserve is that if a customer disputes a charge with your store you (the merchant) are liable for it. If you are not able to make good on it, then your merchant account provider is liable for it (see “Disputes, chargebacks and liability”). It is completely understandable that merchant account providers need to have a reserve to mitigate their risk in certain cases but this was frustrating for several reasons:
- The reserve was obviously way out of proportion to the risk they were bearing. We had only had a few hundred dollars in chargebacks ever, when a scammer used someone else’s credit card at our site and we didn’t catch them before we shipped it out.
- The merchant account provider wasn’t ever able to give us up-to-date balances on our reserve
- We weren’t given the notice we needed to find another merchant account provider
Note: we eventually got the reserve back 6 months after we switched to another merchant account provider. Try and avoid reserves, they can be a really big drain on your cashflow.
The first thing you can do to avoid such a situation is to get your Merchant Account Provier to agree in writing that there will be no reserve on the account, unless something changes in your business that increases your risk, before you sign the contract. If you don’t have a lot of chargebacks in your past you can probably find plenty of merchant account providers that will not require you to have a reserve. The second thing you can do is to warn your Merchant Account Provider if you anticipate a spike in sales. Recognize that they bear a lot of risk and that most merchant account providers have been burned in the past by merchants that sold stuff to customers and then didn’t deliver, leaving their Merchant Account Provider on the hook for the damages. If you can anticipate your periods of higher sales and warn them they will view you as a responsible merchant who does not cause them much risk.