A rolling reserve allows a credit card processor to withhold a pre-specified percentage of your gross sales. The processor deposits the held funds into a non-interest bearing account for a pre-determined period of time that is specified in your merchant processing agreement.
For example: If your merchant account has a 5% rolling reserve for 18 months, the processor will withhold 5% of your gross sales. The 5% of sales that are withheld will not be accessible to you for a year and a half.
- Why are rolling reserves imposed?
- Transactions Affected by Rolling Reserves
- Effects of a Rolling Reserve on Your Business
- Will a rolling reserve hurt my business?
- Finding a Credit Card Processor
Why are rolling reserves imposed?
Rolling reserves may be applied to high risk merchant accounts by a processor to lessen the risk associated with the account. In some cases, a processor is only able to provide a merchant services account if it includes a rolling reserve.
The underwriters for the processor, aggregator, or acquiring bank are responsible for requesting rolling reserves for a high-risk merchant account. There are a number of variables that can make an account fall into a high-risk category, such as:
- Large average tickets
- High processing volume
- High-risk business types
- Business owners with poor personal credit
In some cases, a rolling reserve will be required for new businesses in high-risk industries, but may not be needed for established businesses switching processors.
Transactions Affected by Rolling Reserves
A rolling reserve will only affect credit card sales for Visa and Mastercard transactions, unless other card providers specifically call for a reserve in their individual processing agreements. If an authorized processor for Visa and Mastercard requires a rolling reserve, the same reserve would not automatically apply to American Express and Discover transactions.
Effect of a Rolling Reserve on Your Business
Rolling reserves are one of the harsher restrictions that a provider can place on a new merchant account. Unlike an ACH delay, a rolling reserve can have a serious and long-lasting adverse effect on the cash flow of a new business.
The effect that a rolling reserve will have on your business is directly proportional to your gross sales from Visa and Mastercard transactions. Below is an example of how a 5% rolling reserve would affect two distinctly different business types.
A gross sales chart for a retail business may look something like this:
- Cash Sales 50%
- Check Sales 15%
- American Express 5%
- Discover 10%
- Visa & MasterCard 20%
Visa and MasterCard sales for this business only account for 20% of gross sales, therefore lessening the affects that a 5% rolling reserve would have on the overall cash flow for the business.
A gross sales chart for an online business may look something like this:
- Cash Sales 1%
- Check Sales 5%
- American Express 10%
- Discover 15%
- Visa & MasterCard 69%
Visa and MasterCard sales for this business account for a sizable 69% of gross sales, therefore magnifying the negative effects that a 5% rolling reserve would have on the overall cash flow for the business.
Will a rolling reserve hurt my business?
There are several factors to consider when determining if a rolling reserve will hurt your business. You’ll need to think about cash flow, competitive capabilities, and growth.
Before agreeing to a rolling reserve you should seriously consider the effect that the withheld funds will have on the cash flow of your business. Make sure that you will have enough NET profit from credit card sales to pay for merchandise and operating expenses after the percentage reserve. For many businesses, especially small businesses and those in industries with low margins, even a single-digit percentage as a rolling reserve can be a big chunk.
A rolling reserve will cut into your profits and make it even harder for you to compete in a low-price market. If your target market is price-sensitive a rolling reserve may be out of the question. You may be unable to price your goods or services high enough to cover the reserve and your operating expenses while being low enough to compete in the market.
Having funds withheld by a processor will leave less money available for working capital. Less working capital will translate into slower business growth, since you won’t have as money available for marketing, additional inventory, and other business expenses.
However, remember that rolling reserves do serve a purpose. They make it possible for processors to grant merchant accounts to businesses that otherwise may not be able to get one. These days, almost all businesses need to accept credit cards in order to stay competitive, even if there is a rolling reserve attached to the account to make card acceptance possible. Rolling reserves are eventually released, and you can go on processing normally.
Use the information above to examine how a reserve will affect your business and ask yourself:
- Do I have a high percentage of Visa and Mastercard Sales?
- Will my mark-up allow for a rolling reserve?
- Can I stay competitive with a rolling reserve?
The answers to these questions will help you determine if your business will be adversely affected by a rolling reserve.
Finding a Credit Card Processor
Unfortunately, there’s no easy way to determine in advance if a credit card processor will require a rolling reserve. Whether one applies – and the percentage and time frame – will be determined when you apply. However, you’ll have the option of declining a merchant account if the rolling reserve is too onerous.
You can use merchant account comparison services like CardFellow to find a processor. CardFellow is free, private (no sales calls!) and lets you easily compare multiple processors. You can get started and see pricing in just 2 minutes. Try it here!