Most businesses want their money as soon as possible, and some are willing to pay to get it sooner. In this article, I’ll go over the most common payment timeframes and whether it’s worth it to pay for faster settlement.
What is settlement?
Settlement refers to the process of transferring cash from a cardholder’s account to your business. You may also see it referred to as “funding,” but a few different things can be called funding, so it’s easiest for this article to refer to settlement.Understanding Settlement Options
Settlement times still vary by processor, but typically come in at 3 business days or less. Some processors explicitly offer next-day funding, and a newer option is “instant” settlement or “real-time” settlement. Instant settlement allows you to receive funds from your credit card transactions within minutes. Some processors have limits on the amount that can be transferred instantly, meaning you may not be able to get all of your funds immediately. Limits can be per-transaction, per-day, and longer timeframes. Note that instant settlements can still be delayed if your processor suspects fraud, same as other settlement options.How much does instant settlement cost?
Again, this varies by processor. You can expect to pay a percentage-based charge for instant settlement, typically at least 1% of the total amount you’re transferring. For example, Square charges 1.75% for instant transfer and PayPal charges 1.5% for instant transfer from a business account. Let’s do some sample math. Say your business processed $5,000 in credit card sales with Square in one day this week and you want to access that money right away. Using the instant settlement option costs 1.75%, so you’d pay $87.50 as a fee for the instant transfer. Keep in mind that this fee is separate from credit card processing fees you’ve already paid. If you were to process $5,000 each day and use the instant settlement option every time, it adds up quickly. For one 5-day week, you’d pay $437.50, which translates to $22,750 per year. That’s an expensive fee cutting into your bottom line. Note that most processors that offer instant settlement don’t require you to use it on all transactions. So you could decide to have a standard 1-3 day settlement for most transactions, but opt for instant settlement on a particular day. Maybe you have an expense coming up and want the funds in advance of that. In that case, you could choose the instant settlement for a particular day or a few days and pay for the convenience without forking over money for every transfer of funds.Do all processors offer instant settlement?
No, but it’s becoming more common. In addition to Square and Paypal as noted above, Fiserv recently announced a partnership with Paysafe to offer a digital wallet for faster funding to businesses using Clover equipment. If you’re already accepting credit cards, you’ll need to check with your processor to determine if instant settlement is available for your account.When should you pay for faster funding?
There’s no single answer - you’ll need to decide if paying for instant settlement makes sense for your business. Given the costs, it may never make sense for your business. However, it could be a good option if you’re experiencing a temporary cash flow issue and just need to bridge a short-term gap. Perhaps a client that sends checks is late on a payment or you have an unexpected bill. In those cases, access to money quicker with a 1.5%+ fee could be a good way to get out of a jam without resorting to other funding options. (Which themselves would have added fees!) As yourself these questions:- Why do I need the funds instantly?
- If I don’t get this money until tomorrow or the next day, what happens?
- (If you have a bill to pay or unexpected expense) Do I have any alternatives to paying to get access to my money?
When should you not pay for faster funding?
You may want to reconsider paying for instant settlement if your margins are already slim. At the end of the day, instant settlement doesn’t increase your revenue, it just cuts into your bottom line so that you can spend money a little bit sooner. If it’s possible to shift bill due dates or otherwise accommodate the gap to get to standard funding times, you’ll find that to be healthier for your overall cash flow. Some business owners prefer to see their funds instantly because it appears to make bank account reconciliation easier. The amounts you processed that day are in your account the same day. However, it just takes a shift in thinking to line up one day’s sales with the next day’s deposits. It’s also typically not worth paying for instant settlement if your business has healthy cash flow and you’re just in the habit of paying for instant settlement. Consider shutting it off to save unnecessary fees. Bottom line: Given the added expense, it’s best to treat instant funding as a backup plan rather than your standard operating procedure.Alternatives to Instant Settlement
If it’s hard to picture not using instant settlement but you don’t love the fees, there are a few alternatives to consider: Build up a “business emergency” fund. Similar to personal emergency funds suggested by financial experts, a business emergency fund helps cover unexpected expenses or gaps in cash flow. Ideally, business emergency funds should be held in a separate account from main operating expenses, but easily accessible in case of need. It can take awhile to build up an emergency fund, but even starting small can help defray costs that would otherwise require paying fees to access your funds. Switch processors. If your current processor settles funds on a longer timeframe, consider switching to one that offers next-day funding at no additional charge. Once you get past the first day of no deposits, you’ll receive them steadily each day following that. For example, if you sign up with a processor and your first processing day is Monday, you won’t receive any funds on Monday. But on Tuesday, you receive Monday’s funds. On Wednesday you receive Tuesday’s funds, etc. So after your very first day, you’re consistently getting funds. Need help finding a processor for your needs? Check out CardFellow.com’s credit card processing quote marketplace. No sales calls or pressure, just fully-disclosed quotes to review in private. Make sure you’re batching on time. When you accept credit cards, you don’t typically send them to your processor at the time of the transaction. Instead, you “batch” a group of transactions to be sent at once. Most business batch once per day. However, processors have a cut-off time for when batches must be received in order to receive funds the next day. Make sure you’re batching prior to that cutoff time. At the end of the day, instant settlement is a convenience and comes with a price. In some cases, you may be willing to pay for that convenience. Using instant settlement very intentionally, for specific purposes, can help you bridge short-term cash gaps without resorting to higher-cost options. However, it may not be your best option as a regular practice. What do you think? Do you use instant settlement for your business? Leave a comment!
Ben Dwyer
Ben Dwyer began his career in the processing industry in 2003 on the sales floor for a Connecticut‐based processor. As he learned more about the inner‐workings of the industry, rampant unethical practices, and lack of assistance available to businesses, he cut ties with his employer and started a blog where he could post accurate information about credit card processing. As the blog gained in popularity, Ben began directly assisting merchants in their search for a processor. Ben believes in empowering businesses by providing access to fair, competitive pricing, accurate information, and continued support. His dedication to transparency and education has made CardFellow a staunch small business advocate in the credit card processing industry.
