Whether you already have a merchant account to process credit card transactions, are looking to switch or compare merchant account providers, or need a merchant account for the first time, there are many pitfalls to avoid. These include processing delays, changing fees and rates, rules on chargebacks - and the latest hot button on "holdbacks."
Tight credit, rising business bankruptcies and changes in how consumers use their credit cards are contributing to an unusual amount of financial ferment involving credit cards.
For small business owners, the top credit card hot button right now is holdbacks. This is a percentage of your overall credit card receipts that the card processor or merchant bank keeps to cover possible chargebacks if a customer returns something or demands a refund for other reasons. Lately, merchant banks and card processors have started requiring new or bigger holdbacks to cushion their own bottom lines should customers seek refunds after a business goes bust.
If you read the fine print in your merchant account agreement, you'll likely see a provision allowing your provider to withhold cash from your receipts, even without telling you. Result: You end up with less cash. And as First Data, a major card processor points out, "Merchant banks almost never pay interest on this money and it's not available for your business to use during the holdback period."
Ask about your card processor's holdback or "rolling reserve" policies. If your business is considered high risk (those that sell exclusively online often are), or has a less-than-stellar credit rating, you may be facing higher holdback or reserve requirements. Other high risk categories include merchants selling only a few high-ticket items; those with high processing volume, and business owners with a low personal credit score.
Check your statements! Some merchants are missing money they didn't even know was gone. Find out if any cash is being held back, and if so, at what rate, and under what conditions will you get it back. Some small businesses have successfully appealed a holdback and retrieved their funds. Others find themselves shopping for a different merchant account provider. Before you decide to switch, however, ask if you are on the hook for an early termination fee.
Take steps to reassure your account provider about your business prospects. Consider upgrading your point-of-sale (POS) systems, software and ecommerce website to a higher security level. This can decrease your exposure to credit card fraud, and offer more comfort to the merchant bank.
An excellent resource I recently discovered in this area is MerchantCouncil.org, a web site that offers a wealth of facts, helpful tips and information about merchant accounts, geared to small business. It's written and organized primarily by Ben Dwyer, a small business owner himself.