What is a Merchant Account Cash Reserve?
A merchant account cash reserve is like a safety deposit that a bank or payment processor holds to protect itself against potential losses. When you, as a business owner, accept credit or debit card payments, you do so through a merchant account. This account helps process card payments, ensuring that the money from a customer’s card purchase ends up in your business’s bank account. Think of a cash reserve as a form of insurance that the bank or payment processor uses to ensure they can cover potential costs without immediate financial harm, thus keeping the payment ecosystem stable and trustworthy.
Types of Cash Reserves
Rolling Reserves: A small percentage of each transaction you process is held back and kept in the reserve for a specified period (like six months or a year). After this period, the money is released back to you.
Upfront Reserves: You might be required to provide a fixed amount of money upfront, which is kept in the reserve.
Capped Reserves: This is a mix of the first two types. A certain amount is held back until the reserve reaches a pre-agreed cap.
Cash Reserves Impact on Business Cash Flow
Cash reserves can impact a business’s operational liquidity, as a portion of revenue is inaccessible for a duration. This situation necessitates effective cash flow management strategies to ensure that daily operations are unaffected while complying with reserve requirements. Business owners should engage in meticulous financial planning to accommodate the delayed availability of funds.
