Merchant Account Cash Reserves Explained

Here is the illustration depicting a Cash Reserve for a merchant account.

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.

1 User Reviews

  • richie melendez

    First off, would like to thank Mr. Parker for the informative website, and helping the little guy (as well as I’m sure some equally worthy financial giants in waiting) become experts at understanding this convolution.

    I have not done credit card processing for over a decade, so I am surely outdated, however how has there not been outrage over these reserves? Or the way we are left in the dark on terms and condition involving reserves? Ten years ago, a reserve killed my business, a very good business and a growing small business that supported my family. It was deemed a chargeback issue, although I was beneath the percentage. 20k taken, with another 30k to be taken that I just did not have at the time (20k was about 19k more than I had ever had in a bank account before that year.) It was NOVA, apparently a huge reseller, and I was told by the rep I talked to two things: 1. I shouldve planned for this, and, conveniently, when asked if the thousands of reserve accounts they possessed were in non interest bearing accounts was told that ‘is not a requirement’ by law.

    Today with multiple platforms and heavier competition, the rules and laws seem to favor the little guy a bit more. And please do not get me wrong, I COMPLETELY understand a company’s need to protect against fraud, and upfront policies like rolling seven day reserves seem more than fair, and can be planned for (going to your bank account and seeing in 24 hours a +22k balance go to a -4k balance cannot), however my ramblings lead to this: how can these companies still get away, how is it legal I mean, to have such vague rules and double talk regarding what they can pull, when, and why?! It happens every day to hundreds and hundreds of businesses STILL from the research I have done, not detailed but still.

    My prime example is Square, which I have been a member but have not yet used, how is it legal for them to deactivate members accounts, and then claim what they do about the funds that these accounts contain are set to different rules and regulations because they belong to said deactivated accounts??! Also, as with most of these companies for DECADES, these deactivations and terribly unjust reserves are almost entirely arbitrary and in my case was after the biggest month of my professional career, though I would never judge a system on just one case out of millions out of personal bias.

    Please write up something on this very informative and helpful site about this as it affects millions of families and businesses, and seems as potential damaging to the US economy as the Prescription Drug stronghold with almost none of the publicity.

    R. Melendez

Comments are closed.


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