What is an Upfront Reserve and How Does it Affect Your Business ?
If you're a merchant who accepts credit card payments, you may have heard of an upfront reserve. An upfront reserve is a portion of your sales that is withheld by your payment processor as a form of collateral. The amount of the reserve is typically a percentage of your sales, and it is held in a separate account for a specified period of time.
While an upfront reserve can be an effective way for payment processors to mitigate risk, it can also have an impact on your business. Here's what you need to know about upfront reserves and how they can affect your business.
What is an Upfront Reserve?
An upfront reserve is a portion of your sales that is held by your payment processor as collateral for potential chargebacks or other losses. Payment processors may require an upfront reserve if they perceive your business as having a higher risk of chargebacks or fraud, or if you're a new merchant without a proven track record.
The amount of the upfront reserve is typically a percentage of your sales, and it can range from 5% to 20% or more. The reserve is held in a separate account and is released to you after a specified period of time, typically 90 to 180 days.
How Does an Upfront Reserve Affect Your Business?
An upfront reserve can have a significant impact on your business, particularly if you rely on cash flow to maintain operations. Here are some ways that an upfront reserve can affect your business:
- Reduced cash flow: Since a portion of your sales is being held in a reserve account, your available cash flow will be reduced. This can make it more difficult to cover expenses and invest in growth.
- Increased costs: In addition to reducing your cash flow, an upfront reserve can also increase your costs. You may need to pay higher processing fees or other charges to offset the risk of chargebacks or other losses.
- Limited access to funds: While the upfront reserve is being held, you won't have access to those funds. This can limit your ability to invest in new products or services, make necessary upgrades to your business, or respond to unexpected expenses.
- Potential impact on credit: Depending on the amount of the upfront reserve and how it's reported to credit agencies, it may have an impact on your credit score or creditworthiness.
Despite these potential challenges, an upfront reserve can be a necessary measure for payment processors to manage risk and protect their business. If you're a merchant who is required to have an upfront reserve, it's important to plan accordingly and factor it into your budget and cash flow projections.
An upfront reserve can have a significant impact on your business, but it's an important tool for payment processors to manage risk. By understanding how an upfront reserve works and how it can affect your business, you can make informed decisions and plan accordingly. If you have any questions or concerns about upfront reserves, be sure to discuss them with your payment processor. Feel free to reach out to us at GetPayment so we can help you with your reserve and merchant processing issues!