As liquidity becomes a larger problem for businesses of all types, some business owners are finding money being frozen by an unlikely source, their credit-card processors.
According to Business Week: The recession and rising business bankruptcies have prompted giant credit-card companies such as Denver (Colo)-based First Data and Atlanta-based Elavon to demand that some business owners maintain a cash reserve with the processors in order to protect against the possibility that customers may require refunds after the merchants have gone belly-up. Most processing agreements give the transaction giants the right to accumulate those reserves simply by holding back money the merchant is supposed to be paid after a credit-card transaction has cleared, often with little or no warning.
Dan Price, chief executive officer and co-founder of Gravity Payments, a card processor in Seattle, says he has seen “dramatically more” cases of reserves being created for small accounts in the past year. He says he has not asked any of his clients for reserves but has requested regular financial statements from customers that might pose a risk. Price says the size of reserves varies greatly, but it is common to require an amount equal to one or two months’ worth of transactions.
Once processors clear charges, they are responsible for customer refunds. If the company goes under before that time, the processor is on the hook for the cash. The practice of withholding money from business owners is primarily due to unscrupulous vendors racking up credit card transactions as the curtain call of bankruptcy draws nigh. Red flags go off for processors when high volumes of large transactions are flying from a business. This not only puts the intended shady dealers in their sites, but also businesses that are legitimately taking off.
One of the biggest problems for business owners is in predicting cash flow as processors often don’t alert owners that they are withholding large volumes of cash.
According to the Business Week piece: Ron Gregory, owner and chief executive officer of 3-person Cheyenne (Wyo.)-based trucking company RAD Enterprises, says he found out First Data had withheld nearly $7,000 from his account when he happened to check the balance in March. Gregory had dumped a previous processor because of its high fees and signed on with First Data in February after seeing a promotion at his local Sam’s Club.
Gregory says First Data canceled his contract after he complained but told him they planned to hold onto his $7,000 for six months. Gregory aired his woes on ripoffreport.com and says his next stop will be small claims court.
It is advisable to check with your contract with your credit card processing company, or contact them to find out their policy on cash reserves and see if your account is subject to withholdings and if they are already taking place.