As an entrepreneur, there are times when virtually every penny counts. When your credit card processor puts a hold on your funds, it can shake your company to its very foundations. What are some of the reasons why processing companies may do this?
Processing companies act in the middle between you and your bank. When your customer makes a credit card payment, their bank is extending a line of credit to make it happen. By the same token, your processor is paying you on the customer’s behalf long before they receive the money. If anything goes wrong in this procedure, it is the credit card processor that is on the hook for the money.
Let’s say that, despite your best efforts to stay afloat, your company goes out of business. One of the unintended casualties might be your credit card processor. If you terminate your account while you still owe merchant fees, it is the processing company that suffers the hit.
As a business owner, chargebacks may be one of your most time-consuming nightmares. They occur when a customer disputes a charge and requests to reverse it. Believe it or not, these chargebacks are even more damaging to merchant companies.
Let’s say that one of the purchases made before your business went under was a very large one. For whatever reason, the customer chooses to dispute the purchase, basically refusing to pay the charge. If your company is no longer a business entity by the time the chargeback becomes official – they can sometimes take as long as 180 days – the processing company is again left owing the money to the bank.
Credit card fraud is one of the biggest reasons for chargebacks. Merchant processing companies are often put in the unenviable position of owing many thousands of dollars when a transaction or merchant company is found to be bogus.
To sum it up, your funds are probably on hold because your processing company is attempting to protect itself from the risk of fraud, chargebacks and fees that cannot be recovered due to a merchant closing. For an entrepreneur, this situation can be frustrating in the short run. However, it’s safe to say that it is an inevitable part of doing business with credit card processing companies.