You’ve had a very promising start to your business and are looking forward to reinvesting funds to chase your goals. However, you check your merchant account and find that a hold has been placed on your funds. Plans stall, frustration sets in, and now you’re wondering what it all means and where do you go from here. Most importantly, how are you going to pay bills on time? What should you do when card processors hold funds?
First, it’s important to know the difference between a merchant account hold, also known as a “funds hold” and a merchant account freeze.
What is a Merchant Account Hold?
A merchant account hold happens when a credit card processor pauses settlements and holds all processed funds in security. This is why you’re not seeing the money deposited into your merchant account. (Keep in mind a hold differs from an ACH delay or rolling reserve; these are an internal issue at the acquirer or processor level.)
There are many reasons why your provider might choose to withhold your funds. In the event that your provider says you broke the terms of your contract, you could wait up to 180 days to receive your funds. Common reasons why a hold might occur include limiting risk and chargebacks. The primary reason a processor will hold funds is to limit the risk of a merchant closing their account while they still owe fees, chargebacks and fraud.
They may also choose to hold funds to ensure there is money available in case chargebacks occur. Having funds on hold helps to shield them from suffering losses due to a merchant conducting fraudulent transactions, and to ensure they can pay any accompanying fees.
What is a Merchant Account Freeze?
A merchant account freeze is similar to a hold, but a freeze is a worst-case scenario for merchants. When a freeze happens, your business will no longer be able to accept credit and debit card transactions. To complicate matters further, any and all income from recent transactions will not be deposited until the processor lifts the freeze.
How to Avoid and Fix Account Holds
The most important thing is to be transparent and communicate clearly when it comes to your merchant account. Before partnering with a processor, spend some time going over the terms and conditions in the agreement so you can avoid unnecessary holds and freezes. Make sure you only use your merchant account for your business (not another business or person), and only sell items that you agreed on initially.
It’s also important to keep in touch with your processor over any and all changes to your business. For example, if you starteded out processing around $10,000 in transactional volume per month, but you suddenly experience rapid growth and it jumps to $40,000 per month, you’ll need to let your processor know. Another big thing to manage diligently is chargebacks. Find a processor that can help you fight against and protect your business from chargebacks.
All in all, avoiding a merchant account hold boils down to choosing the right payment processor and being proactive with your account activity. Make sure your processor understands the ins and outs of your business type and industry.
Did your card processor place a hold on your funds? Here’s everything you need to know about holds, freezes and what to do when card processors hold funds.