When you’re seeking a merchant account, making an informed decision is crucial. At JJS Global, we’re happy to serve as a resource during your vetting process (even if you don’t end up choosing us!), helping you validate information and make the best choice for your business. A common area of concern we encounter is merchant account reserves—specifically, what they are, why they’re necessary, and how they impact your business.

What Is a Merchant Account Reserve?

A merchant account reserve is a portion of your sales revenue that your payment processor holds to mitigate potential risks. Typically, this reserve is around 10% of your transaction volume, acting as a financial safeguard to cover unexpected events like chargebacks, fraud, or other disputes.

Why Are Reserves Necessary?

Reserves serve to both protect the payment processor and also safeguard your business:

Risk Mitigation:

The primary reason for a reserve is to cover potential losses from chargebacks or fraudulent transactions. If a customer disputes a charge, the reserve ensures that the processor can refund the customer without disrupting your operations.s.

Financial Stability:

A reserve can help stabilize your business during unexpected financial strain. If there’s a sudden spike in chargebacks or a temporary dip in cash flow, the reserve provides a cushion, helping you manage these challenges without severe impact on your day-to-day operations.

Building Trust with Processors:

By maintaining a reserve, you demonstrate financial responsibility, which can lead to better terms and increased trust over time. Processors are more likely to offer lower fees and more favorable conditions to businesses that effectively manage their reserves.

How Reserves Protect Both Businesses and Payment Processors

The reserve serves as a mutual safety net. For the payment processor, it reduces the risk of financial loss due to chargebacks or fraud. For your business, it ensures that there are funds available to address any disputes or issues that arise, protecting your cash flow from sudden disruptions.

Imagine a scenario where a high-value transaction is disputed. Without a reserve, the payment processor might need to freeze your account or withhold other funds to cover the potential loss, creating a cash flow crisis. With a reserve in place, these issues can be managed more smoothly, ensuring business continuity.

Managing Your Reserve Effectively

While reserves are necessary, it’s understandable that businesses might be concerned about having a portion of their revenue held back. Here are strategies to manage your reserve effectively:

Plan Ahead:

Treat the reserve as a standard business expense. Include it in your financial planning and cash flow forecasts so that it doesn’t catch you off guard.

Maintain a Buffer:

Keep an additional buffer in your business account to cover any potential shortfalls caused by the reserve. This ensures that you have liquidity even when part of your revenue is being held.

Negotiate Terms:

It’s worth discussing the reserve terms with your payment processor. Depending on your business history and risk profile, there may be flexibility in the percentage held or the duration of the reserve.

Monitor and Review:

Regularly review your reserve with your payment processor. As your business grows and your financial stability improves, you may be able to negotiate more favorable terms or reduce the reserve percentage.

Demystifying the 10% Industry Standard

For many businesses, the idea of a 10% reserve might seem like an unnecessary burden, especially when cash flow is critical. As we mentioned earlier, it’s important to understand that this standard exists to protect your business as much as it protects the payment processor. By ensuring that there are funds available to cover unexpected events, the reserve helps maintain the integrity of your merchant account and keeps your business running smoothly.

Think of it as a safety measure—similar to insurance. You hope never to need it, but when the unexpected happens, having that reserve can mean the difference between a minor hiccup and a major financial setback.

Reserves might seem like just another hurdle in the complex world of payment processing, but they are a crucial component of a stable and secure financial relationship between your business and your payment processor. Understanding why reserves exist, how they protect both parties, and how to manage them effectively can demystify the process and help you incorporate them into your financial planning with confidence.

Partner with JJS Global

At JJS Global, we’re committed to helping businesses navigate these complexities with transparency and support. Whether you’re just starting out or looking to optimize your payment processing setup, we’re here to guide you every step of the way, ensuring that your reserve works for you, not against you.