Imagine running your high-risk business smoothly, only to find out a chunk of your hard-earned money is being held back by your payment processor.
Frustrating, right? Welcome to rolling reserves—a concept that might initially seem annoying and costly but is essential for managing financial operations in high-risk industries.
This means that if you’re a high-risk merchant, understanding rolling reserves isn’t just beneficial—it’s necessary.
However, like most aspects of running a high-risk business, rolling reserves might sound like yet another confusing term you might think you don’t have time to understand. So, we’ve created this quick guide to help you understand what they are, how they work, and why payment processors enforce them, particularly for high-risk merchants like yourself.
Want to ensure that your cash flow remains steady despite these holdbacks? Curious about negotiating better terms with your payment processor? We’ve got you covered. This guide has it all.
What is a Rolling Reserve?
At its core, a rolling reserve is a predetermined percentage of your daily transactions that your payment processor temporarily holds back. Think of it as a security deposit that ensures both you and the processor are protected from potential financial risks.
Payment processors implement rolling reserves to cushion against chargebacks, refunds, and fraudulent activities. For high-risk merchants—like those in industries such as online gaming, travel, or e-commerce—this safety measure is even more pertinent due to the higher likelihood of these financial disturbances.
The withheld funds are typically released after a set period, assuming no issues arise during that time.
How Does a Rolling Reserve Work?
Before you skip to the end, now that you think you understand what this term is, we can’t stress enough how essential understanding how a rolling reserve works is for managing your business’s cash flow and financial planning.
Essentially, a rolling reserve involves withholding a specified percentage of your daily sales revenue. This withheld amount acts as a buffer against any potential financial disruptions, such as chargebacks or fraudulent transactions.
Calculation of Rolling Reserves
Calculating a rolling reserve is straightforward but important for your financial forecasting. Typically, your payment processor will determine a percentage—often ranging from 5% to 10%—of your daily transaction volume to withhold.
For example, if you process $10,000 in transactions daily and your reserve rate is 7%, then $700 will be held in reserve each day.
Again, this calculation might seem simple, but it can significantly impact your working capital. If you’re aware of this percentage, you’re better equipped to plan accordingly to maintain a healthy cash flow and avoid unexpected financial strain.
Release Schedule of Rolling Reserves
The release schedule of rolling reserves varies by payment processor but usually follows a consistent pattern. Commonly, the held funds are released after a predetermined period, such as 90 or 180 days.
For instance, if your processor has a 180-day rolling reserve, the funds withheld on January 1st would be released around July 1st, assuming no chargebacks or major issues occur during this period. This staggered release ensures that there are always sufficient funds available to cover potential disputes or refunds.
But Why Are Rolling Reserves Imposed on High-Risk Merchants?
Rolling reserves are particularly common in high-risk industries due to the increased likelihood of chargebacks, fraud, and other financial discrepancies. Payment processors use rolling reserves as a form of risk management to protect themselves and ensure the long-term viability of high-risk merchant accounts.
As you likely know, high-risk merchants often operate in sectors with volatile transaction patterns and greater exposure to fraud. For instance, businesses in the online gambling, travel, or subscription services sectors may face frequent disputes and chargebacks. By implementing a rolling reserve, payment processors can mitigate the risks associated with these uncertainties.
Moreover, rolling reserves offer a layer of assurance that there will be funds available to handle any financial disputes that arise. This practice not only protects the payment processor but also creates a more stable environment for you as a merchant by encouraging responsible transaction management and reducing the likelihood of account termination due to excessive chargebacks.
A rolling reserve is a type of merchant account reserve. Most merchant account reserves usually amount to 10% in high-risk industries. If you don't have any chargebacks or fraud and operate within a low-risk industry, it's easy to negotiate it down to a lower percent. However, in high-risk industries, it's usually set at at least 10%, and it's hard to lower that.
The Good, the Bad (and the Ugly) of Rolling Reserves
It’s not like you have a ‘choice’ here and can choose not to have a rolling reserve. So, really, there are no proper pros and cons of rolling reserves you can use to see if it ‘works for you.’
However, it is nice to understand the good and the bad so you can start to see how to use rolling reserves as part of financial forecasting for your high-risk business.
On one hand, they provide a safety net for both payment processors and merchants. On the other hand, they can strain your cash flow and financial planning. Here’s a more in-depth breakdown of those factors.
Advantages of Rolling Reserves
Rolling reserves aren’t just a hassle—they come with their own set of benefits that can actually work in your favor:
Risk Mitigation: As mentioned, the primary advantage is risk mitigation. By holding back a portion of your daily transactions, payment processors ensure there’s a buffer to cover chargebacks, refunds, and potential fraud. This not only protects them but also stabilizes your business by preventing sudden financial shocks.
Financial Discipline: Knowing that a percentage of your revenue is withheld forces you to plan and budget more effectively, ensuring you maintain a healthy cash flow despite the reserve.
Improved Processor Relationship: Demonstrating that you’re willing to engage in risk management can make processors more inclined to offer favorable terms or additional services down the line.
Disadvantages of Rolling Reserves
Of course, rolling reserves come with their fair share of drawbacks that can impact your business operations:
Cash Flow Restrictions: With a portion of your revenue withheld, you might find it challenging to cover operational expenses, invest in growth opportunities, or handle unexpected costs.
Delayed Access to Funds: Because funds are held for a specific period—often 90 to 180 days—you won’t have immediate access to all of your earnings. This delay can be particularly burdensome for businesses that rely on quick turnover of capital.
Potential for Increased Fees: Sometimes, the presence of a rolling reserve can come with additional fees or higher transaction costs. Payment processors may charge more to compensate for the perceived risk, adding another layer of financial strain.
The point here? By weighing the good and the bad, you can develop strategies to maximize the advantages while mitigating the disadvantages, setting your business up for long-term success.
Managing Your Financial Operations with Rolling Reserves
Dealing with rolling reserves doesn’t have to throw a wrench in your financial operations. With some strategic planning and effective management techniques, you can maintain a healthy cash flow and keep your business thriving.
Don’t believe us? All sounds too stressful? Here are some actionable tips from our payment experts to help you navigate the challenges of rolling reserves:
Learn to Manage Your Cash Flow
Effective cash flow management is crucial when dealing with rolling reserves. Here are some tips to help you stay ahead:
Create a Detailed Budget: Start with a meticulous budget that accounts for the withheld percentage. Factor in all your regular expenses and ensure you have a buffer for unexpected costs.
Diversify Your Income Streams: Relying on a single income stream can amplify the impact of rolling reserves. Consider diversifying your revenue sources to spread out the risk and enhance your financial stability.
Monitor Transactions Closely: Keep a close eye on your daily transactions to anticipate the amount that will be held in reserve. Regular monitoring helps you stay informed and adjust your financial plans accordingly.
Maintain an Emergency Fund: Set aside an emergency fund to cover any gaps caused by the rolling reserve. This fund can help you manage operational expenses without tapping into your reserved funds.
Build a Strong Relationship with Your Payment Processor
A strong relationship with your payment processor can make managing rolling reserves (and life as a high-risk business owner) significantly easier.
Here’s how to foster that connection:
Open Communication: Regularly update them about your business status, transaction volumes, and any changes in your operations. This transparency builds trust and can lead to more favorable terms (if possible—honestly, sometimes it’s not).
Negotiate Terms: Don’t be afraid to negotiate the terms of your rolling reserve (again, if that’s possible, given your business and industry). If your business has a solid track record and low chargeback rates, leverage that to potentially reduce the percentage withheld or shorten the release period.
Seek Advice and Support: Payment processors often have resources and support systems to help merchants manage their financial operations (at FastoPayments, we do, at least!). Don’t hesitate to ask for advice or assistance in optimizing your relationship and handling rolling reserves more effectively.
💡 Don’t forget to demonstrate stability!
Show your payment processor that you’re committed to maintaining a stable and secure business. Minimize chargebacks, employ robust fraud prevention measures, and ensure compliance with industry standards to strengthen your profile as a reliable merchant.
One simple way to do this is to ensure your website is compliant. Here’s a word from our Founder & CEO about that:
“We’ve seen businesses have their accounts get suspended or terminated because they didn’t follow the thread of compliance throughout the whole website. We go through CBD websites, for example, really thoroughly to ensure they have their product ingredients and lab analysis clear on every required page.”
Are There Alternatives to Rolling Reserves for High-Risk Merchants?
Finding alternatives to rolling reserves can be challenging for high-risk merchants but not impossible. While rolling reserves are a common risk management tool used by payment processors, each case is unique and may offer different solutions.
One alternative is chargeback insurance, which can cover the costs of chargebacks and reduce the need for a rolling reserve. This insurance typically involves paying a premium to a third-party provider, who then absorbs the financial risk associated with chargebacks. However, chargeback insurance can be costly and might not be a viable option for all businesses.
Performance bonds are another potential alternative. These bonds are essentially a guarantee that the merchant will fulfill their financial obligations. By securing a performance bond, a merchant can demonstrate financial stability and reliability, potentially persuading the payment processor to waive or reduce the rolling reserve requirement.
Ultimately, whether these alternatives are open to you depends on your specific business circumstances and the risk assessment conducted by your payment processor. Our best suggestion here is to have open discussions with your processor and explore all available options to find the best solution for your needs.
Partner with FastoPayments
While they can seem like a financial hurdle, rolling reserves protect both you and your payment processor from potential risks such as chargebacks and fraud.
We’ve covered the advantages and disadvantages of rolling reserves, provided cash flow management tips, and discussed alternatives like chargeback insurance and performance bonds. Each of these elements can help you handle rolling reserves more effectively.
Now, it’s time to start working with a high-risk merchant account provider that understands these challenges. At FastoPayments, we offer tailored solutions designed to ease the financial strain and provide robust support, ensuring your business thrives despite the complexities of high-risk operations.
Take control of your financial future with FastoPayments and ensure your business has the support it needs to grow confidently. Get your free, no-obligation quote here.
