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What is a Rolling Reserve and How Does It Work?

February 14, 2022

So, you’re learning the ropes of maintaining a merchant account. Along the way, you’re bound to learn about chargebacks and their nasty effects on your business. And while it might seem unfair to have the chargeback system particularly skewed to the customers’ side, you can have the advantage of the rolling reserve.

Okay, to be fair, a lot of businesses actually perceive the rolling reserve in a negative light. But with this intuitive feature in place, you might be able to offset a lot of the damages that chargebacks can deal. Of course, you’re still going to end up paying for them, but at least you can dial down the repercussions.

What is a Rolling Reserve?

If you’re operating in a high risk industry, then chargebacks are pretty much a pre-determined part of the experience. High risks businesses will incur chargebacks one way or another, and when that happens, businesses could get slapped with exorbitant charges that can negatively affect cashflows without warning.

And that’s precisely what the rolling reserve hopes to prevent. The rolling reserve is a kind of cash reserve that you accumulate by collecting a portion of your gross sales for a period of time. The maximum amount taken is usually set at 10%, but some acquirers will impose deductions as low as 5%.

The purpose of the rolling reserve is that it gives you a pool of funds to pull out from in case you’re slapped with chargebacks in the future. This can protect your account against unannounced deductions, and may even improve your contract terms with your acquiring bank.

How Does a Rolling Reserve Work?

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Keep in mind that the rolling reserve isn’t always required when you sign a contract with a merchant acquiring bank. But then again, there are some that will impose the need for a rolling reserve stipulation in your contract, especially if you operate in a high risk industry. So it really depends on who you choose to work with.

Should you opt to get a rolling reserve, the amount taken from your initial sales can range between 5% and 10%. This is calculated on a case-to-case basis and is different for every merchant. To be clear, the funds collected for your rolling reserve account do not accumulate interest, so it won’t generate a profit for either you or your acquirer.

The rolling reserve is collected for a period of time, before being released to your account. For instance, the acquirer can continue to collect the percentage for up to 18 months, and then the money is released back into your account if they’re unused. That means that you’re not actually losing any money, and you’re simply delaying the cash out from your transactions.

So when are the funds actually used? Simple — when you experience a chargeback. Instead of taking the money from your account, the acquirer will charge your rolling reserve. This just makes things easier for both you and your acquirer, and works to prevent any disruptions to your cash flow. Then, anything that’s left behind will be funded back into your account.

Benefits of a Rolling Reserve

There are a number of reasons why you might want to consider saying yes to getting a rolling reserve feature with your merchant account contract. These include:

 

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Better chances of approval – Merchants in high risk industries are known to struggle with merchant account applications because of the risk associated with their businesses. Most financial institutions will actively avoid partnering up with businesses that are prone to chargebacks simply because the process of reversing a transaction also costs them money.

The rolling reserve shows merchant acquiring banks that you’re willing to step up and take responsibility for the risk. And because the money is already there for them to debit and charge whenever necessary, they’ll feel more confident to write up a contract for you.

Streamlining your cash flow – A chargeback will usually hit your account with no warning. Banks will not let you know ahead of time when they’re going to reach into your account and take back an amount disputed by a client. So you’ll be surprised to see that you’ve been charged not only the cost of the transaction but also expensive penalties.
The rolling reserve gives you a sort of safety net that lets you go about your business without having to worry about sudden deductions that you didn’t expect. This allows you to map out your cash flow and plan your next steps without chargebacks foiling your strategy.

 

Guaranteed windfall – Unless you get a lot of chargebacks, it’s likely that your rolling reserve will continue to grow over time. And when the money isn’t used, your acquirer will release the funds right back into your account. Now, when you get back 10% of your total gross sales after about an 18 month period, you might find yourself face to face with a fat lump sum.

This can be more than enough capital to grow your business or start a new one entirely. Now, if you’re not the kind to do well with saving up, and you’re worried you might end up spending your income unnecessarily if you can always easily access it, then a rolling reserve might be for you.

Downsides of a Rolling Reserve

While there are some definite upsides to getting that rolling reserve, it’s not for everyone. This safety net can provide some major protection in the future, but not without a few potential downsides that could counteract its benefits.

Delayed revenue – For smaller businesses that rely mostly on their cash flow to keep their venture up and running, the rolling reserve can keep them from getting their hands on important funds needed to run their operations. That’s why most small businesses opt out of the rolling reserve because it restricts their access to much-needed funds.

If you’re a small business owner, then you might be able to negotiate lower terms for your rolling reserve. This should help you get the best of both worlds, and limit the impact of the delayed revenue on your cash flow.

Account closure – Let’s say that your acquirer closed down your account for whatever reason they had. This means that they can hold on to your rolling reserve for up to 180 days, leaving the funds inaccessible to you — on top of the funds that they might hold in your merchant account.

Obviously, this can be a major hit against your business, and many small to medium-sized enterprises might not even be able to recover after such a profound experience.

Hiccups in the process – What’s funny is that most acquirers act fast when it comes to collecting fees, charges, and penalties, but take their sweet time when sending out money that they owe their merchants. The same goes for the rolling reserve.

While they might guarantee to send back the accumulated amount after a period of time, there will almost always be delays. So although they might tell you that your rolling reserve funds will be released after 18 months, you might see yourself having to wait for an extra 2 or 3 to actually access the amount.

Frequently Asked Questions About Rolling Reserves

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  • What factors affect the rate of the rolling reserve? These are actually the same factors that would affect your risk rating. Things like your chargeback history, your location, the industry you operate in, and the average monthly revenue you get will all factor into your rolling reserve rate. The higher your risk, the higher the rate.
  • How is a rolling reserve different from a static reserve? As the name suggests, a rolling reserve is an account that increases in value over time. The accumulated amounts roll month after month and grow with each new statement. The static reserve on the other hand stops growing after it reaches a specific dollar value indicated in your contract.
  • Where are the funds kept for the rolling reserve? All of the money collected for your rolling reserve is kept in a sub-account that’s connected to your merchant account. This is a non-interest account, which means that whatever money is collected as a result of your rolling reserve will not grow or turn a profit at the end of the time period it’s accumulated.
  • Is a rolling reserve always beneficial? Not exactly. Businesses that only make a profit of about 5-10% will have the rolling reserve consume their entire profit, which causes more harm than good. Another type of business that would absolutely not benefit from the RR is low risk merchants. In fact, experts recommend that if a merchant acquirer requires that you get a rolling reserve for your low risk merchant account, avoid them all together. That should be your first red flag.

Over to You

Because chargebacks are becoming increasingly damaging for businesses in the here and now, the rolling reserve gives you a way to fight back and protect your business. Of course, it’s not for everyone. But if your business qualifies for the safety net, then you should definitely consider opting for the added security to protect your cashflow and keep your books nice and clean.

 

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