Can merchants charge large test payments?
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
I assist businesses with online transactions. We take a
credit card number from the business as security should they run a negative
balance for a long period, so we can as a last resort recover our loss through
Right now we do a "penny transaction" to validate
the card. Is it possible to do a large transaction authorization and then "reverse
it" with a very small transaction? I got the idea from gas stations where
they do authorizations for a predicted amount and then send another
for the actual amount. Can you help? -- George
Don't try it. You're asking for trouble with your merchant
Here's why: You can't make charges a customer hasn't
officially authorized -- or that customer will have recourse against you, says Evan
Hutchinson, who consults from Ames, Iowa with small businesses on how to open
merchant accounts as well as other business practices.
"You can't just swipe a card, even for a penny, unless
you have a valid business transaction with the client," he says. If you
do, and the customer disputes it, the bank may reverse the charge.
Do that over and over again with different clients, and it
may be a red flag that causes a merchant account provider to close your
account. "Remember, banks can close merchant accounts for any reason at
any time," he says.
You are right that banks are familiar with payment practices
in various industries and may allow certain ones, such as gas stations, to
preauthorize transactions for a certain amount tied to them, Hutchinson says. That
is based on how they code your account.
"Normally, with gas stations, restaurants and hotels,
you preauthorize for an expected amount," he explains. "Usually
hotels will charge 20 percent more than the expected bill. Restaurants will
authorize 20 percent more for an expected tip. Gas stations don't know how much
you will spend for gas."
From your note, it is hard to tell exactly what form of
assistance you provide to customers with online transactions. If you provide
consulting services or technology help, I would recommend protecting yourself
against nonpayments in another way. For instance, many consultants charge a
nonrefundable deposit under the contracts they sign with clients.
I would also examine your business model. Businesses live
and die on cash flow. If you have significant numbers of clients with negative
balances -- meaning they owe you money -- you probably need a better system for
invoicing them and perhaps tracking your accounts receivable. Even small unpaid
bills can add up over time, so make sure you have a system in place for keeping
track of them and pursuing them in a timely manner.
No business should be paying to work with clients -- which is
what you're doing in essence if the client isn't paying you for services you've
delivered. Remember: Time is your most important currency in a small business.
If you're devoting it to clients who don't add to the health of the business,
cut the cord. You'll have more energy to devote to the accounts that really
help your growth.
See related: Can my business add a surcharge for card-paying customers?
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Published: May 26, 2014