Can merchants charge large test payments?

Your Business Credit columnist Elaine Pofeldt
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, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for

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Question 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 the card.

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

Answer Dear George,
Don't try it. You're asking for trouble with your merchant account.

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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Updated: 03-24-2019