I ultimately recommended Square for my husband, Justin, and his brewery, Nocturnal Bloom. But my suggestion came with a caveat.
Square checks most of our boxes. However, online comments about merchant account holds sparked some concern. It wasn’t enough to convince us to choose a different POS system. And on the heels of the brewery's one-year anniversary, account holds haven't been an issue.
That said, it’s something businesses considering Square should be aware of.
» MORE: Read our full Square review
What is a merchant account hold?
A merchant account hold happens when your payment processor withholds money from card sales. You can continue to process card transactions. But you won’t have access to the funds in your merchant account until you resolve the reason for the hold.
A merchant account freeze takes the situation a step further. During a freeze, your payment processor withholds your business’s funds. And it cuts off your processing capabilities.
How long does a merchant account hold last?
The duration of a hold or freeze is hard to predict. But it can last anywhere from days to months. It depends on your processor and the severity of the issue at hand. Some processors, for instance, say they can hold funds for up to six months.
Are merchant account holds more common with Square?
Merchant account holds aren’t unique to Square. Instead, it’s an inherent risk you take with all payment service providers (PSPs). These processors (e.g., Square, Stripe, PayPal) combine multiple merchants' funds into a single shared account. Individual merchant account providers, like Finix, dedicate one account to each business.
Individual merchant accounts often require underwriting. The process is in-depth and may take more than a week. However, individual merchant account providers are usually more stable than shared accounts. The underwriting process makes the provider more familiar with how your business works. That typically means there are fewer surprises down the road.
This isn’t necessarily the case for PSPs. Since the application process is so simple, the processor might not understand the risks associated with your business. On top of that, these merchant account providers' tolerance for risk is lower. A pooled fund is more vulnerable to fraud than a single business’s account. That means a PSP is quicker to flag potential issues. This, in turn, can lead to more holds or freezes.
Why do processors withhold money?
The following scenarios can set off merchant account holds:
- Customers request chargebacks. Frequent chargebacks may suggest the items you’re selling aren’t legitimate or as described. Having clear return policies and accurate item descriptions can help you avoid chargebacks.
- You’re selling items you didn’t disclose. If you branch out into a new industry without alerting your processor, that might catch it off guard. Before you start selling new products, let your payment processor know your plans. Then they may be less likely to flag your account for fraud.
- You start selling high-risk products. Square, for example, doesn’t support sales related to membership clubs, credit repair agencies, telemarketing agencies or weapons dealers, among other high-risk industries. If you plan to venture into a high-risk industry, it’s best to work with a high-risk merchant account provider.
- Your sales volume surges. Unusually large transaction amounts or volumes may raise eyebrows. If you anticipate a significant influx of business, give your payment processor a heads-up. This is especially important if you think you'll exceed the monthly processing volume you initially agreed to.
- You violated your agreement. When you sign up with a payment processor, read the entirety of your contract. Make sure you understand what types of sales the company prohibits. Also ask your processor what you can do to minimize your risk before you run into problems.
What do you do if your funds are frozen?
Don’t wait to get in touch with your processor if you notice something’s off or your funds aren’t arriving on time. Start by reaching out to the company’s support team or your dedicated representative. Ask why the company is holding your funds and what it needs from you. Is it missing a particular document or piece of information? Get the requested documentation back to the company as soon as possible and follow up often.
What if you don't reach a solution? Then, you might hire a third-party company that specializes in payment strategies. It can help audit your business and work with your processor to release your funds. Payment litigation firms are another avenue to consider.
You might also try signing up with another payment processing company. That way, your business can continue processing transactions in the meantime. Just know that having two processors can be complicated. You'll be juggling two merchant accounts, separate processing fee bills, etc.
Regardless, applying for a business line of credit might help cover your bills until you resolve the issue.
Is Square still worth it?
My honest opinion? Yes. Square is one of NerdWallet’s top POS systems thanks to its low barrier to entry. It felt like a safe investment for a brewery like Justin's that's only serving beverages. The same could be said for small retailers, service-based businesses and cafes.
That said, Square's Free plan didn't cut it like I thought it would. The brewery ultimately needed to upgrade to the Plus plan to split up tips by shift. Thankfully, the Plus plan is relatively affordable at $49 per month.
That said, don't choose a POS system just because it has a free software plan. You'll likely need to upgrade as your business becomes more established.
Thankfully, I chose Square for reasons other than its Free plan. Another selling point was the fact that Square is an all-in-one solution. Lots of individual merchant account providers sell third-party POS systems. Square, on the other hand, bundles POS and payment processing services together. It felt more convenient to go with a PSP, like Square, as opposed to working with two different companies.
However, I understand PSPs, such as Square, come with their own risks. I think the best way to deal with them is to be proactive and communicative. For example, Justin plans to let Square know ahead of time if he starts selling non-alcoholic beverages with CBD. Some processors consider that high risk. The same goes for if he has a busy season coming up or he processes an unusually large transaction.
So far, Justin hasn't had to report any of these scenarios. And there have been no freezes or closures (knock on wood). If anything changes, I'll report back.
