By Collin Sullivan, national accounts manager, AVATAS Payment Solutions
If you accept credit cards you know that running a pre-authorization on a card is always an option. But how well do you know what it is, when to use it or its implications for your bottom line? We steer our customers away from pre-authorizations in favor of running the transactions upfront (more of this in the wrap up), but if you are going to use pre-authorizations make sure you have a good understanding of what they are and how it can impact your business. To help we’ve put together a few cases to think about.
First, to ground us all, what is a pre-authorization?
In the simplest of terms a pre-authorization is similar to a credit card charge; however, instead of charging a customer, it holds the funds for a limited time. On the back end, the system is checking that the card has the available funds and reserving them for the merchant. Then after the delivery, the merchant must capture that transaction before the time period expires. Now onto the cases:
Case Number 1: It is the start of the season and the first delivery is a regular customer who has been with you for a number of years. He always asks for you to deliver 100 gallons. This year he wants to make the switch from paying by check to paying by a credit card. When he was paying by check, you always got paid on time. Would you run a pre-authorization?
Answer: Don’t run a pre-authorization. Pre-authorizations make sure you get paid, but they do come at a cost because a pre-authorization allows for two actions to run on a card which downgrades the card and disqualifies it from the best rates. Since he has a track record of on-time payment, why would you want to pay more? Just run the credit card once after delivery. This way you will have the exact payment amount and qualify for the best rate.
Case Number 2: A customer contacts you for a delivery and says he wants to give you a credit card to keep on file. The previous season when he was paying by check, payments were always late and when they came in, they weren’t for the full balance. Do you run a preauthorization?
Answer: If possible, run a straight sale ahead of time for the estimated amount. After delivery, you can go back and make adjustments to the card. That way you will qualify for the best rates. If this is not an option (due to weekend delivery, etc.), go ahead and run a pre-authorization. In this case, the higher rate that you may pay is probably worth it because you are guaranteed payment. This customer’s payment track record suggests that they could be a problem. You don’t need the headache of late payments or a potential collections situation. Let the credit card company worry about that.
Case Number 3: A new customer has just signed up with you. They aren’t sure how big their tank is or how full it is. Do you run a preauthorization?
Answer: Try to run a straight sale, but if not an option, it makes sense to run a preauthorization. Because this is a new customer and neither you nor her know the size of the tank. In this case, a pre-authorization serves as an estimate of the delivery amount. After the delivery, you can adjust it up and down, but it guarantees at least partial payment.
As you can probably see, running a pre-authorization is not a black or white decision. There are a lot of factors to consider. Ultimately, it comes down your business, your customers, and your willingness to pay for guaranteed payment.
Our suggestion is to always run the card upfront instead of using a pre-authorization. If an adjustment is necessary, you can always go back and charge or credit the difference. Another thing to note is that both a straight sale and a preauthorization still reserve the funds, so to the customer there is no difference. This still counts as two actions for your Customer Service Reps, but allows the card to qualify for the best rates.
One last thing, if you do run a pre-authorization, make sure you go back in and capture it. Too often we see customers run a pre-authorization, and then do an additional charge after delivery. If this happens, you are taking up double of your customers credit limit.
AVATAS Payment Solutions is the leading payment processing company for the energy and service industry. Collin is AVATAS’s National Accounts Manager and can be reached at 866.298.7836 or by email at firstname.lastname@example.org.