What Does Next Day Funding Mean?

Next day funding is a service provided by some payment processors that gives merchants access to the money from their sales in a single business day – in some cases, as little as ten to twelve hours after transactions are submitted. Next day funding stands in contrast to the industry standard practice of holding funds for two to three business days or even longer in some extreme cases. It’s one of the most important features available to merchants because it has a direct impact on cash flow and financial health. The following is a 101-level breakdown of how the funding process works, why funding holds are detrimental to merchants, and how next day funding can help. 

How the Industry-Standard Funding Process Works

When a credit card is inserted, tapped, or entered at a store, an authorization happens immediately, but the transaction isn’t sent into the bank right away. Instead, a day’s transactions build up and get sent in altogether in batches, generally once or twice per business day. 

When a batch is submitted to be settled, the transactions go into the payment processor, who then categorizes them by each customer’s card-issuing bank and sends the transactions into those banks to initiate the transfer of funds. While the initial transaction authorization was nearly instant, the settlement process can easily take a day or two. 

There is also risk involved in the settlement process. The payment processor and acquiring banks know the customer has available credit, but what they don’t know for certain is that the merchant will deliver on their side of the transaction. If a fraudulent or incapable merchant disappears or can’t cover the cost of a refund or chargeback, that money comes directly out of the pocket of the processor. 

To allow for the time the settlement process takes and build a buffer against potentially lost funds, payment processors generally apply a two to three business day waiting period before funds are released to merchants – known in the industry as a “standard hold.” Standard holds are important and serve a very real purpose, but, unfortunately, they’re also a major headache for some merchants. 

The Problem Standard Holds Pose for Merchants

A two to three business day wait doesn’t sound like much, but it’s an annoyance at the best of times and can be a real problem in some rare situations. On the surface, it’s a question of ownership. Merchants work hard for their sales revenues, and they want them sitting in their own bank accounts, rather than a processor’s holding account. But, digging a little deeper, delayed funding matters for other reasons, too. 

Consider a small business like an independent movie theater or bar that does a large portion of its revenue on a Friday night. Sales batched in the evening on a Friday won’t begin processing until the following Monday. If a three-day standard hold is applied, those funds won’t hit the bank until the following Thursday – six calendar days later. That’s obviously not ideal. 

At the heart of the matter is cash flow. Cash flow is the absolute most important aspect of a small business’ financial health. Any delay in funding means a subsequent delay in liquid cash. For businesses that have significant variable expenses on a week-to-week basis – like bars and restaurants – delays in cash flow can be a big problem. Cash flow also has a big impact on a merchant’s ability to react quickly to emergencies. 

In short, faster funding is always better for the merchant. Luckily, there is a solution that can help well-established merchants get access to their funds without having to worry about standard holds – next day funding. 

How Next Day Funding Helps Merchants

Next day funding is a program offered by some (but not all) payment processors that acknowledges that merchants with a strong payment history represent less risk and, in turn, should have access to better funding terms as a reward.

Next day funding effectively waves the standard hold, making funds batched before a preset cutoff time available to merchants the next business day. Here’s an example of how it works: 

Let’s say a merchant with access to next day funding has a cutoff time of 5 PM EST. If they batch their day’s transactions prior to 5 PM on Monday, the funds will be in their bank account at some point on Tuesday. If they miss the 5 PM cutoff time on Monday, the next day funding technically kicks in on Tuesday, and their funds hit their bank the “next day” on Wednesday – still much faster than many standard holds. 

All next day funding options are better than no next-day funding, but not all processors’ next day funding terms are created equal. The biggest thing merchants should look for is a late cutoff time. The later the cutoff time, the higher the likelihood a merchant’s batch will be eligible and hit their bank account the following morning. 

How to Access Next Day Funding

So, with so many advantages to next day funding, why does any merchant settle for a standard hold? First and foremost, not all processors offer next day funding. And of the ones that do, not every merchant can get access. 

In essence, when a processor extends a merchant next day funding, they’re fronting the money to the merchant before it actually arrives from the issuing bank. Because that represents a potential risk, only merchants with a certain level of business history are eligible. New merchants and merchants with a history of chargeback or fraud issues will likely find they’ll have to accept standard holds until they can build up a history of proper payment operations. 

Merchants who do have the reputation and history necessary to get access to next day funding first have to find a processor that offers it. A quick call or email to their dedicated support specialist should clarify that question extremely quickly. If the answer is no, it may be time to start shopping for a new payment processor. 

Merchants who switch processors to access next day funding should always make it clear to any potential new partners that fast access to funds is a top concern. With that in mind, merchants are well served to look for a processor that offers three things:

• A next day funding program
• A late cutoff time
• Reasonable acceptance requirements

BAMS, for instance, offers a leading next day funding program that offers merchants a 9 PM EST cutoff time – one of the latest in the industry. With BAMS, any funds batched before 9 PM EST will be available in the merchant’s account by 7 AM EST the following morning – just ten hours later. BAMS also offers generous acceptance requirements, making next day funding available to more merchants than many competitors. 

To find out more about the BAMS next day funding program and everything it can do for your business, get in contact with a member of the BAMS team or get started with a comprehensive five-point price comparison today.