As a business owner, you have to make many decisions regarding your finances. One such decision is whether to choose gross or net funding for your payment processing. So, what’s the difference between the two?
What is Gross Funding?
Gross funding is the total amount of money that a payment processor receives from merchants in a given period. This figure includes all fees associated with processing payments, as well as any other income generated by the processor. Gross funding can be used to measure the overall health of a payment processor, as well as its performance.
Gross funding is typically reported on a monthly or quarterly basis. It is important to note that gross funding is different from net revenue, which excludes all fees associated with processing payments. Gross funding is also different from total revenue, which includes all income generated by the processor, including interest income and other miscellaneous income.
Payment processors typically generate revenue from two sources: transaction fees and interchange fees. Transaction fees are charged each time a payment is processed, regardless of the amount of the transaction. Interchange fees are charged by the card issuer when a cardholder purchases with their credit or debit card. Payment processors typically earn a percentage of each interchange fee, which is typically around 1-2%.
In addition to transaction and interchange fees, payment processors may also generate revenue from other sources, such as interest income on funds held in reserve, late payment fees, and chargebacks. Chargebacks occur when a customer disputed a charge on their credit or debit card statement and the issuer reversed the charge. Payment processors typically assess a fee for each chargeback, which can range from $20 to $100.
Gross funding is an important metric for payment processors because it provides a snapshot of the overall health of the business. If a processor is not generating enough gross funding, it may be at risk of defaulting on its obligations to merchants or card issuers. Conversely, if a processor is generating too much gross funding, it may be overcharging merchants or cardholders. Either way, gross funding is an important metric to watch for any payment processor.
What is Net Funding?
Net funding is a type of payment processing in which funds are transferred from one account to another regularly. This type of funding can be used to cover expenses such as payroll or other recurring payments. Net funding is often used by businesses that have multiple locations or need to make large payments regularly.
Net funding can be set up with a variety of different payment processors, including PayPal, Stripe, and Square. Some banks offer net funding services. To get started, businesses will need to provide their bank account information and set up a schedule for when they want funds to be transferred. Once the net funding process is set up, businesses will typically be able to make one-time or recurring payments without having to worry about manual transfers.
One of the benefits of using net funding is that it can help businesses save time on payment processing. manually transferring funds can be a time-consuming process, especially if a business has multiple locations or needs to make regular payments. With net funding, businesses can automate their payments so they don’t have to worry about manually transferring funds each time a payment is due.
Another benefit of net funding is that it can help businesses manage their cash flow. When funds are automatically transferred into a business’s account, it can help them keep track of their spending and income. This can be helpful for budgeting purposes and for avoiding overdraft fees.
Overall, net funding can be a helpful tool for businesses of all sizes. It can save businesses time on payment processing and help them manage their cash flow. If you’re considering using net funding for your business, be sure to compare different providers to find the best rates and terms.
So, which should you choose?
Which is Better Gross or Net Funding?
There is no easy answer to the question of whether gross or net funding is better for a business. It depends on a variety of factors, including the type of business, its growth prospects, and the availability of other forms of financing.
Gross funding refers to the total amount of money that a business receives from all sources of financing. This includes equity investments, debt financing, and any other form of external funding.
Net funding, on the other hand, is the total amount of money available to a business after deducting all debts and other liabilities.
In general, businesses prefer gross funding because it gives them more flexibility in how they use the funds. For example, they can use the funds to finance expansion plans, research, and development, or working capital.
However, gross funding also has its drawbacks. First, businesses have to pay taxes on the interest income generated by the funds. Second, they may have to give up equity in the business if they take on too much debt financing.
So, which is better for a business? It depends on the individual circumstances of each business. It depends on your specific needs and preferences. If you need quick access to all the funds from each transaction, then gross funding is probably the better option. However, if you’re okay with waiting a bit longer to receive the full amount of each sale, then net funding may be a better fit.
At the end of the day, it’s up to you to decide which type of funding works best for your business. There is no right or wrong answer, so choose the option that makes the most sense for your company’s needs.
Do All Payment Processing Companies Offer both Gross and Net Funding?
Most payment processing companies offer both gross and net funding options to their clients. Gross funding is the simplest and most common type of funding, where the processor advances the full amount of each transaction to the merchant. Net funding, on the other hand, involves the processor deducting a small percentage (usually around 2-3%) from each transaction before forwarding the funds to the merchant. This allows the processor to take on some of the risks associated with fraudulent or chargeback transactions. Ultimately, it is up to the merchant to decide which type of funding best suits their needs.
Some processors may also offer other funding options, such as reserve-based funding. This type of funding is typically used by high-risk businesses and involves the processor holding back a portion of each transaction (usually around 10%) in a reserve account. The funds in the reserve account are then used to cover any chargebacks or refunds that may occur. Reserve-based funding can be a good option for businesses that are concerned about potential fraud or chargebacks, but it is important to note that it can also tie up a significant amount of working capital.
At the end of the day, there is no right or wrong answer when it comes to choosing a payment processing company. It is important to shop around and compare different providers to find the one that best meets your needs.
If you are looking for a payment processing company that gives you a wide range of funding options including gross and net funding options, then Balanced Processing Partners may have the solution for you.