Preselling: what it is and how to mitigate risks.

Jul 12 2018 | Alice Wong, Small business - North Americas, PayPal

You may occasionally find yourself in a position where you need to presell items; in other words, you collect money up front for goods or services that aren’t available yet. When that’s the case, it’s helpful to know some basics to help you accept and process payments smoothly.
How do you know if you’re a preseller?
Preselling is pretty common. Here are a couple of examples:
  • When you sell tickets for an event like an upcoming concert or travel.
  • When you need to use the money collected from buyer(s) to purchase the product from a distributor.
  • When the product is made to order and/or being created, the item might be ordered and paid for upfront and then delivered after it’s completed. This is also known as delayed delivery.
PayPal’s preselling requirements.
If you’d like to presell items in an online store, keep in mind you’ll need to guarantee delivery within 20 days from the date of purchase and also let your customers know they’re buying a presale item.

Withdrawing payment from a presale.
We may ask you for documentation before you can withdraw payments from a presale. The documentation can include:
  • Information about your supplier such as a contract and/or their contact information
  • Proof of purchase from your supplier
  • Invoices
  • Shipping receipts
We ask for information about your supplier and invoices to verify that you have a product or service; and we ask for shipping information to verify that you’ve shipped the orders.

How PayPal helps protect against preselling risks.
PayPal also takes measures to protect you and the buyer in presales. One measure is an account reserve - an amount of money held in your PayPal account for a temporary period of time. It ensures your buyer receives the product or service they paid for within the agreed upon timeline. Learn more on account reserves here.
 
You can check if a reserve was placed on your account by viewing your on hold balance when you log in to your PayPal Business account and clicking on Money. 
 
How to mitigate preselling risks.
Any time money is collected before an item is available, things can go wrong—some of which may be completely out of your control. 
 
As an example, natural disasters can impact the production or delivery of goods. Or, your manufacturer may have internal issues that cause shipment delays. Unfortunately, you could also find yourself dealing with fraud on the part of your supplier or sudden inventory problems may cause a shortage of product. 
 
In the case of ticket sales, events may be cancelled due to unexpected circumstances like serious illness or weather conditions. 
 
Any of these circumstances can impact your ability to supply your buyer with the product or service they purchased. However, there are ways to mitigate your risk. 
 
One way to lower risk for products and services with an extended delivery time is by dividing payments; a down payment to secure the order, and a final payment once you ship the product or deliver the service.
 
For example, if you’re selling a custom piece of furniture, you may initially charge the buyer for the materials needed. After you’re finished with the piece and it’s ready for shipping, you can charge the remaining balance.
 
Here’s how else you can help ensure a safe preselling transaction:
  • Clearly state when an item will be available for shipping in your listing by specifying the correct handling time. The handling time specified in your listing needs to reflect the time from the end of the listing until the item is shipped to the buyer — not when the item is in your possession.
  • Indicate it’s a presale item in the product listing.
  • Make sure people can easily see the sales terms on your website with default font sizes.
  • Clearly list the refund policy on your website. Being upfront will help your buyers accept the terms of an extended delivery, and it can also help you process any refunds smoother.
Presales always carry some level of risk, but following preselling guidelines and taking necessary precautions can help you ensure a successful transaction.
 
You can also access additional information by reviewing our FAQs at the bottom of this page.

 
The contents of this site are provided for informational purposes only. You should always obtain independent, professional accounting, financial, and legal advice before making any business decision.

Frequently asked questions.

The Electronic Communications Delivery Policy describes how we electronically send you transaction receipts, statements, and other important account information.

To agree to the policy, please log in to your PayPal account. You’ll see a pop up page asking you to accept the policy upon login, unless you've already done so.

You can also see the Electronic Communications Delivery Policy by clicking Legal  at the bottom of the PayPal home page.

An account reserve is an amount of money that is on hold in your PayPal account to cover potential financial risk such as payment reversals you may receive like chargebacks and claims. PayPal uses three types of reserves: rolling reserves, minimum reserves and jumpstart reserves.
  • A Rolling reserve is a reserve where a percentage of each transaction you receive each day is held and then released later on a scheduled basis. This is the most common type of reserve.
    • For example, your reserve could be set at 10% and held for a 90-day rolling period – meaning 10% of the money you receive on day 1 is held and then released on day 91, 10% of the money you receive on day 2 is held until day 92, etc.
  • A minimum reserve is a specific minimum amount of money that’s held in your reserve balance. The minimum reserve is either taken as a percentage of money held until a certain amount has been reached, or a one-time amount.
    • For example, 5% of your daily transaction volume is held until a balance of $5,000 is reached.
  • A Jumpstart reserve is when funds are held from your available balance immediately.
    • For example, if we make the determination to keep a $10K jumpstart reserve and there is $20K in the PayPal account balance, $10K is moved to reserves straight away.
We may also use a combination of a reserve types on your account.

Why does PayPal use reserves?

Reserves are used to prevent transaction losses that may occur from payment reversals like chargebacks and claims filed by your buyers. Ordinarily, if you have a reserve on your account and receive a chargeback or dispute, we will deduct that amount from your available balance and not from any reserve balance. However, if a seller goes out of business or stops processing payments through PayPal, we will use any reserve to satisfy future payment reversals.

Reasons for placing reserves

Reserves are a common industry practice. They are used to minimize losses and to create a safer shopping experience. If you would go out of business or would be otherwise incapable of covering your financial obligations, we would still need to pay back the buyer. If a buyer contacts PayPal or their financial institution because they didn’t receive what they ordered, we’re responsible for making things right. A reserve can be placed on your account for a number of reasons and is set on a case-by-case basis. PayPal considers a list of factors to determine this including:
  • Your processing history with PayPal and other providers
  • Whether your industry has a higher likelihood of chargebacks or refunds
  • Whether your account has an elevated number of customer claims and disputes
  • Your business and/or personal credit history
  • Whether you are selling products or services in advance (preselling orders).
  • Your delivery time frames - whether there are extended delivery timeframes
PayPal will periodically review the account to determine whether the reserve placement and amount needs to be adjusted. Reserves may be eligible for the reduction or removal with positive changes to key areas such as performance, industry, claims reduction, etc.

When will I get my money?

Once a reserve is placed, you will receive communications outlining the terms of your reserve. Your terms are also outlined in your account. When your money will be released depends on what type of reserve you have.

If you have a rolling reserve, the funds will be released after a certain period of time. For example, if you have a 90 day rolling reserve, funds from Day 1 sales will be available on Day 91.

For minimum reserve, reserves are reviewed every 90 days. PayPal proactively reviews reserves and based on improvements to your business performance it is possible that your reserves could be adjusted or removed.


How to prevent reserves from being placed on an account

Reserves may be a necessity throughout your relationship with PayPal. Preventing reserves isn’t always possible, and depending on your industry and your credit history, you might never be able to fully remove a reserve from your account.
However, you can reduce the likelihood of having a reserve and improve your customer service in the process by following Seller Best Practices – and that’s a win-win for everyone.

Seller Best Practices
Some best practices to follow are:
  • Ship promptly and give your customers valid tracking information through PayPal, so they can keep tabs on their purchases and know when to expect delivery
  • Communicate early and often with your buyers and let them know about any changes, delays, or other important information
  • Monitor your buyer complaint rates regularly and try to keep complaint rates below 1% of your sales.
  • Avoid long refund times, which can lead to complaints from unsatisfied customers
A customer who receives prompt service, accurate order fulfillment, and speedy billing is a customer who will be less likely to file complaints or make returns in the future – and more likely to buy from you again.

You can also access additional information on account reserves by reviewing our Business Resource Center.
 
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