What Is a Pre-Authorization Payment?

When you make a traditional payment using a credit or debit card, the money is immediately withdrawn from your account and the purchase amount is subtracted from your available balance. Pre-authorization payments work by placing a temporary hold on the funds in your account, with the actual withdrawal of said funds taking place later on.

Pre-authorization payments can be confusing if you aren’t familiar with them, but they’re used by lots of different businesses.

Why Are Funds Held?

The whole idea behind pre authorization payments is to make sure customers are paying for goods and services. Once a pre authorization payment has been made, the funds for that payment are unavailable until the payment goes through. Think of pre authorization payments as a sort of security deposit; if a customer decides they don’t want to pay, a pre authorization payment allows you to get the money that’s owed to you. Not only does this ensure you get the money you’re rightfully owed for goods and services, but it can also save you a lot of trouble when it comes to payment processing.

Benefits of Pre Authorization Payments

Obviously, the biggest benefit of pre authorization payments is the fact that they allow you to secure funds in exchange for goods and services. However, you also don’t have to worry about the hassle of things like refunds and chargebacks. If you need to give a customer a refund, you can simply cancel the pre authorization payment before the funds are actually withdrawn. This means it’s easy to provide refunds and your customers will be happy since they don’t have to wait 3 to 5 business days for a refund.

Who Uses Pre Authorization Payments?

Pre authorization payments are commonly used by a handful of different businesses. For example, hotels use pre authorization payments while guests stay in hotel rooms, charging for the stay once the guest has checked out. Car rental companies will also use pre authorization payments to ensure customers are paying for the rental and have the incentive to bring it back in good shape with plenty of gas. The security and versatility offered by pre authorization payments make them a great solution for all types of businesses.