How to Pre-Authorize Credit Cards to secure funds
Pre-Authorizing Credit Cards is a great way to secure your funds from a customer before committing an Invoice to the system or going through the pick/pack process only to find out the credit card declined. Orders start to pile up in the warehouse and become unmanageable.
Pre-authorizing is also handy to secure funds against a credit card when you don't know the final amount of the order, as in the case where shipping charges need to be added at a later date, or the item is back-ordered, or needs to be manufactured.
Let's first begin with a quick overview of how credit card processing works.
All basic credit card purchases such as buying gas at the pump or groceries or Amazon go through the same basic process.
- First the transaction hits the Authorization (System A) and secures the funds against your customers credit card. This authorization immediately reduces the available credit on the card and is held for you in trust for 7-30 days waiting for you to Capture those funds.
- Next the Capture for Settlement (System B) initiates a transaction to secure those funds from the card-issuing bank and initiates a transfer to your merchant processor. This is typically done automatically at the end of the business day when the system batches out.
- Finally the funds are transferred from the processor to your bank account, usually the next day.
It is also important to understand that you should not charge a credit card until the order is invoiced and shipped. This is where Pre-Authorizing comes into play.
How it Works
DocuFire can Pre-authorize a credit card through the printing of an Order Confirmation (Sales Order) to DocuFire.
Let's say for example the order total is $1,000 with tax in. After printing, DocuFire checks the Terms Code of that order for payment instruction and determines that this is to be charged.
DocuFire includes a feature to estimate freight charges based on the order amount with MIN and MAX thresholds. In this example, the formula added 5% to the order or $50.
Now the Order total for Pre-authorization purposes is $1050.00. The DocuFire user must click on the confirmation button and they can adjust the freight amount accordingly and in this case they added an additional $50. Now the user submits the Pre-Authorization for $1,100.00. It is approved and an Authorization code is issued. The authorization is typically valid for up to 30 days.
DocuFire will now release the document for delivery to the customer with an optional Pre-Auth stamp on the page indicating the authorization amount and credit card used for the transaction.
Now, two days later the order is ready to ship and the shipping charges come to $65.00 and the invoice is generated for $1065.00 and the Invoice is printed to DocuFire Printer. DocuFire looks up the Invoice and associated Order number and then automatically submits a "Capture for Settlement" for the actual amount using the prior pre-authorization transaction reference.
The Capture for Settlement automatically releases the additional funds from the customers credit card or $35.00. The cardholder will typically see a credit for $1,100.00 and an immediate charge of $1,065.00.
The Invoice document is released and sent to the customer with an optional PAID stamp again showing the actual amount and masked card holder information.
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