Retail - protecting customer deposits, pre-orders and gift vouchers

[Barry]

Good morning.

I'm not sure if this is best placed here, or over in legal; it straddles the line a bit. I'm setting up an ecommerce venture and want to accept pre-orders on goods not yet released. This could be a X% deposit, or the full item amount. I can then secure the required stock from my supplier. The pre-order window is a set window, but the items often release months later. Once the window closes, then I'll take no further pre-orders. I want to ensure that the money take for pre-orders is ring-fenced.
This has two aims.

1) Keep customer deposits outside of the day-to-day business expenses, keeping them for the intended purpose.​

2) Protect customer deposits should something happen and the business goes under.​

I know ring-fencing is possible. However, I'm not sure of the best approach. I could create a separate ltd company to hold the money until I need it, but is there a better way to do this? Any advice would be appreciated.

 

[Scalloway]

I have heard of funds being put in escrow, but I don't know if it would work for you.

What is a Payment in Escrow and How Does it Work?

How do escrow payments work and are they just for real estate?

gocardless.com

 

[Ozzy]

It is legal, not even straddling any line as is very common in many industries such as computer games, toys and even clothing. The computer gaming industry uses the 'pre-order' concept to bring in funds to help cover the cost of finishing the game.

So I do not see an issue in doing this so long as you have the correct controls (financial management in place). You could even use either Escrow as mentioned above, or even a separate bank account and ensure the business is disciplined enough to adhere to the controls.

Make sure your terms are rock solid.

 

[Lisa Thomas]

Good morning.

I'm not sure if this is best placed here, or over in legal; it straddles the line a bit. I'm setting up an ecommerce venture and want to accept pre-orders on goods not yet released. This could be a X% deposit, or the full item amount. I can then secure the required stock from my supplier. The pre-order window is a set window, but the items often release months later. Once the window closes, then I'll take no further pre-orders. I want to ensure that the money take for pre-orders is ring-fenced.
This has two aims.

1) Keep customer deposits outside of the day-to-day business expenses, keeping them for the intended purpose.​

2) Protect customer deposits should something happen and the business goes under.​

I know ring-fencing is possible. However, I'm not sure of the best approach. I could create a separate ltd company to hold the money until I need it, but is there a better way to do this? Any advice would be appreciated.

Usually you would open a second bank account, that the bank agrees is a client account and any funds in there are held on trust for the customers, should anything go wrong.

 

[Barry]

Thanks everyone,

@Scalloway Regarding Escrow, please correct me if I'm wrong. My understanding here is that funds held in escrow are only released once both the provider and customer agree the job (in this case fulfilling the transaction) has completed to satisfaction. Two concerns here. 1) Cash would not be released at the time of stock ordering, only once the customer has received the item. 2) Risk of fraud if customer claims they have not received the item. I've only used escrow for big-ticket items and jobs.

@Ozzy Thanks for the reply. This was my initial thought, but I want to keep customer money safe should the worst happen. No one wants their business to fail, but we've seen it happen with customer prepayments lost when a company goes under. Look back to the Christmas Club fiasco back in 2006. Anything I can do to protect customers' money. I'll definitely ensure the terms and conditions are clear on customer pre-orders regardless of anything else I put in place.

@Lisa Thomas Thank you. This sounds like the best option but I'm not sure how this works. Can I get a single general purpose client account to hold pre-orders, or is this set-up on an ad hoc basis per client. Other than asking the bank to open a client account, do I need to do anything else to protect customer pre-orders?

Again, thank you all for the comments.

 

[Lisa Thomas]

As far as I am aware you just need one client bank account that all deposits are paid into. Best to speak to the bank. They will need to provide you with a letter confirming it's a client account and all funds in the account are held on trust for the payees.

 

[Gyumri]

As far as I am aware you just need one client bank account that all deposits are paid into.

The only legal way is that funds should be held separately, however it is kept, so as not to mingle with the company's money. So a separate deposit account would suffice provided the OP makes it clear that deposits would be held on trust in that account and would not constitute assets of the company.

 

[Helen]

Good morning.

I'm not sure if this is best placed here, or over in legal; it straddles the line a bit. I'm setting up an ecommerce venture and want to accept pre-orders on goods not yet released. This could be a X% deposit, or the full item amount. I can then secure the required stock from my supplier. The pre-order window is a set window, but the items often release months later. Once the window closes, then I'll take no further pre-orders. I want to ensure that the money take for pre-orders is ring-fenced.
This has two aims.

1) Keep customer deposits outside of the day-to-day business expenses, keeping them for the intended purpose.​

2) Protect customer deposits should something happen and the business goes under.​

I know ring-fencing is possible. However, I'm not sure of the best approach. I could create a separate ltd company to hold the money until I need it, but is there a better way to do this? Any advice would be appreciated.

Here's a little advice for you. You can run activities in advance, depending on the release cycle of your own merchandise. Let customers know that paying a deposit in advance can be a better deal than buying at regular price, or that there are perks such as freebies. Then people who have a need to buy will naturally come to buy. It will also achieve the purpose you want to circle money.

 

[Lisa Thomas]

The only legal way is that funds should be held separately, however it is kept, so as not to mingle with the company's money. So a separate deposit account would suffice provided the OP makes it clear that deposits would be held on trust in that account and would not constitute assets of the company.

As far as I'm aware that will be a client account. OP will want to get a bank letter to confirm this.

 

[eteb3]

This could be a X% deposit, or the full item amount. I can then secure the required stock from my supplier.

You seem to be wanting two things that (afaict) don’t mix:

1. You want to segregate client money to protect it should the biz go belly up,
2. and you want to use the cash to buy stock.

Have I got that right?

 

[eteb3]

As far as I'm aware that will be a client account.

Yes, usually breach of account terms to hold client money. Needs special approval from the bank.

 

[Lisa Thomas]

I said OP will want to get the letter from the bank.