When your business pays a vendor, you probably assume the process is straightforward: you initiate payment, funds are transferred, and the vendor gets paid. But in many payment systems — especially those that run through third-party processors — that’s far from the truth.
Instead, you’re likely caught in a cycle of prefunding. That means sending your money to a third-party platform days before the payment even happens. You’re essentially giving someone else control of your cash in order to pay your bills. Sounds inefficient? It is. And it can be expensive too.
What Is Prefunding, Really?
Prefunding refers to the practice of transferring funds in advance to a third-party payment provider so they can initiate payments on your behalf. It’s common in many bill payment services, payroll platforms, and digital payment networks.
Here’s how it typically works:
- Your business transfers funds into a reserve account
- The payment platform holds your money until the payment date
- They issue the payment (via check, ACH, etc.) when it’s time
This might sound convenient, but there are downsides.
Why Prefunding Hurts Businesses
1. Lost Control of Your Cash Flow
When your money leaves your account days before your bills are due, you lose valuable flexibility. That cash could’ve been earning interest, covering expenses, or just staying accessible until the last minute.
2. Delays from Middlemen
Third-party processors act as intermediaries — and that means more steps, more delays, and more opportunities for things to go wrong. If an issue arises, you’re dealing with someone who doesn’t own the relationship with your vendor — you do.
3. Higher Costs
Prefunding arrangements often come with transaction fees, float fees, or hidden charges baked into the process. You’re paying for the privilege of having your money held up.
4. Security and Reconciliation Risks
Having your funds held by an outside party introduces risks — from delays in refunds to reconciling errors. And when payments don’t go out as expected, it’s your reputation on the line.
So Why Do Businesses Tolerate It?
Many businesses simply don’t know they have a choice. Prefunding has been intertwined into the architecture of older payment systems — especially those designed before modern, real-time connectivity. But today’s businesses need more agility, transparency, and control.
There’s a Better Way to Pay
Prefunding might feel like “the way it’s always been,” but that doesn’t mean it’s the way it should be. Keep your money working for you — until the moment it’s actually needed. Are you looking for a smarter payment solution that doesn’t require prefunding and doesn’t hand off your funds to a third party?
Checkrun lets you initiate and manage check payments directly from your existing bank account — no intermediaries, no lost float, and no giving up control of your cash. You approve, sign, and send checks and payments from anywhere, while keeping full visibility of your expenses and transactions.
