As small business owners, we have a lot of decisions to make. One important one that gets overlooked consistently is the types of payment that your business accepts and uses. I’ve seen businesses waste hundreds of dollars a month based on the methods of payment they choose to accept (check out the quick case study at the end of the post showing some real numbers). Let’s think carefully about each payment form and determine if the cost is worth it for your business. I have put together a quick rundown of the pros and cons of different common payment methods. I’m not getting into the nitty gritty detail here or recommending any service providers. We are just trying to keep things high level for now.
I am also providing a ranking here on my assessment of the best and worst types of payments for business. Let me know if you agree or disagree!
Here are the seven most common ways to pay and get paid by customers/clients and the key pros and cons of each:
Pros Cash is the most tangible form of payment. You get a sense of earning when someone hands you cash, and you feel the pain when you pay cash out of pocket. Many financial pros like cash for that emotional transaction that occurs, as the theory is that you will be less likely to spend because of that pain. A huge benefit of cash is that there are no fees associated with using cash. In fact, there may even be a discount for cash payments. Cash is easily accepted by most businesses that do high volume, low dollar-amount transactions.
Cons Cash is hard to track in accounting systems as entries all need to be manually entered. Cash is also not secure as it can be easily lost or stolen. It is also not handy for long-distance or high-dollar value transactions either (unless you are a briefcase wielding sort).
Overall Rating: Poor – The risk of theft and poor tracking makes this a poor choice for business transactions.
Electronic Bank Transfers (Also includes EFT or ACH)
Pros Electronic Bank Transfers (EBT) have many of the conveniences of cash as you pay directly out of your bank account using a bill-pay application. Fortunately, the risk of loss/theft are much lower with these transactions than with cash. EBTs can usually be set up easily with most bank accounts, and they are either free or very low cost. Many vendors accept these payments as they are low cost for the receiving side as well. When a customer sends an electronic bank transfer, your bank account should reflect the payment in 1-5 business days. This is one of the fastest and lowest costs ways of getting paid by customers. We highly recommend this one!
Cons With any online banking transaction, there is always a risk of theft (through hacking). When you set up an electronic bank transfer, you typically provide your routing and account number to the vendor. Disseminating this information widely can expose you to risk or information theft (setting up a separate account for this could help mitigate this risk). Sometimes these payments can take a few business days to process, so the delay could be a downside for some people. Giving a vendor access to your bank account for electronic payment can cause problems if the vendor makes an error and takes out too much money; resolution can take time.
Overall Rating: Great – Ease of set up, the security, and the speed of transactions makes this a great option for business payments. I particularly love this option for receiving EBT/ACH payments from customers.
Pros Checks have many of the conveniences of cash without the same level of loss/theft risk. Checks have a low cost per transaction as the bank account owner buys a book of checks once every few years (some banks provide free checks!). For businesses wanting to hold onto cash, checks provide a longer “lead time” from issuing the check to when the money is actually taken out of the account. This can be used to assist in cash management processes. Checks are also ideal for recording in accounting systems – they are always numbered for easy transaction tracking.
Cons Stolen checks can cause big problems for your bank account, if someone with evil intent gets ahold of your check, they have your checking and routing number. If blank checks fall into the wrong hands, that can cause big problems too. Banks have security protocol that try to prevent unauthorized use, so that is a great line of defense against someone stealing your checks and using them. However, if you’ve seen “Catch Me if You Can”, then you know check fraud can always happen with some ingenuity.
Additionally, since checks are physical, they cause some annoyances. For example, when you run low on checks, you have to remember to reorder on time. Printing and mailing checks can be a headache as well. Because of the banking delays with checks, some vendors (especially small retailers and restaurants) don’t like accepting checks because of the risk they face from taking a bad check from a customer. Accepting checks from customers poses problems if their bank account has insufficient funds. Additionally, accepting checks means you need some way of depositing them – meaning you either need to be close to a bank location, have a lockbox setup, or have some digital way to deposit your checks (the last two typically incur monthly services charges with your bank).
Overall Rating: Great (for paying) Good (for receiving) – I love the flexibility and the timing advantages of paying with checks. However, receiving check payments is a pain in the… But I still like checks even on the receiving side for their low cost per transaction.
Pros The number one pro of credit cards is convenience. Credit cards are accepted almost everywhere, even overseas. Online shopping is optimized for cards. Another bonus on the credit card is that it delays cash leaving your bank account. When you swipe the card, you have about a month to pay that bill. Transactions on a credit card are usually easy to download or sync with accounting systems, so they make your accountant’s life easier. By accepting credit card payments, many businesses see an increase in sales. When you receive a credit card payment, most processors will deposit the cash into your account in a matter of a few business days. Another helpful thing about credit cards is the fraud protection. If your card is stolen and used without your consent, you are not liable, and the credit card company takes on the responsibility.
Cons There are many cons of credit cards. If you are using credit cards, there is a significant risk of over-buying. Millions of people rack up credit card debt through overspending and underpaying the bill. Businesses tend to do the same with access to a credit card. By not feeling the “pain” of cash leaving your bank account, individuals tend to overspend on credit. Overspending and not paying off your balance can result in outrageous interest expense payments.
If you are accepting credit cards for your goods/services, you need to know that there is a price for the convenience. Banks and credit card processors can charge you anywhere from 2.5-4.5% for your transaction. Most businesses feel it is worth the fees because they think sales increase to compensate.
Overall Rating: Good (for paying) OK (for receiving) – I don’t hate the business credit card. I do want anyone who has one to be SUPER careful and responsible. If you can be responsible and pay off the balance every month, go ahead. Put a “Handle with care” sticker on that card! I don’t love taking credit cards because of the fees, but if I can get paid faster, the fees are sometimes worth it. Depends on the business…
Pros Debit cards provide almost all of the conveniences of credit cards with none of the negatives! They can be used anywhere that credit cards are used, and now many have fraud protection as well (check with your bank on these details). The biggest difference in credit vs. debit cards is that debit cards pull directly from your bank account. This gives you a more accurate reading on your spending, and helps keep many people from overspending as they see the bank balance decreasing immediately. Accepting debit card payments is a win for businesses. Transactions costs are usually minuscule compared to credit card fees!
Cons If a debit card is compromised and cash is stolen from your account, your checking account could take time before it is made whole again. Even if your bank has protection against fraud, restoring stolen funds is a painful process. Check with your bank to see what they do in the event of fraud. If you are accepting debit card payments, remember that individuals tend to use debit cards more often than businesses.
Overall Rating: Great – Debit cards are great! Get one, use it for your opex spending instead of the credit card – see how it goes! Try to convince customers to use debit cards, trust me!
Pros Wire transfers are great for international payments and very large dollar-amount transactions (domestic and international). Wire transfers are also very secure. The cash leaves your account immediately after you send a wire. Receiving wires can take 1-5 business days.
Cons Wire transfers take administrative time to set up each wire transfer individually. Additionally, the sender need a lot of information from the vendor to send a wire (account number, routing number, SWIFT code, bank address, and more). Wires typically have a flat-rate fee, usually $10-55/transfer. International wires may incur fees at every routing bank as well. So if a transfer funnels through 2-3 banks on its way to the destination bank, fees can rack up. When receiving wires, banks typically charge lower (but still costly) receiving fees.
Overall Rating: Good – Wire transfers have their place. Unless you are doing business with large sums of money, you will likely not be considering wire transfers.
Payment Service Companies
Pros Payment services companies (like PayPal) create a benefit to users by being a “shell” for their payment details. It’s a great way to transfer money to unfamiliar parties. Keep in mind that PayPal was originally part of Ebay – created as a way for buying/selling to occur between parties without too much personal information being passed. Services like PayPal eliminate the need to provide account information and address information to your vendor or customer. Usually money can be transferred with a simple email address. Services like PayPal can link to your credit card or bank account, based you your preference. Some person to person transactions are either free or very low cost, these are typically transfers to bank accounts directly.
Cons Making or receiving credit card transactions can be very costly. PayPal credit card fees are some of the highest in the business (I’ve seen 4.5% will all fees combined). Another negative is that both parties need to have a PayPal account to transfer funds.
Overall Rating: Good – Payment service companies like PayPal can be used effectively. I don’t recommend them for accepting credit card payments.
Quick Case Study
One of my clients sells a product that retails for around $15,000. This client was receiving payments from overseas customers paying with credit cards through PayPal. PayPal was charging almost 4% of the transaction price to process this transaction – THAT’S $600!!! We have worked to move overseas customers to international wire transfer instead, which costs $45 for my client to receive. We instantly saved the client $555 on each of these transactions. That’s super savings from a business decision that oftentimes gets overlooked!
So, what payment methods do you want to use to pay your vendors? What do you want to use to receive payments? Choose the right mix that suits you and your customers the best! Need help figuring out what’s best for your business? Our Virtual CFO services provide this type of advice. We can analyze what fees you are paying now and see if there are lower-cost options.
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Disclaimer: This blog and the linked videos are intended for educational purposes and should not be taken as legal or tax advice. You should consult with your financial professionals about your unique financial situation before acting on anything discussed in these videos. Clara CFO Group, LLC is providing educational content to help small business owners become more aware of certain issues and topics, but we cannot give blanket advice to a broad audience.