One of the numerous ways in which technology has benefitted small businesses has been to increase the number of payment options available. While conventional methods of payment like cash and cheque still exist, there are also a variety of other options like debit cards, internet transfers and mobile payments that have greatly facilitated payment infrastructure and made financial management significantly more flexible. Every business owner must wade through the alternatives and decide what type of payment options are right for their customers. This is based on several factors including their industry, common practices, location and of course business specific considerations. For example, a retailer will usually allow for payment by credit and debit cards, cash and possibly some form of mobile payment. Conversely, a law office may not offer a credit card option, but request payments via cheque or bank transfer.
Some payment alternatives for small businesses to consider are discussed below:
For many, cash continues to be a preferred way of receiving payment, given its tangibility and absence of associated costs. There is also a visceral satisfaction in receiving a cash (I imagine few things are more thrilling than receiving a briefcase full of cash). The use of cash for payments has diminished considerably as other options have become more popular.
Despite the many payment alternatives, a surprising number of businesses still make payments via the decidedly low tech cheque. They are a low cost alternative and are still a fairly universally accepted form of payment. The most compelling downside with cheques is the delay between receiving payment and the funds availability date. And, of course, there is the dreaded bounced check which can affect credit and lead to a host of other problems.
For certain types of business, particularly those in retail and ecommerce, it is essential to offer the option of paying by credit card. There are great many benefits to offering credit cards including ease of payment, flexibility and perhaps most importantly not having to worry about potential bad debts (except in the case Chargebacks). Conversely, credit cards can be expensive for small businesses due to fees charged by payment processors, especially when compared to cash or cheques.
There are several add-ons that allow you to convert your smartphone into a credit card terminal. This is beneficial to business owners who tend to be on the road, and/or who do not want to incur the expense of an additional credit card terminal.
If you are a small business owner , Square is an option that essentially turns your smartphone into a credit card terminal. No monthly contracts are required, processing can start immediately and transaction fees are fixed at 2.75% of the transaction amount. There are also several other options including Quickbooks, which integrates with your Quickbooks online software.
Over the past few years a number of payments services have arisen allowing small businesses to pay vendors and collect from customers. The payor/payee details are set up one time after which payments can be initiated either individually or using a pre authorized debit (PAD) agreement. These services can significantly facilitate the payment process. The downside is that a payment might take a few days to settle which can be problematic from a cash flow perspective. Some examples of these services include Telpay, Plooto, Waypay and Rotessa
Another type of payment service allows you to pay any bill including property tax, Revenue Canada, mortgages, lease payments etc. by credit card which can be an easy way to manage cash flow. Charges for these services are usually about 2.5% which is steep and ideally only used when cash flow is an issue. These include Plastiq and PayTm (where you can actually accumulate points that can be redeemed for rewards
The advent of internet payment processors like Paypal have been a blessing for many freelancers, bloggers, ebay sellers and other microbusiness who want to offer the option of a credit card, without having to incur the setup expenses or the registration hurdles of obtaining an credit card processing account. Almost anyone, anywhere can set up an account with Paypal thereby removing barriers to international payments. The major detriment of PayPal is that it is quite expensive, on an ongoing basis, relative to providing credit cards directly.
When other methods of payment are impractical, particularly with international clients, wire transfers are another assured way to receive payment directly to your bank account. Given that there is a fairly high fixed cost associated with wire transfers , it more fiscally prudent to use it with larger amounts.
A simple, cheap and efficient ways of making payment is to use email transfers. This function is usually available with online banking and simply requires you to enter the amount, the recipient and a password. There are no cheques to deposit nor do you have to wait expectantly /nervously for several days for the funds to be available. There is, however, usually a restriction on the amount that can be sent via email transfer.
Transfers between bank accounts can be automated through the use of electronic transfer services including EFT and ACH. These are a cheaper and potentially more efficient alternative to paying via cheque, and are often use for large numbers of concurrent transactions. As a small business owner who bills their customers on a periodic basis, you can generate an ACH file (often using your accounting software) that is sent to your bank. The bank then proceeds to debit your customers automatically. The time between initiation and clearing is usually a couple of days. ACH/EFT transactions requires authorization from your customer, however it can be a low cost, hassle free way of collecting.
Like credit cards, debit cards are a popular method of payment, especially in Canada. Unlike credit cards, since they are actually withdrawals directly from the customer’s bank account, fees associated with debit cards are quite low. Its primary advantage for customers is the convenience of not having to carry cash around. Many smaller businesses often only offer the option of paying by cash or debit card.
Money Order/Certified Cheques:
When the creditworthiness of the debtor is in doubt, a money order or a certified cheque can be a good way to ensure that funds are received, especially with respect to infrequent customers. As this method is expensive for the payer, it is generally not recommended for recurring payments or ongoing business relationships.
Having numerous payment options should certainly help to minimize bad debts and allow for a more fluid cash flow. Conversely business owners need to analyze the cost and benefits of any payment option and determine if it is right for your business.
Ronika Khanna is a Montreal Accountant who helps small businesses achieve their financial goals. Please sign up to receive articles pertaining to small business, accounting, tax and other occasional non business topics of interest. You can also follow her on Facebook ,Twitter, Google Plus or Linkedin