Revenue keeps a business afloat. Unless a small business is able to accept payments for goods and services, then the business is simply not going to maintain the necessary cash flow required for solvency. Turning away customers who cannot pay in cash is a bad idea. Accepting checks as payment is always a risk. Mercifully, the long and storied history of using credit cards for purchases remains an option. New small business owners may wonder if setting up a credit card merchant account is a wise plan. In truth, there are pros and cons associated with accepting credit cards. Thoughtful minds eventually realize the pros absolutely outweigh the cons.
The Major Benefits to Accepting Credit Cards
The primary benefits associated with accepting credit card payments are fairly obvious. All are connected to the aforementioned point that credit cards increase the odds of boosting revenue. How do credit cards boost revenue? There are a few ways:
The Customer Base is Widened
A certain segment of customers simply does not like to pay in cash. Many do not even like to carry cash on them. Such consumers could be dubbed “credit card exclusive buyers”. A shop that accepts credit cards surely can tap into these buyers. Stores that don’t accept credit cards cede these buyers to others.
Ability to Spend More
Cash on hand may be far more limited than the available credit line a person has on a credit card account. As a result, the buyer is able to spend via using the credit card. He or she may be very willing to spend more than would ever be possible when paying solely in cash. The more the customers are spending, the more revenue a store is receiving. To repeat, stores really do need consistent revenue streams in order to thrive and survive.
Numerous credit cards are backed with tons of consumer protections. The competition in the credit card industry has led to many different banks and financial institutions putting together rewards programs, travel miles, and other added features on accounts. Protections against fraud or “lemon purchases” are popular perks as well. Buyers may be more inclined to purchase when knowing the credit card company might refund a bad deal.
Drawbacks Do Exist
Not all is perfect with credit card acceptance, though. A few drawbacks do exist and they are worth noting.
Merchants are stuck with having to pay the fees on the transaction. Everything from processing fees to monthly statements come with a cost. While the expenses are not excessive, such costs do detract from the profit margin of a business.
Chargebacks on Disputes
Remember the aforementioned point about customers being able to get refunds on purchases through their credit card? The credit card issuer is not the one who ultimately takes the loss on the transaction. A chargeback ends up being issued and that means money is taken right from the merchant’s account. The small business owners ends up with a loss when a transaction turns out this way.
Credit card fraud is, sadly, a common problem all throughout the globe. Criminals compromise and use other people’s credit card accounts at an alarming rate. The credit card holder has the option of filing a fraud complaint with his or her credit card company. Things might not work out so easily for a small business owner.
Credit card companies may not pay merchants who are the victim of someone using a stolen credit card to make purchases. Even when the merchant has absolutely nothing to do with the fraud, a credit card company could simply refuse to compensate the merchant. Chargebacks ensue.
Merchants Have Little Choice
Small business owners are likely to look at both the positives and negatives of accepting credit cards and come up with one logical conclusion. Not accepting credit cards would be a big mistake for a business. Small businesses do not want to direct any customers away. Not accepting credit cards could lead to this exact situation. Even with the risk of certain costs, accepting credit cards is a must.
As a business owner, you might be reluctant to start accepting paperless payments from customers. After all, aside from purchasing terminals that facilitate physical credit cards, the credit card company will bill you for every purchase made using this method, which leads you to believe that it will substantially reduce your profit. However, let’s take a look at a scenario from an arbitrary consumer’s perspective.
Consider the Following Scenario
Imagine you’re in the mall. You walk past your favorite clothes store and notice that they’re having big sale on most of their items until today. However, the store is packed with customers and you decide it’s not worth the trouble. You go home, feeling a little disappointed, but reassure yourself that it’s better to save. Before going to bed, you decide to open up your phone. The official page of the store shows up on your news feed and alas — it says the sale lasts until midnight! Without further ado, you purchase a bunch of merchandise using your credit card and fall asleep, satisfied with your last-minute purchase.
In that scenario, the customer wouldn’t have made the purchase if that store didn’t accept online payments. The convenience of being able to make the purchase in the comfort of their homes and the availability of the discount to online transactions is what encouraged the consumer to go through with the purchase. That is the power of cashless payment methods, such as credit cards, and is one of the biggest reasons why businesses everywhere are opting to accept online payment methods despite the substantial recurring processing fees.
It’s as if the store is always open for countless customers, providing an efficient and convenient way to purchase items from anywhere. This kind of premise circumvents the limitations of the physical store and invites even more customers with purchasing power. And the credit card processing fees are worth the investment — whatever charges are incurred by processing each credit card transaction are far less significant than the additional revenue.
In order to help you decide, here are the advantages and drawbacks of accepting credit card payments in your business.
Pros of Accepting Credit Card Payments
- Fewer people nowadays carry cash; many shoppers prefer to transact using their credit cards because of how quick and convenient it is.
- Accepting credit card payments offers your customers additional convenient options of payment, which gives you an edge over your competitors.
- Credit card payments are automatically transferred to your bank accounts, saving you time that would otherwise be spent depositing cash and checks at the bank.
- People with credit cards generally have the tendency to spend more, because spending virtual cash feels less impactful on budget plans than spending actual cash.
- Newer payment options, such as Shopify offer incentives for availing their services, as well as other useful features such as inventory tracking and creating gift card promotions.
- There are different credit card payment options available to suit the needs of your business, from terminals able to read physical cards to online payment gateways such as PayPal. It’s just a matter of selecting which service options and provider is the most applicable to your business operations.
Cons of Accepting Credit Card Payments
- Depending on your service provider, you will be charged either a percentage-based fee or a flat transaction fee for every purchase, reducing the revenue per item sold.
- The payment services can also be subjected to other processing fees such as setup fees, transfer fees, monthly minimum fees, and compliance fees. Online payment gateways may also charge you whenever you transfer your balance to your bank account.
- Payments made via credit card take a few days before they are reflected on your bank account. This can be problematic for businesses that rely on immediate cash transfers.
Parts of the world are shifting toward cashless payments. In fact, India is taking steps towards cashless revolution and growth. As technology progresses, people are growing more accustomed to alternative methods of transferring money. Failure to get on board with this growing practice will cause your business to lose out on a large number of potential online customers. Don’t forget to conduct ample research on your consumer base before expanding your payment options.
If you are like most consumers, there is a good chance that the credit card in your wallet comes with a rewards program. Most cards limit the rewards to certain types of purchases, such as gas or groceries. What you may not realize is that you do not accrue points based on what you purchase but where you purchase. That is where understanding merchant category codes can help you get the most out of your rewards credit card.
What Is a Merchant Category Code?
When a merchant signs up to accept credit cards with MasterCard, Visa, American Express, or Discover, they are assigned a four-digit code that identifies the type of goods or services that the merchant provides. The code, sometimes referred to as an MCC, was originally meant to assist the Internal Revenue Service and businesses with certain tax reporting requirements. The major credit card networks also use the codes to determine how much they charge certain merchants for the privilege of accepting credit card payments.
MCCs and Rewards:
Merchant category codes allow credit card issuers to easily classify purchases for the purpose of providing rewards benefits. To maximize your rewards, you need to frequent merchants with the appropriate MCCs; however, this can be a little tricky. First of all, these codes are assigned storewide and have nothing to do with the items purchased. For example, your local Walmart may have an MCC classifying it as a grocery store. If you have a credit card issuer that includes groceries in its rewards program, you will earn points even if you purchase paint or a pair of jeans.
Unfortunately, determining a particular store’s merchant category can be somewhat confusing. For example, the local deli where you eat lunch every day may be categorized as a convenience store. This means that you are missing out if your card only awards dining rewards points for merchants listed as eating places or restaurants. To make the waters even murkier, different locations of the same merchant may be classified with a different code depending on that location’s primary line of business.
How to Find a Merchant’s Category Code:
There are several ways in which you can identify a store’s MCC:
- Most credit card statements will list the merchant’s industry or the spending category along with the purchase information. This lets you know at a glance how the issuer classifies a merchant.
- Some credit card issuers will only list the four-digit category number, such as 5251, with your purchase information. In this instance, you can use the code table that is available on the Internal Revenue Service website to look up the merchant category. For example, a merchant with an MCC of 5251 is considered a hardware store.
- You can also use the Visa supplier locator to identify the MCC of any merchant in your area that is signed up to accept Visa. All of the major credit card networks typically identify a particular merchant with the same code, so the MCC should be the same even if your card is not a Visa.
Maximizing Your Rewards Points:
Before signing up for a rewards card, be sure to review the cardholder agreement carefully. The agreement will specify the MCCs that the issuer is including in the rewards program. Review your spending habits to see if the businesses where you spend the most money are included in order to determine if the card is worthwhile. As a general rule, it is best to avoid rewards programs that change categories every few months as these force you to constantly check which merchants are included so that you can adapt your spending patterns.
If you are a small business owner that accepts credit cards, then there will be fees that you have to pay. Merchant account companies typically charge around five percent of company’s revenue from credit card sales. Statement fees, interchange costs and processing fees are examples of some of the fees that your business may be charged for credit cards.
Many consumers are opting to use credit cards over cash. Only 23 percent of point-of-sale purchases are made using cash. Credit card use will continue to increase. It may not be possible to avoid all credit card fees. However, there are some things that you can do in order to save money on credit card fees.
The key to getting the most out of any financial product is to shop around. Some providers will provide the same level of service but charge you more. Other companies may advertise a low rate and charge hidden fees. You can find a credit card processor by doing a Google Search. Make sure that you select a company that is accredited by the Better Business Bureau.
There are several questions that you should ask before choosing a credit card processing company. What is the total rate including all of the fees? Are there any application fees, cancellation fees or statement fees? Those are examples of some of the specific questions that you will need to ask.
You should also read the fine print before you choose a credit card processing company. Additionally, you may be able to negotiate the fees.
Swipe the Credit Card
You will pay more in credit card fees if you manually enter the credit card information instead of swiping it. The reason that companies charge more is because fraud is more likely to occur if the information is manually-entered. In order to prevent fraud, you will need to make sure that the name on the credit care matches the name on the ID. You can decline the sale if the information does not match.
Impose Minimum Credit Card Sales
If your customers make a lot of small transactions, then you may want to impose a minimum purchase requirement. Put up a note saying that you will not accept transactions that are under a certain amount. If customers have a problem with this, then you will need to let them know that it takes more to process credit card transactions.
Managing cash flow can be a true struggle for small business owners. Depending on the type of business activities you are involved in, your cash flow issues may be the result of slow sales, a regular down season or even a slow accounts receivable pipeline. While cash may be trickling in, bills may be pouring in, and expenses may be mounting. You may be wondering what you can do to get your hands on extra money to make ends meet. The idea of a merchant cash advance can sound enticing, and many small business owners jump at the chance to get their hands on quick cash without hassle. However, the reality is that a merchant cash advance can be expensive, and you should take a closer look at what a merchant account is and what some of the alternatives are before you make a decision about how to manage your business finances.
What Is a Merchant Cash Advance?
Understanding what a merchant cash advance is can help you to make the best overall decision about your business’s cash flow management. A merchant cash advance essentially is a loan against your future merchant account sales. To obtain a merchant cash advance, you typically need to locate a reputable provider to advance you the funds. There is an application process, and during this process, the provider may review your sales activity for the last few months or longer to determine reasonably how much money you can afford to borrow through your cash advance. Basically, you are borrowing money from your future proceeds, and this can create a financial shortfall down the road when you need to pay upcoming bills with that money.
What Is the Cost of a Merchant Cash Advance?
The bottom line is that you need access to extra cash. Your financial needs may be urgent, and you may not have time to wait for a traditional loan application to be processed. Nonetheless, it is important to understand the true cost of a merchant cash advance. Most cash advances are paid back through a daily holdback. Through a holdback, the provider recoups a portion of your daily sales until the loan proceeds plus interest charges and loan fees are paid back in full. A typical holdback amount may be approximately 15 percent of your sales proceeds, and the repayment amount may be between 30 to 40 percent in some cases. You may be more interested to learn what the interest rates charged on a merchant cash advance are. The rates typically vary between 10 to 20 percent, but some rates fall outside of this threshold.
Why Are Merchant Cash Advances a Bad Idea?
As you can see, the cost of a merchant cash advance can be significant. Paying back the proceeds over time can eat away at future profitability, and this can make a currently bad time even more challenging for you to deal with. In addition, there may be more affordable ways to borrow funds that are needed by your business that give you greater ability to manage your finances better without detracting from the daily profitability from your business. For example, with a merchant cash advance, any benefits from very profitable days are eroded because of the percentage-based payment system of a merchant cash advance. With a monthly repayment option from another source, you could enjoy a fixed monthly payment and could more successfully reap the rewards from a very profitable day, week or month.
What Are Alternatives to a Merchant Cash Advance?
There are several alternatives to merchant cash advances. It is important to consider the availability of loan proceeds, the time it takes to obtain the funds, the cost of the loan and other factors. A credit card cash advance is one idea. Some credit card companies offer exceptional advance offers that you can take advantage of. The payment is often a monthly payment that is based on the amount you borrow. You can also apply for a short-term business loan through a bank. While there is a loan application process for this, you may enjoy more reasonable and affordable repayment terms.
Keep in mind that many businesses that are dealing with a cash shortage must pay the bills as well as invest in marketing or advertising to boost sales. Thoroughly explore the options today to find the best financing option available.
If you are a small business owner that accepts credit cards and debit cards, then you will need to choose a credit card processing company. You will have to pay some upfront fees, but you will be able to boost your sales by accepting credit cards and debit cards. In fact, it is estimated that businesses lose $7,000 every year in revenue because they do not accept credit cards.
It can be difficult to choose a credit card processing company. There are five important factors that you need to take into consideration.
How Much are the Fees?
Credit card processing companies typically take about five percent of everything that a business earns in debit and credit card sales. However, there are some companies that will charge more or less than this. Monthly statement fees, set up fees, monthly minimum fees, early termination fees and monthly gateway access fees are examples of some of the fees that you may be charged.
It is important for you to understand all of the fees and the terms of service. If you need clarification, then you will need to contact a company representative.
How Long Does it Take to set Up?
You and your employees should have an easy time setting up the processing technology. If it will be difficult for you to set up the equipment, then you will need to make sure that the processor can come out and help.
What Payments are Accepted?
You should make sure that all major debit cards and credit cards are accepted. You do not want to have to turn away customers because their card type is not accepted. You should also make sure that other forms of payment are accepted such as gift cards and electronic benefits transfer.
Are new Payment Technologies Accepted?
Many of your customers may be tech-savvy. That is why you should choose a company that allows you to accept Google Wallet, Apple Pay and other digital wallets. These devices allow people to use their tablet or smartphone to make purchases.
Is Customer Support Helpful?
Finding Credit Card Processing Companies
You can find a list of accredited credit card companies on the Better Business Bureau. Citbank, Bank of America and Chase also offer merchant services. If you have a business that is constantly on the go, then you may want to consider getting a mobile credit card reader. This is a device that you can attach directly to your phone or tablet.
With more Americans choosing to use plastic and even their smartphones to conduct their purchases and make online payments, small business owners and entrepreneurs should pay close attention to this trend. Accepting credit and debit card payments has become a vital necessity for businesses that offer products and services, and the benefits of these payment methods are undeniable.
- Impulse purchases and larger checkout transactions are more likely to happen when shoppers are given the benefit of paying with their cards.
- Companies that have credit card terminals are more likely to enjoy returning shoppers than those that only accept cash.
- Credit card acceptance is similar to a marketing tool in the sense that customers actively look for the stickers that indicate the payment networks offered.
Understanding Merchant Accounts
Unlike commercial bank accounts that hold business transactions usually tied to a line of credit, merchant service accounts provide the connections needed to payment networks and processors. In some cases, commercial bank accounts also offer merchant services to accept credit cards as value-added services.
As a means to competing against banks, many merchant processors offer lower fees and convenient tools to small business owners. Merchant processor tend to offer modern terminals that can be set up to interact with point-of-sale (POS) systems and can also be upgraded to accept payments from digital wallets such as Google Pay.
Merchant processors often work with preferred banks that offer business accounts, which need to be established for the purpose of depositing payments made with credit and debit cards.
Understanding Terminals and Online Payment Portals
There was a time when merchant processors applied stringent criteria in terms of accepting new accounts. That started to change with the advent of companies such as PayPal and Square, which offer online payment solutions that are easy for small business owners to obtain.
When the Square credit card reader for the iPhone was introduced a few years ago, the company started a revolution in terms of credit card acceptance. The device itself was not as revolutionary as the business model behind it: Square offered the reader for free to just about any small business owner without having to complete long application forms, background checks and accounting reviews. The Square reader empowered entrepreneurs such as hot dog cart operators to start accepting credit and debit cards; this was a small business segment that had largely been ignored by the merchant processing industry.
PayPal followed Square with a method to accept card payments online by means of a few lines of code that could be embedded on a website or with invoices. Square and PayPal lowered the barriers to entry for small business owners; however, this ease comes at a higher cost. Square swipes or manual entry of card numbers are charged 2.75 percent while most merchant processors will charge 2 percent.
Square and PayPal are more adequate for micro companies and self-employed professionals. Proprietors of brick-and-mortar retail stores are better off with a merchant processor that provides card reading devices. Modern terminals accept traditional cards with the old stripe system as well as the new EVM chip and PIN cards that considerably reduce the likelihood of fraud. The lowest processing fees can be achieved by means of physically swiping or dipping credit and debit cards.
Another advantage of new credit card terminals is that merchant processors always have the most advanced models. This means that they can be integrated into POS systems; in fact, many processors offer free subscriptions to powerful, cloud-based POS solutions that feature employee scheduling, marketing and even accounting functions. Some terminals even include features to start accepting digital wallet payments directly from smartphones.
The bottom line of accepting credit and debit cards these days is that company owners should not ignore the numerous benefits from this business process. The merchant processing industry is highly competitive, which means that it pays to shop around for processors that can offer better rates and value-added services.
You will not be held responsible for credit card fraud. However, someone has to pay. There have been many concerns raised about credit card fraud after the Target security breach occurred in 2013. There are going to be costs associated with any security breach.
Banks Take Shots at Target
The security breach cost target millions of dollars. Federal law states that cardholders cannot be held responsible for fraudulent purchases. The charges were made by thieves who will obviously not pay for the purchases. The banks have gone after Target and expected them to foot the bill.
The reason that the banks expect Target to pay is because poor security is likely the culprit behind the breach. Target can potentially lose over one billion dollars. This is not the only issue. The people whose card information has been stolen will need to get new cards. They will again look to Target in order to make up for the costs.
Major Risks for Small Business Owners
This problem is even worse for small business owners. A small business can be destroyed by credit card fraud. If a company delivers a product to a fraudster, then that person will likely be out of a product. A credit card processing company may choose to terminate the relationship with the merchant if fraud occurs. If this occurs, then the business may be blacklisted by other merchants.
However, banks are the ones that will affected by fraud the most including regional banks. MasterCard and Visa typically put the reimbursement responsibility on the bank. A small bank may also be affected by the fraud. Additionally, the merchant may also be held responsible for credit card fraud. In many cases, it can be difficult to recover losses from the merchant.
Debit Card Fraud
Fraud is less common in the debit card world. In fact, debit card fraud is on the decline. Both the merchants and card issuers may be held responsible for debit card fraud. The issuer is typically responsible for about 60 percent of the loss whereas the issuer is responsible for the remaining loss.
It is rare for the cardholder to be held responsible for the fraud. This happens in less than two percent of the cases. In most cases, the issuer was usually held responsible if the card was present and fraudulently used. The merchants were typically held responsible if the card was not present.