Many small business owners launch their businesses without thinking about things like how to bill their clients and how to accept payments. Many business owners start off accepting cash and checks. When clients ask if they take credit cards, they look into it. Most will sign up for a service like Square without thinking about the cost and then get sticker shock at the end of the year when they do their taxes and see several thousands of dollars paid to Square to process credit card transaction fees. Many small business owners will look at the cost of accepting credit cards and see it as an easy way to lower their business expenses by not taking them or charging their customers the transaction fee. Today, we will discuss why credit card transaction fees are worth paying and why you shouldn’t charge the customer the fee.
You may be asking yourself I know what a credit card is, and I would say from a consumer perspective you do. But what is a credit card from a business’s perspective?
A credit card is a short-term pre-approved unsecured loan. Why does that matter to you as a business owner? Accepting credit cards means you can essentially offer your clients short-term financing without having an agreement with a leading company and without needing to run your customer’s credit. This means accepting credit cards saves you time and money in two ways.
Upfront time savings by being able to sell a product in seconds instead of minutes and back-end costs because you don’t have to worry about the client not paying the loan back.
Now, 2.75% is Square’s base credit card fee, and most companies that offer credit card processing will charge something like that. Yes, you could get around 1% by signing an agreement with a leading company and offering in-house credit. With in-house credit, not only do you have to sit down with a client and explain all the terms and conditions (which, if you get them wrong, could lead to legal trouble) and run their credit and give them an interest rate, but you have to deal with the leading company as well.
The 2.75% rate saves you lots of time. Think about it. If your hourly rate is $50 an hour and it takes an extra 30 minutes to process a loan application and another hour in admin time in the future, each client costs you $75 above and beyond the 1%. It also means that in an 8-hour day, you can only process 16 clients with a loan process vs. 480 clients in an 8-hour day with credit cards.
Lastly, your median sales per client would need at least $3,000 for the 2.75% transaction fee to be a higher cost than the 1% cost for offering financing plus admin costs.
Most small business owners still see cash and checks as king when clients pay for products. But most need to realize the hidden risk and cost both cash and checks carry.
Cash is one of the riskiest ways to collect payment from clients regarding fraud, especially for small business owners who don’t have the manpower to have good internal controls. Cash can so easily walk away without anyone noticing and without any record. As a small business owner in the professional service industry, I would not take the risk of collecting cash payments on any of my employees.
What about checks? You might think the only risk involved with a check is if it bounces. But checks have a similar risk as cash. Anyone can cash a check nowadays if they want to set up a bank account with a somewhat similar name to your business. Also, when a client gives you a check, they give you all the information you need to drain their bank account if desired.
But the most significant issue with both cash and checks is admin time. Not only should you have proper internal controls in place, but you also need to take the time to match the check and cash payments to the sales, then reconcile the sales to the deposits, prepare the deposit, and finally take it to the bank between the hours of 9 to 5. Ultimately, when you add all that time together, and the lost time away from the business, the 2.75% charge comes way ahead.
First, your competition isn’t. Secondly, from your client’s perspective, you are increasing the product’s price by 2.75% at the time of purchase, which they didn’t expect, and because of that, their customer experience can go from a 5-star experience to a 4 or 3. If you can sell a product and get your clients to pay the 2.75% on top of the price already, then you can increase the product’s price by 2.75% and improve your customer experience.
I met with a client a while back about doing their taxes, and he was explaining the excellent deal he got from a credit card processor. They only charged him $150 a month and then charged the client $3.99%. You could tell from how the individual sold him the service he thought he was getting a deal. But essentially, what the credit card processor did was convince him to increase his prices by 6.74% (the client was paying the transaction fees before). The processor got paid not only the 3.99% but was guaranteed $150 or 3.99% on $3,759 of sales whether or not he sold any product—all of this with an iron-clad three-year contract. Remember, before signing any long-term contract, it is always a good idea to get advice from a CPA.
If you consider your time and energy (which you should), your small business would probably save thousands of dollars in admin time going cashless—time and energy that can be used to provide your clients better services and expand your business. Start transitioning from cash and checks to credit cards.