Offering more than one option could help you attract a wider variety of customers and allow your customers to make larger purchases. However, there are advantages, disadvantages and costs associated with each payment type.
Pros and cons of different payment types
Where you open your business and the types of items you sell could play an important role in deciding which payments systems to offer customers.
If you expect to make a large portion of your sales online, accepting electronic payments will be a must. Similarly, if your products or services are expensive, customers might not feel comfortable carrying that much cash to your store to make a purchase — checks, cards or mobile payment could be better options.
On the other hand, if you sell inexpensive items from a physical store, your customers may prefer to pay with cash. Customers may also expect you to accept cash if you open a shop in an area where many people don’t have bank accounts or where card processing networks, the companies that send and verify information when someone makes a purchase with a card, frequently go offline.
No matter which payment type(s) you offer, there will be advantages and disadvantages to each. Here are some of the pros and cons of the main payment types:
| Payment Type
|
Advantages
|
Disadvantages
|
|---|
| Cash |
One of the most common and easiest forms of payment.
Many customers will expect you to accept cash.
You won’t have to pay any fees to accept cash. |
Customers might not want to make large purchases with cash.
Storing cash at your place of business or home, or transporting it to the bank, can be dangerous.
Ensuring your register is stocked with bills to make change can tie up money you could use for other business purposes.
Counting money at the end of each day is time-consuming. |
| Checks |
May lead customers to make more frequent or larger purchases.
Allows customers to safely make large purchases.
You won’t have to keep as much cash in your store.
You won’t have to pay any fees to accept checks. |
After depositing a check, you’ll need to wait for the bank to process the check and put the money in your account.
There’s a risk that someone will try to pay with a fake check, or that a check will “bounce” if the customer doesn't have enough money and you won’t receive the payment. |
| Debit, Credit and Prepaid Cards |
May lead customers to make more frequent or larger purchases.
Allows customers to safely make large purchases.
Can be quicker and more convenient for customers at checkout than cash or checks.
You won’t have to keep as much cash in your store.
You don’t have to worry about bad checks or fake cash.
Allows foreign travelers to more easily make purchases. |
You’ll have to wait for the transaction to process before getting money in your account. This usually takes between one and three days.
You may have to pay transaction fees, a small percentage of the transaction. Debit cards generally have lower fees.
You will need to purchase or rent a device to accept payment (called a point-of-sale device).
You may be responsible if a customer uses a fake or stolen card to make a purchase.
If a customer disputes a charge (i.e., initiates a “chargeback”), the transaction may be reversed and you won’t receive a payment. |
| Mobile Payments |
May lead customers to make more frequent or larger purchases.
Allows customers to safely make large purchases.
Can be quicker and more convenient than accepting cash or checks.
You won’t have to keep as much cash in your store.
You don’t have to worry about bad checks or fake cash.
Mobile payments may be more reliable than card-based transactions in some areas.
If you sell items at markets, conferences or trade shows, you can bring your mobile payment system with you.
Allows foreign travelers to more easily make purchases. |
You’ll have to wait for the transaction to process before getting money in your account. This usually takes between one and three days.
You may have to pay transaction fees, which is usually a small percentage of the transaction.
You will need to purchase or rent a device to accept payment (called a point-of-sale device).
You may be responsible if a customer uses a fake or stolen payment information to make a purchase.
If a customer disputes a charge (i.e., initiates a “chargeback”), the transaction may be reversed and you won’t receive a payment. |
| Electronic Bank Transfers |
Allow you to receive large payments without paying fees.
Allows customers to safely make large purchases.
Can be quicker and more convenient than accepting cash or checks.
You won’t have to keep as much cash in your store.
You don’t have to worry about bad checks or fake cash.
Could be a good option if you sell products or services to other businesses. |
Non-business customers might not feel comfortable transferring money directly from their bank account to your business.
You’ll have to wait for the transaction to process before getting money in your account.
You may need to set up this type of transaction with your bank and the customer’s bank, which isn’t always easy. |
| Mobile Wallet |
Mobile Wallet payments allow customers to pay without using a physical card
Often more secure to customers than using a physical card as the data is encrypted and cannot be seen
All smartphones are now equipped with a mobile wallet
Quick, efficient checkout process can encourage customers to make more frequent purchases |
Requires you to rent or own a device to process the “tap” to complete the transaction |
| QR “Quick Response” Codes |
Contactless payment option for customers who want a hands-off experience
Enabled in all smartphones and does not require a specific app for customers to access
Does not require a POS or payment terminal to complete transactions |
Requires a strong wifi connection
May require customers to input credit or debit card information more than once since information is not automatically stored |
| AutoPay |
AutoPay is very easy to set up for customers
Beneficial for subscription services or recurring payments
Ensures on-time payments that aren’t reliant on customers being reminded to submit payment
Less time spent following up with customers to remind them to submit payments |
Overdraft payments occur more often with AutoPay resulting in reverse transactions
Customers may forget about the AutoPay they’ve set up and request refunds after the fact |
| Email Invoicing |
If your business is providing services, email invoicing immediately following the service allows customers to pay and receive a receipt automatically
Allows you to streamline your reporting and manage data securely, connecting with your CRM and accounting systems
>More efficient and environmentally friendly
Quicker transactions and less follow up required to collect payment |
Primarily for service providers and less useful for retail, consumer goods or online businesses
Potential for lost emails or being flagged as "junk mail" |
As a small business owner, especially if you hire employees, you’ll also want to consider the time and effort associated with each type of payment.
For example, employees might need less training to accept cash sales than credit card sales, but you’ll need a safe place to store the cash and may need to regularly make trips to the bank. Additionally, you might want to create a system to make sure employees are accurately adding up the cash and aren’t stealing from your business.
On the other hand, it might take more time to train employees to accept cards, but once they’re trained, there may be fewer math errors and it will be much easier to add up and record your sales for the day.
Also, consider other forms of payment and whether they could work for your business. Perhaps you could benefit from selling gift cards that your customers can give to their friends or family. Or, you might be able to stand out from your competitors by letting your customers pay with digital payment methods.
Preparing your business to accept payments
The amount of time and effort that goes into running your business’s payment system can depend on the types of payments you’ll accept and how closely you want to monitor your business.
If you only accept cash and don’t have a lot of inventory to track, getting started could be as simple as buying a cash register and paper sales book. However, most small business owners want (or need) a more detailed process for tracking their inventory and sales. Many see the benefit of letting customers pay with cards or digital payments.
Legally create your business
If you haven’t already gone through the steps to legally create and register your business, that’s generally where you’ll want to start. The process will also help you get the required documents and information you need to open a business bank account, such as an Employer Identification Number (EIN), which is like a Social Security number for your business.
Open a business bank account
A business bank account could be a requirement if you accept non-cash payments, and is a safe place to store the cash your business receives from customers. Separating your personal and business accounts can also help you stay organized and make filing taxes easier.
Business checking accounts may have different fees than personal bank accounts, such as a fee based on the number of transactions you have each month. Compare your options carefully before opening an account. You may also want to start saving money, which you could do with a business savings account.
Get set up to accept non-cash payments
You may need to sign up for several services before you can accept cards or mobile payments. The process can be confusing, so here’s a quick overview of what you might need:
- Merchant services. A merchant services provider will set you up with a payment processor and a merchant account.
Payment processors, such as Worldpay Inc. and Square Inc., are companies that can send all the information back and forth when a customer pays with a card. A merchant account is a special type of bank account that allows your customers’ money to flow through the card processing system and get deposited into your business bank account.
You might be able to set up merchant services with your bank, an independent sales organization (ISO) or an all-in-one payment services provider.
Compare your options and try to negotiate the length of your contract (a shorter contract might give you more options in the future) and the fees you’ll have to pay with each option. There’s generally a fee to get set up, along with monthly and annual fees. You’ll also have to pay a fee for each transaction.
- A point-of-sales device. This is the device where customers will swipe, insert or tap their card (or smartphone) when making a purchase. Your merchant services provider may sell or rent you a POS device. Some are small handheld devices, others are built into larger cash registers. There are also options that plug into mobile devices or let you enter the card information into an online form. If you have a POS software system, you’ll want a POS device that can connect to the system, which will then record your sales.
- An all-in-one payment services provider (PSP). Rather than setting up your own merchant account and finding a credit card processor, you may want an easier option. Payment service providers often bundle credit card processing, offer you a point of sale system and let you use their merchant account. It’s generally easier to understand the fees you’ll pay and set your business up to accept non-cash payments with a PSP, but the fees could wind up being higher than what you’d pay with a merchant services account.
- Selling online? You’ll need a payment gateway. If your business plans to accept payments online, you’ll also need a website with a shopping cart and payment gateway. The shopping cart lets customers choose and purchase products. The payment gateway will take your customer’s payment information and either accept or decline the transaction. Some payment gateways can also let you accept electronic bank transfers. Your merchant services account or PSP might come with a payment gateway (sometimes for an added fee), or you could shop around and find a different solution online.
Stay compliant
When you’re using a merchant services account, a PSP or a payment gateway, if you plan on accepting debit and credit cards, you should make sure the company and your business practices comply with the latest laws and credit card companies’ regulations.
The Payment Card Industry Data Security Standards (PCI DSS) is an important standard related to accepting, sending and storing customers’ data. Many merchant services, PSPs and payment gateways stay up to date with this standard and may charge you a monthly or annual PCI compliance fee.
Your business is also responsible for meeting the PCI DSS. If it doesn’t, you could be responsible for the costs associated with a data breach or theft of your customers’ information. You might also have to pay a PCI noncompliance fee to the company you’re working with to accept card payments.
The PCI Security Standards Council creates and promotes the standards. Visit its website to learn more about training, staying certified and preventing data breaches.
Choosing a point of sale system
A point of sale (POS) system can be an essential tool for managing your business’s sales and keeping accurate records. Most POS systems consist of hardware and software.
The hardware may be a cash register, tablet or dongle, a small card reader that you can plug into a mobile device. Some hardware options can work with a variety of POS systems. Or, you may be able to accept non-cash payments with a POS device without attaching it to a more complex POS system.
The POS software can help you record, store and analyze all your business’s information, saving you time and making you a more effective business leader. You may be able to choose between different features or functions depending on the complexity of your POS system.
There are hundreds of POS systems to choose from, including specialty options for certain types of businesses (a restaurant has different needs than a clothing store) and customizable systems. Here are four things to consider as you compare your options:
Cost
Consider the upfront and ongoing costs for the system.
You may need to purchase or rent the hardware, such as a cash register or POS device. Then, depending on your choice, you may need to purchase the POS software or pay a monthly (or annual) subscription fee.
Additionally, POS systems may charge different fees for processing debit card and credit card and transactions. Compare processing costs between POS systems, and see if the system allows you to change to a different third-party processing company later if you want more flexibility.
Features
Your needs may change as your business grows, so consider which features you need today and may want in the future. Here are some of the things that POS systems can do:
- Accept EMV chip (a small chip in cards that can help keep the cardholder’s information secure) debit card and credit cards
- Accept contactless cards (cards that can be tapped rather than swiped or inserted) and mobile payments
- Store cash in a secure drawer
- Scan products’ barcodes
- Track your business’s inventory
- Create sales reports
- Manage employees shifts and timesheets
- Manage a customer loyalty program
- Connect with your bookkeeping software
- Print physical receipts or send digital receipts
Simplicity
Some systems might take hours or days to set up, or require you to hire a consultant to get started. Others may be much simpler. The setup is only part of the process, though. Consider how easy the system will be to use every day, and how easy it will be to train new employees to use your POS system.
Support
A problem with your POS system could slow down your business, and as the business owner, it may be your job to fix the problem. Where will you turn? Some POS system providers may offer free support at any time of day. With others, you may need to figure out how to solve the problem on your own, or pay a consultant for help.
