10 Payment Alternatives to Help Small Businesses Get Paid Faster

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.

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Some payment alternatives for small businesses to consider are discussed below:

Cash

For some, 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 (for anyone who has watched more than a few movies, the thought of receiving a briefcase full of cash is quite thrilling).  That being said, the use of cash for payments has diminished considerably as other options have become more popular and as more services move online. Covid also had a huge impact as handling cash became problematic - many businesses simply stopped accepting it and never looked back.

Cheques

Despite the many more efficient payment alternatives, a surprising number of businesses still make payments via the decidedly low tech cheque. This is likely because they continue to be a low cost alternative and are still a fairly universally accepted form of payment. 

The most compelling downside of cheques is the delay between sending a cheque and having the funds in your bank account. And, of course, there is the dreaded bounced check which can affect credit and lead to a host of other problems.

There is also the hidden cost of cheques, which is the loss of time - a cheque has to be prepared either manually or through accounting software. It then has to be mailed or delivered to the recipient, There are frequently follow up calls to assure the recipient that the cheque is in indeed in the mail. Finally, the cheque has to be reconciled in accounting software.

Finally there is the issue of the balance in your bank account. If you’re accounting is up to date, you can determine your bank balance by referring to your accounting software, since this adjusted for cheques that have not yet been cashed . However, many business owners only look at their actual bank balances (usually online) which can be inaccurate. If a cheque takes a few days or even several months to cash, your bank balance will appear to be higher that it really is, since certain cheques have not been cashed.

Credit Card Onsite or mobile (smartphone) payments

There are many benefits to offering credit cards to your customers, including ease payment, flexibility and perhaps most importantly not having to worry about potential bad debt expenses (except in the case of chargebacks).  Also, there is not much additional administration (except accounting) and you will often receive the funds within a couple of days.

The downside of credit cards is that they can be expensive for small businesses due to fees charged by payment processors, especially when compared to cash or cheques. 

Retail business typically sign a contract with a payment processor such as Global or Moneris or TD, in Canada (although there a variety of other options). This gives them access to a terminal and pricing that is often based on the type of credit card (there is a whole complex system of charging credit card transaction fees referred to as interchange)

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. One of these add-ons Square which 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.

Credit cards can also be accepted directly through accounting software such as Quickbooks Online. Once you have a Quickbooks account, you can apply to Quickbooks payments. If approved, the customer is given the option to pay directly on the invoice. QBO then tracks the payment when received and automatically enters it into the software. This can be a useful time saver particularly those with several customers who pay by credit card.

Another type of credit card payment service allows you to pay many different types of bills that normally cannot be paid by credit card, such as property tax, Revenue Canada, mortgages, lease payments etc. These are useful when certain payments cannot be deferred for which cash flow is an issue. Charges for these services are usually quite steep at about 2.5%. Some of these include Plastiq and PaySimply.

Internet Credit Card Payments:

Many freelancers, bloggers, ebay sellers, subscription based services, memberships and other internet business 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 can turn to internet payment processors.  The two most popular ones are:

• Paypal: Almost anyone, anywhere in the world can set up an account with Paypal which allows customers to accept both local and international payments.  Paypal also allows you to maintain a bank account, in different currencies, with them and only make transfers when necessary. The downside of PayPal is that it can be quite expensive, on an ongoing basis, relative to a credit card processor. Foreign exchange fees can also be quite high.

• Stripe is similar to Paypal in that it is quite easy to set up and then start charging customers quickly. Stripe, unlike Paypal does not offer a separate bank account. Rather amounts collected are generally transferred to your bank account on a weekly basis, net of fees.

Both Stripe and Paypal integrate with various invoicing software and third party apps. eg. Xero accounting software and Calendly can both be used to collect payments from customers.

direct debit Payment Services:

Over the past few years a number of payments services have arisen allowing small businesses to pay vendors and collect payments from customers. The payor/payee details only need to be set up one time after which payments can be initiated either individually or by having the customer use a pre authorized debit (PAD) agreement, which automatically debits the customers’ bank account on a regular basis. Since the fees charged by these services tend to be lower than credit cards, this option is great for businesses that charge their customers an ongoing subscription , but don’t want to pay the fees associated with credit cards. 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

Wire Transfers:

When other methods of payment are impractical, particularly with international clients, wire transfers are another way to receive payment directly to your bank account.  Given that there is a fairly high fixed cost associated with wire transfers , it makes more sense to use it with larger amounts. Wire transfers can be set up through your business bank account online or by calling your bank representative.

Email (E-) Transfers:

A simple, cheap and efficient ways of making payment, in Canada, is to use email transfers (also referred to as interac e-transfers).  This function is usually available with online banking and simply requires you to enter the amount, the recipient’s email address and a password.  There are no cheques to deposit nor do you have to wait expectantly 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. Note that the maximum daily amount can often be adjusted upwards or downwards by speaking to your bank.

Electronic Transfers:

Transfers between bank accounts can be automated through the use of electronic transfer services including EFT and ACH (usually available in the US).  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.

Debit Cards:

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/Drafts/Certified Cheques:

When the creditworthiness of the debtor is in doubt, a money order, draft 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.  

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