Offering Your Customers Credit
Getting paid for your products or services is what business is all about. These days, there are more options than ever for accepting payment. Whether you are in a B2B or consumer-oriented industry, your choices can include extending credit, taking checks, and accepting credit or debit cards. And there are countless ways to accept payments that don’t involve a card—or a cash register. From automatic bank transfers made easy to online services such as PayPal or devices such as Square and other smartphone-based card-payment options, there are many choices.
With so many options, it’s easy for a new business owner to get caught up in the excitement of making sales and to forget the necessity of a well-thought-out credit policy. Deciding what forms of payment you will accept, how you will handle them, and what collection methods you’ll use to ensure debts are paid is essential to any small business’ success.
warning
Even the best customers can suddenly become deadbeats. Watch for these warning signs that a customer may be in financial trouble:
• Changes in personnel, especially buyers or management
• Changes in buying patterns, such as purchasing much larger amounts than usual or buying significant amounts off-season
• Failure to return calls with the usual promptness
Establishing a Credit Policy
Credit can make or break a small business. A too-lenient credit policy can set the stage for collection and cash-flow problems later, while a creatively and carefully designed policy can attract customers and boost your business’s cash flow.
Many small businesses are reluctant to establish a firm credit policy for fear of losing their customers. What they do not realize is that a consistent credit policy not only strengthens your company, but also creates a more professional image in your customers’ eyes.
A well-thought-out credit policy accomplishes four things:
1. Avoids both bad debts and hard feelings
2. Standardizes credit procedures, providing employees with clear and consistent directions
3. Demonstrates to employees and customers that the company is serious about managing credit
4. Helps the business owner define how credit fits into the overall sales and marketing plan
To establish a smart credit policy, start by investigating the way your competition handles credit. Your goal is to make it easy to buy your products. If your competition offers better terms, they have an advantage. You must meet your competitors’ credit terms to attract customers.
At the same time, be cautious not to go too far with your credit policy. Novice entrepreneurs are often tempted to offer lower prices and longer payment terms to take business away from competitors. Credit is a double-edged sword. You want to attract customers with your credit policy, but you do not want to attract customers who are not credit-worthy. Be aware that some troubled companies routinely switch from supplier to supplier whenever they reach their credit limit with one. Others are outright con artists that take advantage of new and naive entrepreneurs.
How to protect yourself? One good way to start is to write a short, simple statement that sums up the intent and spirit of your company’s credit policy. For example, a liberal policy might read: “Our credit policy is to make every reasonable effort to extend credit to all customers recommended by sales management, provided a suitable credit basis can be developed.”
A conservative policy might say: “Our company has a strict credit policy, and credit lines will be extended only to the most credit-worthy accounts. New customers who fail to meet our credit criteria will need to purchase using cash-on-delivery terms until they establish their ability and willingness to pay on our terms.”
Base your policy selection—conservative or liberal—on your industry, the size and experience of your staff, the dollar amount of your transactions, your profit margins, and your tolerance for risk. Also consider the industry to which you’re selling. If your customers are in “soft” industries such as construction or computers, for example, you would do well to use a conservative policy.
If you adopt a liberal credit policy for your business, make sure you are prepared to handle the collection calls. Liberal policies will require you to be aggressive when customers do not pay on time.
tip
When dealing with a new client, it’s a good idea to protect yourself by asking for part of your payment upfront. This is an especially good policy if the client is a new or fledgling business.
Give ’Em Credit
The simplest customer credit policy has two basic points: 1) limiting credit risk and 2) diligently investigating each company’s credit-worthiness.
No matter how credit-worthy a customer is, never extend credit beyond your profit margin. This policy ensures that if you aren’t paid, at least your expenses will be paid. For example, if you mark up your product or service 100 percent, you can then safely risk that amount without jeopardizing your company’s cash flow. To gauge a company’s credit-worthiness, draft a comprehensive credit application that contains the following:
Name of business, address, phone, and fax number
Names, addresses, and Social Security numbers of principals
Type of business (corporation, partnership, sole proprietorship)
Industry
Number of employees
Bank references
Trade payment references
Business/personal bankruptcy history
Any other names under which the company does business
A personal guarantee that the business owners promise to pay you if their corporation is unable to
Your credit application should also specify what your credit terms are and the consequences of failing to meet them. Indicate what late fees you’ll charge, if any; that the customer is responsible for any attorney’s fees or collection costs incurred at any time, either during or prior to a lawsuit; and the venue where such a suit would be filed. Have your credit application form reviewed by an attorney specializing in creditors’ rights to make sure it is in line with your state’s regulations.
tip
Try this proactive approach to prompt a customer to pay faster: About ten days before payment is due, call to ask if the customer received the bill. Make sure they are satisfied with the product; then politely ask, “Do you anticipate any problems paying your bill on time?”
Once a potential customer has completed the application, how do you investigate the information? One way to verify the facts and assess the company’s credit history is to call credit-reporting agencies. Some companies’ payment histories will also be available through D&B. Because credit agencies’ reporting can be unreliable, however, it’s also a good idea to call others in the industry and try to determine the company’s payment record and reputation. Most industries have associations that trade credit information.
Also ask customers how much credit they think they will need. This will help you estimate the volume of credit and the potential risk to your business. Finally, simply use your intuition. If someone doesn’t look you straight in the eye, chances are they won’t let you see what’s in their wallet, either.
Payment Due
Once you’ve set your credit policy, it’s important to stick to it and do your part to ensure prompt payment. The cornerstone of collecting accounts receivable on time is making sure invoices go out promptly and accurately. If you sell a product, get the invoice out to the customer at the same time the shipment goes out. If you’re in a service industry, track your billable hours daily or weekly, and bill as often as your contract or agreement with the client permits. The sooner the invoice is in the mail, the sooner you get paid.
To eliminate any possibility of confusion, your invoice should contain several key pieces of information. First, make sure you date it accurately and clearly state when payment is due, as well as any penalties for late payment. Also specify any discounts, such as discounts for payment in 15 days or for payment in cash.
“The thing women have got to learn is that nobody gives you power. You just take it.”
—ROSEANNE BARR
Each invoice should give a clear and accurate description of the goods or services the customer received. Inventory code numbers may make sense to your computer system, but they don’t mean much to the customer unless they are accompanied by an item description.
It’s also important to use sequentially numbered invoices. This helps make things easier when you need to discuss a particular invoice with a customer and also makes it easier for your employees to keep track of invoices.
Collect Call
Having trouble collecting on a bill? Your Better Business Bureau (BBB) may be able to help. Many BBBs now assist with B2B disputes regarding payment as part of their dispute resolution service. BBBs do not operate as collection agencies, and there is no charge beyond standard membership dues.
When the BBB gets involved, there can be three possible outcomes. First, the account may be paid; second, the BBB can serve as a forum for arbitration; third, if the company refuses to pay or arbitrate, the complaint is logged in the BBB’s files for three years.
Most businesses find a call from the BBB a powerful motivator to pay up. If the debtor belongs to the BBB and refuses to pay, its membership could be revoked.
To find out if the BBB in your area offers this service, visit bbb.org.
Before sending out an invoice, call the customer to ensure the price is correct, and check to make sure prices on invoices match those on purchase orders and/or contracts.
Know the industry norms when setting your payment schedules. While 30 days is the norm in most industries, in others, 45- or 60-day payment cycles are typical. Learn your customers’ payment practices, too. If they pay only once a month, for instance, make sure your invoice gets to them in plenty of time to hit that payment cycle. Also keep on top of industry trends and economic ups and downs that could affect customers’ ability to pay.
Promptness is key not only in sending out invoices, but also in following up. If payment is due in 30 days, don’t wait until the 60th day to call the customer. By the same token, however, don’t be overeager and call on the 31st day. Being too demanding can annoy customers, and this could result in you losing a valuable client. Knowledge of industry norms plus your customers’ payment cycles will guide you in striking a middle ground.
Constant communication trains customers to pay bills promptly and leads to an efficient, professional relationship between you and them. Usually, a polite telephone call to ask about a late payment will get the ball rolling, or at least tell you when you can expect payment. If any problems exist that need to be resolved before payment can be issued, your phone call will let you know what they are so you can start clearing them up. It could be something as simple as a missing packing slip or as major as a damaged shipment.
tip
To make sure you get paid for any work performed, it’s a perfectly reasonable practice for a business that has out-of-pocket expenses to ask that the client make a deposit at least large enough to cover these expenses.
The first 15 to 20 seconds of the call are crucial. Make sure to project good body language over the phone. Be professional and firm, not wimpy. Use a pleasant voice that conveys authority, and respect the other person’s dignity. Remember the old saying “You catch more flies with honey than with vinegar”? It’s true.
What if payment still is not made after an initial phone call? Don’t let things slide. Statistics show that the longer a debt goes unpaid, the more difficult it will be to collect and the greater chance that it will remain unpaid forever. Most experts recommend making additional phone calls rather than sending a series of past-due notices or collection letters. Letters are easier to ignore, while phone calls tend to get better results.
If several phone calls fail to generate any response, a personal visit may be in order. Try to set up an appointment in advance. If this isn’t possible, leave a message stating what date and time you will visit. Make sure to bring all the proper documentation with you so you can prove exactly what is owed. At this point, you are unlikely to get full payment, so see if you can get the customer to commit to a payment plan. Make sure, however, that you put it in writing.
If the customer refuses to meet with you to discuss the issue or won’t commit to a payment plan, you may be facing a bad debt situation and need to take further action. There are two options: using the services of an attorney or employing a collection agency. Your lawyer can advise you on what is best to do.
If you decide to go with a collection agency, ask friends or business owners for referrals, or look in the Yellow Pages or online to find collectors who handle your type of claim. To make sure the agencies are reputable, contact the Better Business Bureau or the securities division of your secretary of state’s office. Since all collection companies must be bonded with the state, this office should have them on file.
e-fyi
For more information on preventing bad checks, visit ckfraud.org. The National Check Fraud Center offers tips for detecting counterfeit checks as well as a rundown of bad check laws for each state.
For more information on collection agencies, you can also contact the Association of Credit and Collection Professionals (acainternational.org). Most reputable collection firms are members of this international organization.
Many collection agencies take their fee as a cut of the collected money, so there is no upfront cost to you. Shop around to find an agency with a reasonable rate. Also compare the cost of using a collection agency to the cost of using your lawyer. You may be able to recover more of the money using one option or the other, depending on the total amount of the debt and the hourly rate or percentage the lawyer or agency charges.
Accepting Checks
Bounced checks can cut heavily into a small business’s profits. Yet a business that doesn’t accept personal checks can’t expect to stay competitive. How can you keep bad checks out of your cash register? Here are some steps to establishing a check-acceptance policy that works.
Start with the basics. Since laws regarding the information needed to cash checks vary greatly among states (and even within states), begin by contacting your local police department. They can familiarize you with the laws and regulations that govern checks in your state. Some police departments have seminars instructing businesses on how to set up proper check-cashing policies.
While rules vary among states, there are some good general rules of thumb to follow. When accepting a check, always ask to see the customer’s driver’s license or similar identification card, preferably one that has a photograph. Check the customer’s physical characteristics against his identification. If you have reason to question his identity, ask the customer to write his signature on a separate piece of paper. Many people who pass bad checks have numerous false identifications and may forget which one they are using. Ask for the customer’s home and work telephone numbers so you can contact him in case the check bounces. Don’t cash payroll checks, checks for more than the amount of purchase, or third-party checks.
Be observant. Desktop-publishing software, laser printers, and scanners have made it easier for people to alter, forge, and duplicate checks. To avoid accepting a forged or counterfeit check, evaluate the document very carefully. Smudge marks on the check could indicate the check was rubbed with moist fingers when it was illegally made. Smooth edges on checks are another sign of a document that may be counterfeit; authentic checks are perforated either on the top or left side of the check. Smudged handwriting or signs that the handwriting has been erased are other warning signs that you might be dealing with an illegal check.
Be especially cautious with new checks. A large majority of bad checks are written on new accounts. Many businesses will not accept checks that don’t have a customer’s name preprinted on them. If the check is written on a brand-new account (one with a check number, say, below 300), protect yourself by asking to see two forms of ID.
Establish a waiting period for refunds. Merchants can easily be stiffed when a customer makes a purchase by check and returns the merchandise the next day for a cash refund. When the check bounces, the merchant is out the cash paid for the refund. To avoid this scenario, many entrepreneurs require a five-to-seven-business-day grace period to allow checks to clear the bank before cash refunds are paid.
Consider getting electronic help. If you process a large volume of checks, you might benefit from the services of a check-verification company. By paying a monthly fee, which depends on your company’s size and volume of checks, you can tap into a company’s database of individuals who write bad, stolen, or forged checks. This is done by passing a customer’s check through an electronic “check reader” at your checkout stand. If the check matches a name in the company’s database, the check is refused.
Using a “check reader” from companies like TeleCheck, a check-verification and check-guarantee company, is quick and efficient. They can approve a check within seconds, which is generally as fast as, or faster than, a merchant getting acceptance for a credit card purchase.
“This is the nature of genius, to be able to grasp the knowable even when no one else recognizes that it is present.”
—DEEPAK CHOPRA, SELF-HELP GURU
Check-verification companies also offer a check-guarantee service. If a check is approved by a check-verification company and it later turns out to be a bad check, the merchant gets reimbursed for the value of the check. This guarantee service reduces the risk of accepting bad checks. Getting a handle on the bad checks that might pass through your business certainly has its benefits. For small merchants, one bad check can wipe out an entire day’s profits.
Another option is an electronic check conversion/acceptance system, which allows merchants to accept checks as easily and safely as credit cards. Here’s how it works: When a customer makes a payment with a check, the paper check is run through a check reader, converting it into an electronic item much like the credit card terminal does when swiping a card. Once the transaction is approved, funds are electronically debited from the customer’s account and deposited into the merchant’s account, usually within 24 to 48 hours. This same technology allows businesses to process checks over the phone or the internet.
Whatever check-acceptance policy you develop, make sure your employees clearly understand the procedure to follow. Also be sure to post your check-acceptance policy prominently where customers can see it. Specify any charges for bounced checks, what forms of ID are required, and what types of checks you will and will not accept. Posting signs helps prevent disgruntlement when customers wait in line, only to find at the register that you can’t accept their check.
aha!
Require employees to sign their initials on checks they accept. No one wants to have their initials on a check that might bounce, so employees will be extra careful about following your check acceptance policy.
What if you do receive a bad check? In most cases, after a check bounces, the bank allows you another attempt to deposit it. After that, the responsibility for collecting the money falls on you.
Contact the customer, either by phone or mail. (Again, consult your local police on the proper procedure; some states require that a registered letter be sent and a specific amount of time elapse before other action can be taken.) Keep your cool; there’s nothing gained by being angry or hostile about the situation. Most people bounce checks by accident. Explain the situation, and request immediate payment plus reimbursement for any bank charges you have incurred.
If the person still refuses to pay, or you cannot reach them, you have several options. The first, and probably the easiest, is to hold the check for a short time (up to six months) from the date it was written. Although banks will not allow the check to be deposited a third time, they will cash the check if there are sufficient funds. Call the debtor’s bank periodically to see if the funds are there. When they are, cash the check immediately.
Another option is going to the police. Since, through your check-acceptance procedure, you collected all the information needed to prosecute, you should be able to complete the proper paperwork. However, the hassle of hiring a lawyer, identifying suspects, and going to court may be more effort than you want to expend for a $200 check. In that case, your best bet is to use a collection agency. (For more details on this, see the “Payment Due” section starting on page 295).
Accepting Credit Cards
Why should a small-business owner accept credit cards? There are dozens of reasons. First and foremost, research shows that credit cards increase the probability, speed, and size of customer purchases. Many people prefer not to carry cash, especially when traveling. Others prefer to pay with credit cards because they know that it will be easier to return or exchange the merchandise.
Accepting credit cards has several advantages for business owners as well. It gives you the chance to increase sales by enabling customers to make impulse buys even when they do not have enough cash in their wallets or sufficient funds in their checking accounts. Accepting credit cards can improve your cash flow, because in most cases you receive the money within a few days instead of waiting for a check to clear or an invoice to come due. Finally, credit cards provide a guarantee that you will be paid, without the risks involved in accepting personal checks. And, these days, even though more than 25 million U.S. small businesses don’t accept them, credit cards are ubiquitous and you risk losing business if you do not accept them.
A Private Affair
MasterCard, Visa, and American Express all have their place. But there’s another option you may not have considered: issuing a private-label credit card with your company’s name on it.
In addition to all the usual advantages of credit cards, a private-label credit card program allows businesses to focus on who their customers are. For example, your program can gather data about customer purchases, buying patterns, income, and demographics.
Small businesses can save money and eliminate hassles by using an outside administrator that specializes in private-label credit cards. A number of banks have entered this arena; ask your banker if he or she administers such programs. If not, the banker may be able to recommend a private-label credit card administration company.
Administration companies can do everything from setting up the operation to developing specialized marketing programs, designing the credit cards, training employees, and developing lists of potential customers. Fees vary depending on the number of services provided and the size of your customer base.
Before choosing an administration company, talk to other business owners who use private-label credit card programs to see if they’re happy with the service and if the administration company does a good job handling customer applications, payments, and the like. Weigh the cost of any program against the benefits you expect to get from it.
Merchant Status
To accept major credit cards from customers, your business must establish merchant status with each of the credit card companies whose cards you want to accept. You’ll probably want to start by applying for merchant status with American Express or Discover. For these cards, all you need to do is contact American Express or Discover directly and fill out an application.
However, chances are you’ll want to accept Visa and MasterCard, too, since these are used more frequently. You cannot apply directly to Visa or MasterCard; because they are simply bank associations, you have to establish a merchant account through one of several thousand banks that set up such accounts, called “acquiring banks.”
warning
To prevent credit card fraud, follow these steps every time a credit purchase is made:
• Check the signature on the charge slip against the one on the back of the card. This may seem basic, but you’d be surprised at how often it is neglected.
• Verify the card’s expiration date.
• Check frequently the credit card companies’ updated bulletins listing canceled card numbers. There are automated services for this, too.
The first thing you need to understand about accepting credit cards, explains Debra Rossi of Wells Fargo Bank, is that the bank views this as an extension of credit. “When we give you the ability to accept credit cards, we’re giving you the use of the funds before we get them. By the time the money arrives in the cardholder’s account, it could be another 30 days,” Rossi says. There’s also the real concern that if your company goes out of business before merchandise is shipped to customers, the bank will have to absorb losses.
While the requirements vary among banks, in general a business does not have to be a minimum size in terms of sales. However, some banks do have minimum requirements for how long you’ve been in business. This doesn’t mean a startup can’t get merchant status; it simply means you may have to look a little harder to find a bank that will work with you.
While being considered a “risky business”—typically a startup, mail order, or homebased business—is one reason a bank may deny your merchant status request, the most common reason for denial is simply poor credit. Approaching a bank for a merchant account is like applying for a loan. You must be prepared with a solid presentation that will persuade the bank to open an account for you.
You will need to provide bank and trade references, and estimate what kind of credit card volume you expect to have and what you think the average transaction size will be. Bring your business plan and financial statements, along with copies of advertisements, marketing pieces, and your catalog, if you have one. If possible, invite your banker to visit your store or operation. Banks will evaluate your product or service to see if there might be potential for a lot of returns or customer disputes. Called “chargebacks,” these refunds are very expensive for banks to process. They are more common among mail order companies and are one reason why these businesses typically have a hard time securing merchant status.
Skip the Bank and Go Mobile
American consumers conduct 20 billion credit card transactions each year, totaling $1.9 trillion in annual spending, according to Juniper Research—numbers too eye-popping for any merchant to ignore. Yet while shoppers love the convenience of plastic, credit cards are anything but convenient for small businesses. Transaction fees can amount to hundreds or even thousands of dollars each month, dramatically reducing profit margins in the process.
Actually, traditional card processing isn’t an ideal option for many types of businesses—food trucks, for example—which translates into any number of missed sales opportunities.
That’s why more than 100,000 merchants nationwide sign up with Square each month.
Chances are, you’ve already encountered mobile payments (and experienced the rush of writing a signature with your finger) in the form of dongle-based technology, recognizable by a card reader that attaches to a mobile device via its audio jack. Such systems are fast becoming a familiar sight, even at some large retailers.
The commanding leader in the field is Square, which kicked off the trend in May 2010. Square card readers can be used on smartphones and iPads to swipe credit cards securely, without being given merchant status by a bank. There’s a flat 2.75 percent transaction fee for all swiped Square transactions, with a 3.5 percent fee (plus a 15-cent surcharge) when transactions are keyed in manually. There are no additional activation costs, recurring charges, early termination penalties, or hidden fees. That is generally less than bank charges and you can accept any card (no higher fees for, say, accepting American Express).
While Square dominates, there are other card reader device firms, including PayPal and Intuit. Other firms have different pricing—some may charge a monthly fee and slightly lower percentages per charge. As of 2014, there were more than five million devices in use in the U.S. So research all the available services to figure out which is best for your business. For instance, if you do a lot of online and in-person sales, you might prefer PayPal, which will coordinate online payments and credit card swipes with its reader.
In your initial presentation, provide a reasonable estimate of how many chargebacks you will receive, then show your bank why you do not expect them to exceed your estimates. Testimonials from satisfied customers or product samples can help convince the bank your customers will be satisfied with their purchases. Another way to reduce the bank’s fear is to demonstrate that your product is priced at a fair market value.
The best place to begin when trying to get merchant status is by approaching the bank that already holds your business accounts. If your bank turns you down, ask around for recommendations from other business owners who accept plastic. You could look in the Yellow Pages for other businesses in the same category as yours (homebased, retail, mail order). Call them to ask where they have their merchant accounts and whether they are satisfied with the way their accounts are handled. When approaching a bank with which you have no relationship, you may be able to sweeten the deal by offering to switch your other accounts to that bank as well.
If banks turn you down for merchant status, another option is to consider independent credit card processing companies, which can be found in the Yellow Pages. While independents often give the best rates because they have lower overhead, their application process tends to be more time-consuming, and startup fees are sometimes higher.
You can also go through an independent sales organization (ISO). These are field representatives from out-of-town banks who, for a commission, help businesses find banks willing to grant them merchant status. Your bank may be able to recommend an ISO, or you can look in the Yellow Pages or online under “Credit Cards.” An ISO can match your needs with those of the banks he or she represents without requiring you to go through the application process with all of them.
Money Matters
Enticing your bank with promising sales figures can also boost your case since the bank makes money when you do. Every time you accept a credit card for payment, the bank or card company deducts a percentage of the sale—called a “merchant discount fee”—and then credits your account with the rest of the sale amount.
Here are some other fees you can expect to pay. All of them are negotiable except for the discount fee:
Equipment costs of $120 to $1,000
Monthly statement fees of $10 or less
Transaction fees of 20 to 70 cents per purchase
The discount rate—the actual percentage you are charged per transaction based on projected card sales volume, the degree of risk, and a few other factors (the percentage ranges from 2 to 4 percent; rates are usually higher for new, less established businesses)
Chargeback fees around $25 per return transaction
There may also be some charges from the telephone company to set up a phone line for the authorization and processing equipment. Before you sign on with any bank, consider the costs carefully to make sure the anticipated sales are worth the costs.
Getting Equipped
Once your business has been approved for credit, you will receive a startup kit and personal instruction in how to use the system. You don’t need fancy equipment to process credit card sales. You can start with a phone and a simple imprinter that costs under $30. However, you’ll get a better discount rate (and get your money credited to your account faster) if you process credit card sales electronically.
aha!
Chargebacks—those sale reversals issued by credit card companies when customers dispute a charge—can really hurt your bottom line. To reduce chargebacks, let your customers know exactly what they will see on their credit card statement, including your company name and sale amount. Also, if you are not sure an order is legitimate, trust your instincts and call the credit card company or issuing bank before finalizing the sale.
Although it’s a little more expensive initially, purchasing or leasing a terminal that allows you to swipe the customer’s card through for an instant authorization of the sale (and immediate crediting of your merchant account) can save you money in the long run. Cash registers can also be adapted to process credit cards. Also, using your personal computer as opposed to a terminal to get authorization can cut costs per transaction even more.
Once you obtain merchant account status, make the most of it. The credit card and bank industries hold seminars and users’ conferences covering innovations in the industry, fraud detection techniques, and other helpful subjects. You can ask a credit card company’s representatives for details . . . and keep on top of ways to get more from your customers’ credit cards.
Online Payments
Are you selling on the web? If so, you’ll need an internet merchant account to accept payments online. An internet merchant account costs more than a regular merchant account because the risk of credit card fraud is greater in an online environment, where no card is physically presented at the point of sale. To cover this risk, your bank or account issuer may charge a higher discount rate (3 to 5 percent per transaction vs. 2 to 4 percent for regular merchant accounts). The service provider may also charge monthly statement and transaction fees on each purchase. When you apply, you’ll likely need to estimate the average order size and the average monthly amount you expect to run through the account. You may be asked to keep a percentage of that amount in your account to cover fraud.
Third-party payment processors like PayPal will accept credit card payments on your behalf in return for a percentage of the cost of the transaction. This amount is less than if you have a merchant account—usually under 3 percent plus 30 cents per sale. What’s more, you don’t have to pay the mandatory monthly fees charged by most merchant account providers. If your business has significant sales volume, it’s usually cheaper to process payments through a merchant account.
Accepting Debit Cards
If you foresee a merchant account for accepting credit card payments in your future, then you will be perfectly positioned to accept debit cards, too. The same terminal you will use to process credit card payments can be used for debit card transactions, although you may wish to add a PIN pad terminal to your transaction hardware so customers can type in their PIN. That gives you an extra layer of protection against fraud.
There are a lot of advantages to accepting debit cards. First, because funds are deducted directly from the customer’s bank account during a transaction, you will usually get paid faster with debit transactions than you do with credit card payments. Second, rates for PIN-based debit transactions are usually lower than credit card rates because you pay only a flat fee (credit card companies charge a transaction fee and a discount rate of around 2 percent). Finally, merchant account providers may debit the transaction fees at the end of the month rather than with every purchase, as is the case with credit cards. That gives your business extra cash or “float,” which is especially helpful for small businesses.
Don’t Skimp on Security
Thanks to the internet, small businesses have an unprecedented opportunity to market their products and services to a larger consumer audience than ever before. However, an online presence means little if customers don’t feel safe making a transaction on your website. Because identity theft and credit card fraud are running rampant on the internet, many consumers will not buy from a site that doesn’t provide secure transactions.
That’s where a Secure Sockets Layer (SSL) certificate comes into play. Understanding how SSL affects online security can help unlock your business’s ecommerce potential.
SSL technology encrypts your customers’ payment information as it travels to you over the internet, protecting credit card data and other sensitive information from hackers during the transaction process. It also verifies to customers that you are who you say you are (a padlock icon is visible, indicating that a secure transaction is underway). This prevents a third party from accepting orders while disguised as your business.
SSL certificates are issued by a Certificate Authority (such as VeriSign, Thawte, GeoTrust, and others). The cost of a standard one-year certificate is $200 to $400.
If you store your customers’ data or credit card numbers on your server, a firewall is another vital tool for protecting this information. Many companies expose their customers to hackers by neglecting to implement a proper firewall. If you are uncertain how to install a firewall on your site, consult your web hosting company.
For more information, check out VeriSign’s “What Every E-Business Should Know about SSL Security and Consumer Trust.” You can request a free copy at verisign.com.
e-fyi
There are many business forms, contracts, and letters available for free or for a nominal fee on the internet. While they can be great resources, caution must be used as to the legality of the business form for your particular situation. If in doubt, it’s always best to contact a professional to discuss your situation.
Debit cards are so pervasive these days that pretty much every bank or standalone merchant account supplier offers debit card processing—including online providers—and, in fact, you’re likely to be offered the option when you apply for a merchant account. Once your merchant account is approved, all you need to do is buy a PIN pad, which runs as little as $59, connect it to your terminal, and you will be in business. Hypercom and VeriFone are well-known, affordably priced brands.