Why Credit Card Transaction Fees are a Great Deal
Many small business owners launch their business without thinking about things like how do I bill my clients and how do I accept payments. Many business owners start off accepting cash and checks. When a client asks if they take credit card, 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 hundred dollars was paid to Square to process credit card transaction fees. A lot of small business owners will look at the cost of accepting credit cards and see it as an easy way to lower their businesses expenses by not taking them or by charging their customers the transaction fee. Today we are going to talk about why credit card transaction fees are worth paying and why you shouldn't charge the customer the fee.
What Are Credit Cards
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 customers credit. This means accepting credit cards saves you time and money in two ways.
Up front time savings by being able to sell a product in seconds instead of minutes and back-end cost because you don't have to worry about the client not paying the loan back.
But Why 2.75%
Now 2.75% is Square's base credit card fee, most companies who offer credit card processing will charge something like that. Yes, you could probably 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 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 time and lots of it. Think about it. If your hourly rate is $30 an hour and it takes an extra 30 minutes of your time to process a loan application and another hour in admin time in the future, each client cost you $45 above and beyond the 1%. Not only that but it also means that in an 8 hour day you can only process 16 clients. Where with a credit card transaction, which takes about a minute. You could potentially serve 480 clients in an 8 hour day.
Lastly, you median sales per client would need to be 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.
What about Cash and Checks
Most small business owners still see cash and checks as king when it comes to clients paying for products. But most don't realize the hidden risk and cost both cash and checks carry.
Cash is one of the riskiest ways to collect payment from clients in regards to 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 put 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 go setup a bank account with a somewhat similar name to your business. Also, when a client gives you a check, they are giving you all the information you need to drain their bank account if you so desired.
But the biggest issues 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. In the end, when you add all that time together, and the lost time away from the business the 2.75% charge comes out way ahead.
Why shouldn't I charge my client the transaction fee?
First, your competition isn't. Secondly, from your client perspective you are increasing the price of the product 2.75% at the time of purchase which they didn't expect and because of that their customer experience can go from a 5 stars 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 price of the product by 2.75% and make your customers experience a lot better.
Watch Out for Sneaky Credit Card Processors
I meet with a client a while back about doing their taxes, and he was explaining the awesome deal he got from a credit card processor. They only charged him $150 a month and then charge the client $3.99%. You could tell from the way 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), and the processor got paid not only the 3.99% but where 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 for a CPA.
If you take into account your time and energy (which you should), your small business would probably save thousands of dollars in admin time going cashless. Time and energy which can be used to provide you clients better services and to expand your business. Start transitioning from cash and check to credit cards.