Compare small business payment methods

Compare small business payment methods

For a home-based business, the only thing more important than attracting customers is getting paid.

Gone are the days when the one-person company operating out of the spare room had but two options: cash or checks. Today's in-home entrepreneurs have more choices, from credit cards to PayPal to branded "shopping cart" programs.

"Realistically, there are many, many options," says Don Rhodes, director of risk management policy for the American Bankers Association. "A lot of it depends on the nature of the business."

Here are today's four major payment methods for home-based businesses.

Cash
With a local clientele that you can look in the eye, "cash is obviously the best way to get paid," says Melissa Campagnelli, editor-in-chief of eM + C, an e-marketing and commerce magazine, and author of "Open an Online Business in 10 Days."

The great thing about cash: You don't have to pay middleman fees, and -- barring counterfeiters -- worries diminish. Checks don't bounce and credit cardholders don't try charge-backs.

Three caveats:

• Keep accurate books showing who paid, when and for what.
• Get  a separate business account to make accounting easier.
• Report every cent to the IRS.

Checks
If you provide a monthly service or your customers are local, checks are another way to go.

Getting a business checking account is like getting a personal one, but in this case, banks have different pricing schedules and may ask to see your business's registration or incorporation documents.

Checks are easier to track than cash. But occasionally, one bounces. The business lesson: Never release merchandise until the check clears. Otherwise, you will be out both goods and your fee.

If you get a rubber check for services you've already performed (like cleaning or dog grooming), the usual recourse is a few letters or phone calls. Then you have to make a decision: Is it worth it to keep pursuing payment? Further remedies include payment requests from a lawyer or filing a claim in small claims court.

The cost: the fees associated with a business checking account and losses from any bad checks.

Credit cards
"If you want to do an Internet business, you have to accept credit cards," says Joel Elad, proprietor of 10-year-old NewComix.com, owner of Real Method Consulting, and author of a book about selling online. "It's the lifeblood of the Internet."

But credit cards present a host of challenges to small businesses. Many owners believe that their sales are too small to justify accepting credit cards. Others may be leery of new security regulations that require merchants taking personal financial information to have layers of security to protect the data.

Years ago, when Tony Bates operated a small online store, Internet security was simpler. These days, merchants who accept credit cards must adhere to the Payment Card Industry (PCI) Data Security Standard, which means answering a 200-plus-question form "I consider myself reasonably technically savvy, and there's no way I could answer that thing," says Bates, now chief operating officer and partner in PSC, a consulting firm that specializes in payment security and compliance.

In a time of tightening credit, home-based entrepreneurs may also worry about qualifying for a merchant account. "If you're an individual, they will look at your personal credit," says Rhodes.

There are a number of ways businesses can arrange to accept credit cards.

You can go through a merchant services provider -- a middleman who will set up and service the accounts in exchange for a fee. The provider may offer data security, fraud protection, accounting services or credit card processing.

Some Internet hosting services will integrate card processing into the suite of services they offer to small businesses. There are also third-party payment option providers, such as  PayPal, that offer merchant accounts allowing buyers to pay with credit cards.

For a fee, PayPal will process the cards and handle data and security Merchants receive the customer and shipping information -- plus the payment. "For the small business owner, the first choice I recommend is PayPal. They offer one of the easiest methods to take credit cards," Elad says.

PayPal
Formerly consigned almost exclusively to eBay, PayPal now stretches out across the Internet.

"There are not a lot of minuses," says Rick Segal, author of a book on online retail business. While he offers the method, the number of his clients who use it "is very minute," he says.

How it works for a merchant: You apply for a PayPal account. Once you receive it, you link it to an existing business bank account. When someone buys an item, PayPal processes the payment, and you're notified so that you can ship the merchandise. Then, on a regular (but varying) basis, PayPal sweeps that money into your bank account.

With certain types of accounts, merchants can also accept credit cards. The upside for businesses: You don't have to apply for a merchant account or worry about setting up special security to handle data. Unknown to the buyer, the transaction is processed by PayPal. The merchant gets only the buyer's order and shipping information, but none of the financial data.

"It may be more expensive, but the whole PCI issue is removed," says Bates.

Merchants pay a fee based on the amounts that pass through the account, plus a transaction fee. Like credit cards, the more business you do, the lower your rate.

The downside: As with regular PayPal accounts, some merchants feel that the return policies favor the customer. In those cases, they say PayPal will remove the money in question from their accounts and they have to haggle to get it back.

Hammering out the right deal
"One thing I've found over the years is that really everything is negotiable," says Jeremy Shepherd, CEO of PearlParadise.com and author of "How to Start a Home-Based Online Retail Business." "Taking your first offer is not the best deal."

Comparison-shop. Question your own bank, merchant service providers and third-party payment systems.

While you're bargaining, watch the long term. "What happens if you're successful?" says Bates.

With most payment options, fees will decrease as your sales increase. When you start grossing more than $5,000 a month and definitely when you get to $10,000, consider offering credit cards through your own merchant account rather than through PayPal, says Elad. Then again, PayPal rates will drop, so price it out and decide which will better suit your needs, he says.

"It depends on how your customers want, and are willing, to pay you," says Paul Edwards, co-author of "The Best Home Businesses for People Fifty+." "Getting paid is as essential as getting the business in the first place."

Updated: August 14,2023