Accepting credit cards is a significant advantage for small businesses. You’ll get paid faster, boost your professional image, and build stronger customer relationships.
When you meet customers’ needs, they’re likely to become loyal to your brand, and that’s a sweet spot we all want to find. Accepting credit card payments is an easy way to get there. Not only will it make their lives easier, it’ll help you build your bottom line and maintain steady cash flow in the process.
However, inflation is up, and cash is tight for everyone these days – we’re still in unpredictable territory. There are plenty of reasons to be optimistic, but you’ll need to temper that with a healthy dose of realism. If you can optimize spending, even in small ways, you’re moving in the right direction.
The cost of just about everything is skyrocketing left and right, so you need to take control of what you can. While you might think reducing credit card processing fees by a point or two won’t make that much of a difference, every dollar counts — and they definitely add up at the end of the year.
You probably can’t avoid processing fees entirely if you accept credit card payments, but there are ways to minimize them. With a bit of due diligence and a few minor adjustments, you’ll be putting money back into your business instead of shelling it out.
The first step is understanding what you pay now and what’s typical. If you’ve ever attempted to seek out a lower-fee alternative, you likely know how vast the landscape has become.
That’s why we’ve created this tip sheet. Read on for everything you need to know about online payments and credit card processing fees, and suggestions to help you reduce them.
Average costs of credit card processing for small businesses
There are a bunch of payment processors to choose from, each with different fee structures. Some charge a merchant fee based on a percentage of the sale, a transaction fee, and/or a monthly/yearly service fee. Some charge a flat rate, and others charge variable rates, depending on the type of credit card used.
Let’s break it down:
- Transaction fees typically range between 1-4%, depending on the type of sale (swipe vs. online credit card payments), but the amount may vary depending on the type of credit card used and the volume of credit card transactions you complete.
- Subscription fees aren’t always an issue, although some payment processors charge monthly or yearly to use their platform.
- Additional fees could be levied if you have chargebacks, foreign payments, or insufficient funds.
- Equipment rental or purchase might also be an ongoing expense if you have a brick-and-mortar location or take in-person payments. Some companies provide these items free with a subscription or charge a deposit that you can get back if you switch providers or move on.
Types of credit card processing fees
Credit card processing companies operate under one of three general pricing models:
- A flat rate for all transactions can be advantageous for small businesses with a low volume of transactions. It’s simple, predictable, and controllable, but it might not be best for you. For example, if you sell many lower-priced items, that flat rate can end up being pretty high when you view it as a percentage of sales.
- Flat transaction fee plus a percentage (interchange plus). The percentage typically covers the credit card issuer’s fees, also known as an interchange fee. Processing fees can be negotiable if you do high-volume sales, which could save you a good chunk of change. The flat rate is the amount that goes to the processor, while the percentage (interchange) goes to the credit card issuer.
- Tiered pricing combines interchange fees and processing fees, but you pay a consistent rate regardless of the type of card used. While this might sound pretty good, the actual pricing is pretty murky, so it could be challenging to prove value.
If you already use a credit card payment processor, you’ll need to understand what you’re currently paying before you can identify a better option — if indeed there is one. Take some time to deep dive into your processing fees and drill down on your monthly costs. With that number in hand, you’ll have a benchmark to compare other options.
How to accept credit cards and pay fewer fees
Your success as a small business owner can hinge on whether you have the capacity to process credit card payments. But if you’re concerned about what you’re paying for the privilege, it’s a good idea to know your options.
These days, it’s more important than ever to accept as many forms of payment as possible. People are paying with credit and debit cards more and will often choose merchants based on whether they take their preferred card.
Here are a few ways to get all the benefits of credit cards while minimizing the downsides.
1. Get competitive rates when you accept credit card payments
It pays to shop around. Identify potential processors and compare rates. Ensure you’re comparing apples to apples. If you can’t find a review site that offers comparisons (some are biased, so it’s always a good idea to do your own legwork), create a spreadsheet to see everything laid out on one page.
Column one should be your current provider, followed by top players in the market. Don’t be afraid to ask your colleagues or competitors for advice; they might have valuable intel that’ll cut down your research time.
2. Use a payment service provider
If you’re working with your bank for payment processing, chances are you’re paying higher fees. Banks operate on a more traditional model and have not changed their approach even though they’ve got a lot of competition.
Payment service providers like Invoice2go, PayPal, Stripe, Square, QuickBooks, or GoPayment are excellent alternatives. If they integrate with the systems you already use, all the better, since they’ll help you automate your bookkeeping workflow and keep all your financial data organized.
3. Check out mobile payment processors for credit card payments
Mobile payment processors are massively convenient for small businesses just starting out. Square (for example) provides equipment for free and does not require a contract or subscription to get started. It’s an excellent way to get going, and you can always upgrade to more sophisticated gear as needed. In other words, you don’t have to commit to anything upfront, and you can scale as you go.
4. Cancel features you don’t use or need
When comparing subscription plans, look at the features offered and decide whether the fee is worth it. If you won’t likely use most of the program’s benefits, it might not be the most cost-effective choice for you. Can you pick and choose a la carte features? Or are you stuck with a package based on your pricing tier? It’s all about value, so make sure you’re getting your money’s worth.
5. Choose a plan with flat-rate pricing
Small businesses and new businesses generally benefit from flat-rate pricing, at least initially. As you grow, you can move to an interchange-plus plan to reduce credit card processing costs even more
6. Don’t commit to lengthy contracts
Long-term contracts lock you into a rate and a plan, which might not be the best choice for you. Rates tend to fluctuate, and if they trend down, you might be on the hook for more than you ought to pay. Even if you can get out of the agreement, you might be forced into a buyout. Choose a processor that allows you to go month-to-month with minimal strings attached.
7. Can you negotiate a discount?
If you’re an e-commerce business doing large transaction volumes, you might be in a position to negotiate discounts on your processing fees. Your interchange fees are pretty much set; there’s not much you can do there. But there might be some wiggle room with the processor’s fee. You’ve got nothing to lose from having that conversation.
8. Review your processing and plan fees periodically
Rates go up and down. If it’s the former, it’ll cut into your margins. You might not even notice until you look at your balance sheet or compare numbers from the previous year. If you schedule time to review your subscriptions, fees, and other business expenses, you’ll have a better handle on what’s changed and might be able to make adjustments before it gets out of hand.
Remember that spreadsheet we talked about in point #1? Give it a once-over from time to time, so you always have a handle on factors affecting your profitability. Research what’s changed in the industry and find out if there are any special offers or new business models you could be taking advantage of. Invoice2go Money, for example, lets you add a service fee to credit and debit card payments to cover card processing costs. Your customer gets to enjoy the convenience of online payments, while you get to pocket the entire amount listed on your invoice.
The current rate of inflation demands diligence on your part. Based on what you learn, you might need to revisit your pricing, add new products, or remove products or services that are costing you money. Whatever you choose to do, knowing is 99% of the game. The more control you have over your circumstances, the more sustainable and resilient your business will be to economic changes.
9. Limit the types of cards you accept
Premium cards often charge premium fees. For example, high-value travel rewards cards, Discover, and American Express tend to charge merchants higher interchange fees, which either must be passed on to the customer or absorbed by the merchant.
The caveat here is that if you decide not to accept payments from these cards vs. charging the fees back to your customers or taking the L, you might lose a few customers along the way. Chances are these cards won’t be the bulk of your business, but it’s worth considering.
10. Set minimums for credit card purchases
Processing fees can cut into your profits if you sell a lot of low-dollar items. For example, if you have things on your website that sell for $5, you might sell hundreds of them and be on the hook for a transaction fee for each individual purchase.
One way to address this is to set a minimum for credit card payments or enforce multiple orders. Many sellers do this for their low-dollar items, and most buyers don’t mind too much. If you’re selling eyeshadow for $3.50, most buyers won’t mind getting three, especially if they can mix and match.
11. Offer cash discounts or pass fees on to customers
Earlier, we mentioned charging customers back for credit card processing fees to reduce costs and cover your expenses, like Invoice2go Money allows you to do. Some merchants choose to do business this way.
Most of the time, the fee doesn’t add up to a significant dollar amount. But it might be a turn-off if the charge is blatant—in other words if your credit card terminal notifies the customer of the additional fee. There are a couple of ways to address this, should you choose to go this route.
The first option is to tack a service fee onto each transaction, which will pop up when they use your credit card terminal or check out on your website. Or, you could raise your prices slightly to cover the processing fee and build it into the price, making the extra charge invisible to the customer.
In either scenario, you might choose to offer a discount if they pay in cash, which would help you avoid the fee entirely. Of course, this approach wouldn’t be appropriate in all situations, but restaurants, taxis, convenience stores, and most brick-and-mortar retail can use this strategy to save. The prospect of getting a discount might even be compelling enough for some customers to go out of their way to pay cash, which benefits you in myriad ways.
12. Don’t forget to write off credit card processing fees at tax time!
Credit card processing fees are a business expense; therefore, you can write them off on your taxes. Take advantage of every deduction available to you. Check out our ultimate list of small business tax deductions to learn more!