Recurring Payments: The Next Step for Your Small Business

Recurring payments used to be something we only saw for things like rent and utility bills. Now, they’re everywhere, from monthly Netflix subscriptions to weekly grocery deliveries. More and more people are choosing to pay for services automatically, and this is good news for small businesses. Using recurring payments means less work for businesses when it comes to handling payments. It also helps keep customers happy and makes it easier to predict cash flow.

Let’s get into what recurring payments are, how they work, and the pros and cons for small businesses.

Understanding Recurring Payments

Recurring payments are payments that happen regularly, without the customer having to do anything each time. Think about your monthly gym membership or your yearly antivirus software subscription. Recurring payments can also help customers pay for expensive items bit by bit over time.

These payments can be the same amount each time (fixed) or they can change depending on how much a customer uses a service (variable). Usually, subscription and membership fees are fixed, while utility bills like electricity or water are variable.

How Recurring Payments Work

For a business to accept recurring payments, it needs two things: a payment processor (like Tesla Payments) and a merchant account. Here’s how a recurring payment usually works:

1. A customer decides to pay for something on a recurring basis.
2. The customer agrees to the details of the payment like how much it is, when it happens, and when it ends (if there’s an end date).
3. The customer then enters their payment information through something called a payment gateway and agrees to keep this information for future payments.
4. The payment processor receives the customer’s payment information and communicates with the customer’s bank and credit card company.
5. If the customer’s bank approves the transaction, the money is transferred to the business’s merchant account.
6. Next, the money is moved from the merchant account to the business’s regular bank account.
7. This process repeats itself regularly, according to the payment schedule. The payment processor starts each transaction and gives the customer a bill each time a payment is made.

Credit or debit cards and ACH debits are usually used for recurring payments. Some payment processors also offer recurring invoicing.

The Benefits of Recurring Payments

Recurring payments can be really good for small businesses because they’re efficient, reliable, and help build relationships with customers.

1. Efficiency: Automated billing and payments mean less work and fewer mistakes. It also helps businesses predict their cash flow better. For customers, it’s less hassle and more convenience.
2. Reliability: With recurring payments, businesses don’t have to worry about late or missed payments, and it’s easier to predict cash flow.
3. Building Relationships: Recurring payments can help build trust with customers and keep them around longer. It also makes it easier for customers to make larger purchases over time and enjoy regular deliveries of goods or services. Plus, recurring payments mean that customers have to act to stop a payment, not to start one.

The Downsides of Recurring Payments

Recurring payments do have some drawbacks, including a higher risk of fraud and higher costs for businesses.

1. Fraud and Errors: Recurring payments can make fraud more likely because card details are stored and customers don’t have to approve each transaction. Mistakes or accidental charges can also happen more easily.
2. Higher Costs: Payment processors might charge more for handling recurring payments because there’s more risk involved. These fees can be around 3% to 3.5% of the total cost of the transaction, plus a flat fee for each transaction.

Do My Small Business Really Need Recurring Payments?

The choice to use recurring payments in your small business depends on what your business needs and what you offer. If your business has things like subscriptions, memberships, or services that you provide regularly, then recurring payments could make things easier for you and your customers. They can also help if you sell expensive items and your customers would rather pay bit by bit over time.

But remember, recurring payments have their own challenges too, like a higher chance of fraud and more expensive transaction fees. That’s why it’s important to think carefully about your business’s needs, maybe even talking to a financial advisor, before deciding to use recurring payments. In the end, you want to make a choice that helps your business grow while keeping your customers happy and your financial situation secure.