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Navigating Operating Costs and Profits: The Impact of Payment Methods on Small Businesses

4 Mins read

In today’s business landscape, every decision can have a ripple effect on overall success. Small businessowners are faced with rising costs, inflation, and labor and skills shortages, all alongside the daily challenge of making a profit and keeping business operating successfully. Every owner knows that the key to long-term success is more sales and keeping costs down. However, what a small business owner may not know is the role that payments can play in both.

How a business receives payments, and the payment methods they offer their customers, can significantly impact the bottom line, customer satisfaction, and overall profitability. Whether your small business sells products, services, or a combination, there is much you can do to optimize operations and future-proof your business for long-term growth. It starts with an understanding of different payment methods and their impact.

The Impact of Payment Methods on Small Businesses

Cost: Small businesses operate on tight budgets, so any opportunity to reduce costs is vital. Payment methods vary in their processing fees, and these costs can add up quickly. For example, credit card transactions typically involve higher processing fees, including interest, while debit cards generally have lower fees. Digital wallets can offer convenient, low-cost transactions, whereas cash transactions usually have no direct fees but may come with inconveniences and security considerations. Online payments are fast and efficient but may expose you to fraud risks. Understanding and assessing payment processing fees is crucial for maintaining a healthy profit margin.

Customer Convenience: Customer satisfaction is key to getting repeat business and positive word-of-mouth. Some customers prefer the speed and simplicity of credit card transactions, while others may opt for the familiarity of cash or the security of an ACH (Automated Clearing House) bank transfer. Knowing your customer base is essential for choosing the right payments and enhancing overall satisfaction.

Cash Flow Management: Cash flow is a critical factor, and the speed at which funds are received is often the driver for whether a business can stay afloat. The U.S. Federal Reserve’s recently launched FedNow Service allows businesses and individuals to send and receive instant payments, promising to reduce the time spent waiting for funds. For small businesses, ACH and credit card transactions typically result in much quicker access to funds compared to checks and cash. Consider the implications of different methods on your business’s cash flow to ensure cash flow stability.

Security and Fraud Prevention: The security of payment transactions is a top priority for small businesses and customers alike. Credit card transactions often come with built-in security, while ACH payments involve bank authorization, both helping to reduce the risk of fraud. Alternatively, handling cash may involve security concerns and increased vulnerability. For small businesses, striking a balance between security and convenience is crucial. While customers value convenient options, they also expect their financial information to be secure. Choose payment methods that offer robust security  to instil confidence in your customers.

Selecting the Right Payment Methods for Your Business and Customers

When it comes to choosing the right payment solutions, one size does not fit all. There are three things to consider:

Know Your Customer Base

Consumer payment preferences vary depending on industry, the products or services you offer, whether you operate online or in-store, and what your customer base looks like. Understanding your target market is the foundation of selecting the right payment methods because different demographics have different preferences. For example, tech-savvy customers may appreciate digital wallets and contactless payments, while older demographics might prefer more traditional methods like credit cards and checks.

Do some market research to identify the preferences of your customer base. By knowing who your customers are and how they prefer to pay, you can tailor your options to meet their needs, enhancing their overall experience.

Assess Transaction Fees

Every payment comes with a transaction fee, but these costs vary depending on the method. The fees for processing a credit or debit card payment are usually slightly higher than the fee for a bank transfer, and a payment made via a digital wallet is different again. So, evaluate what methods your customers prefer to use, and then take some time to understand what the processing fees are for each payment method. By evaluating payment methods against your business revenue and customer preferences, you can prioritize those with the most impact on profitability.

ACH payments, cost-effective for small businesses, are advantageous for large or recurring transactions. Their efficiency and lower fees result in savings, especially beneficial in fitness and wellbeing sectors. ACH transactions, involving bank-to-bank transfers, enhance security, reducing fraud and chargeback risks associated with credit cards.

Embrace Technology

Adopting modern payment technologies not only reflects positively on your business’s image but also aligns with evolving customer expectations. Every small business should offer a range of payment methods and then do everything they can to simplify the payment process. Why? Because an easy-to-use payment experience makes your business more attractive, increases sales conversation rates, and improves customer satisfaction.

Tips for simplifying the payment process:

  • Choose business management software with embedded payments for automatic retries, streamlined cash flow tracking, and efficient reconciliation and reporting.
  • Ensure your payment experience aligns with your brand to build trust and encourage repeat business.
  • If you have a mobile app, enable customers to book and purchase directly through it.
  • Store recurring customer card or bank details for quick and easy future transactions, especially for businesses with membership models.
  • Explore ACH payments as a cost-saving option.

Why effective financial management is so important for small businesses

Looking beyond the impact of payment methods, in these difficult economic conditions, it is important for small businesses to practice effective financial management. The benefits of these are:

  • Gain a holistic business view through improved budgeting, forecasting, and strategic planning for better-informed decisions.
  • Mitigate risk by anticipating financial challenges and implementing contingency plans to weather economic uncertainty.
  • Efficiently allocate limited resources by understanding cash flow patterns, budgeting effectively, and optimizing expenses.
  • Easily adapt to market changes with a clear, up-to-date picture of your business finances.
  • Facilitate growth, whether expanding offerings, entering new markets, or investing in marketing, with a solid financial foundation.

By choosing the right payment methods tailored to customer preferences, assessing transaction fees, embracing modern payment technologies, and adopting a comprehensive approach to financial management, every small business will be well-positioned for sustained success.

Shayan Azizbaeigi is SVP Product, Fitness and Wellbeing at Xplor Technologies, a leading global platform integrating SaaS (Software as a Service) solutions and embedded payments for “everyday life” businesses. He leads product and innovation, testing, user and customer experience for our leading fitness business management software solutions: Xplor Mariana Tek for boutique fitness studios; Xplor Gym for gyms and health clubs; and Xplor Recreation for parks and recreation centers, leisure centers, fitness communities, clubs and federations.

Payment methods stock image by Roman Zaiets/Shutterstock

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