First Person: Should Small Businesses Accept Credit Cards?

In the Kosher specialty store I owned with my husband, starting to accept credit and debit cards increased our business by 40%. And yet initially much of the profit was washed away by fees associated with the credit cards. Gradually we learned to evaluate the pros and cons of adding a credit card machine to our small business and here's what we learned.

Obvious Pros of Welcoming Credit Cards

Without a doubt, today's consumers are used to shopping with credit and debit cards. This allows them to shop as much as they want, without a pre-set sum dictated by the cash in their wallets. In the past, people who were wary of overspending shied away from credit cards, but with today's debit cards even this reason is lost. In short, a small business that does not accept credit and debit cards is likely losing sales. But does this mean that accepting plastic payments is right for every small business?

Lease or Buy a Credit Card Terminal

My husband and I chose to lease a credit card machine for our small business. This entailed a monthly fee and a contract for a two-year term, after which the terminal was to be returned. As I learned the hard way, companies that lease credit card machines are small and their accounting departments are far from professional. Even while paying my monthly fee regularly, I would receive notices of late fees and non-payment that took hours of phone calls and hold times to resolve. From my experience, I would recommend that small business owners consider buying the credit card terminal outright, as the cost in many cases is lower than the lease. By financing the purchase at a low interest rate, you can save money over time, and the expense will be tax deductible.

Fees Associated with Credit Cards

The specialty store my husband and I owned was a startup attempting to increase its business. We soon realized that accepting credit cards was not the blessing we anticipated. The commission charged by the issuing banks ran between 1% to 3% of the value of the purchase, with American Express and Discover being on the high end and Visa and Master Card on the low. In addition, the banks may add an Interchange rate, which is a variable rate added to the commission. As my husband and I discovered, when our credit card transaction volume was low, this rate went up. When our credit card transaction volume was high, this rate went down but our overall commission total went up. In other words, the bank got its money one way or another. Keep in mind that within the U.S. credit card companies do not allow merchants to pass on the charge to the consumer, although you can offer discounts for cash payments.

Credit Card Machine Pros and Cons

High volume businesses with a high profit margin certainly benefit from the use of credit cards, but a small business which is just starting up (as ours was) may not. Credit card banks often only release payments after 30 days (or more in some cases). Beyond this, with a low profit margin and slow business cycle, credit card fees and the monthly lease of the credit card machine created a cash flow problem for our small startup. However, very slowly the use of credit cards started to pay up, until, within six months we saw an increase of 40%.

For a small business, therefore, credit card machines are a long term investment that may cause a cash flow problem at first. Furthermore, for a business with very low profit margins, credit card fees may wipe away the profit. From my experience, increasing prices to accommodate expected credit card fees and offering a discount for cash payments worked best.

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