How To Set Up Credit Card Payments For A Small Business

More and more, and especially with the younger crowd, people just don’t carry cash anymore. To do business at all, small businesses need to be able to take some sort of payment card, be it debit or credit.

Unfortunately, taking credit card payments can get expensive and complicated. The card payment industry is notorious for charging strange percentage-based fees and other unexpected per-occurrence fees. These are so hard to predict that it can be almost impossible to figure out your exact cost is for taking credit cards. This, in turn, makes it difficult for you to know your profit margin, and without knowing your overall profit margin, you can’t intelligently make a lot of your important business decisions.

We’re here to help. In this article, we’ll provide a brief overview of how you can accept credit card payments for your small business, even when you don’t have a lot of actual sales data to help you with your decision. We’ll give you some tips on narrowing down the many credit card processors out there to just a handful for closer investigation. We’ll give you a quick overview of how credit card processing works, what a merchant account is, and whether you’ll need one to accept credit or debit cards. We’ll explain the various options for taking card payments, including the required hardware and software you’ll need.

So let’s get started on the best way to accept credit cards for small businesses.

Accepting Credit Card Payments For Small Businesses: What You Need To Know

The best way to accept credit cards for your small business depends on the type of business you run. If you have an online store, you’ll need specialized software. If you run a physical store, you’ll need specialized hardware, and if you often meet your customers off-premises, you’ll need mobile processing equipment.

We’ll take you through the details below.

How Credit Card Processing Works

Let’s first go through how, after a card is used by a customer, money gets from the customer to the merchant, so you understand the big picture.

When a customer first hands you a credit or debit card for payment, you’ll need something to take the card information (card number, expiration date, etc.). If you run a physical store or meet the customer outside your store or office, you’d typically swipe or dip the card with a credit card terminal or a mobile terminal. If you run an online store, or you’re taking the information over the phone, you’d usually take or enter that information into a virtual terminal and/or a payment gateway.

Once you’ve taken the card data, it’s sent to your payment card processor for approval. Your processor’s network will check with the cardholder’s issuing bank to confirm that funds are available to cover the transaction. For debit cards, this is a simple check of the remaining balance on the banking account linked to the card. Credit cards require that the cardholder won’t be exceeding their available credit if the transaction is approved. The processing networks will also run a few anti-fraud checks to (hopefully) detect a suspicious transaction. If sufficient funds are available and there aren’t any clear indications of fraud, the transaction is approved, and you can complete the sale.

At the end of each day, you’ll upload all completed credit/debit transactions to your processor’s network for processing (this is called batching). Batching usually occurs automatically if you’re using a payment gateway or a modern credit card terminal. For each transaction, your processor will deduct both the applicable interchange (which is then forwarded to the cardholder’s issuing bank) and markup. You’ll receive whatever is left over after these fees have been deducted. It usually takes another two to three days for these funds to be transferred back to your bank account.

How The Business Of Credit Card Processing Works

The business side of credit card processing involves several major players: the credit card networks (Visa, Mastercard, etc.), the issuing bank that deals with the consumer, the acquiring bank that deals with the merchants, and payment processors that facilitate various interactions between the merchant and the acquiring bank. Each transaction will pass through all of these entities, and each entity will require a fee.

Types Of Fees

Credit card transaction fees can be divided into interchange fees and markups. Each interchange fee has a percentage component and a flat-rate component, and the markup typically has both components too. The card networks set the interchange fees, and they are not negotiable by the merchant. This fee is divided among the card networks, the issuing banks, and the acquiring banks. The markup is what the payment processors charge. These are usually negotiable.

In addition to the per-transaction fees, you will be charged per-incident fees as well. These are charged only when the incident occurs, and they also have non-negotiable components decided by each card network and markups decided by your specific processor. Some of the better processors won’t charge you a markup for these fees.

Types Of Processors

There are generally two types of payment processors: a merchant account provider and a third-party processor/payment service provider. We have articles discussing each type of processor’s pros and cons in detail, but below, we will give a quick overview of each.

Do You Need A Merchant Account To Accept Credit Cards?

The Good & The Bad Of Having A Merchant Account

For many years, the only way to accept credit cards was to set up a merchant account. At its most basic, a merchant account is simply a bank account that the funds from processed credit/debit card transactions are deposited into. Of course, maintaining a merchant account also requires transaction processing services, equipment, and software to process the transactions, security features, and numerous other services, depending on your business’s needs.

Traditional merchant accounts tend to end up being somewhat expensive, and merchant services providers often require that you agree to a long-term contract with a hefty early termination fee in case you close your account before the contract expires. Nevertheless, if you process around $10,000 a month, you might want to go with a merchant account.

Even within merchant account providers, there are several pricing models. One might fit your business better than others. For instance, Payment Depot offers membership pricing, while PaymentCloud works best for high-risk businesses. We recommend that you do your research before deciding which processor to work with.

Cheapest & Easiest Ways To Accept Credit Cards Without A Merchant Account

In recent years, an alternative business and pricing model has become available that lowers costs for small businesses while still providing most of the essential features available with a full-service merchant account. Payment service providers (PSPs) allow you to accept credit and debit card transactions without a traditional merchant account.

PSPs (such as Square, Stripe, and PayPal) have revolutionized the processing industry by offering simple, flat-rate pricing, no fees for basic services, and month-to-month billing that eliminates long-term contracts. They’re able to do this by aggregating accounts together, so you won’t have a unique merchant identification number for your business. PSP accounts are easier to set up, but they’re also vulnerable to sudden account freezes or terminations, making them a risky proposition for businesses that depend on accepting cards without interruption.

3 Primary Ways For Small Businesses To Accept Credit Card Payments

Below are three general ways a small business can accept credit card payments. Of course, we know that some businesses will take credit cards in two or all three ways as well. If your business is such a business, be aware that, with some processors, this will cost you a lot more. It all depends on the processor’s pricing model, so keep that in mind as you shop around.

Accepting Credit Card Payments In Stores

For businesses with physical locations (such as retail stores or restaurants), you’re going to need at least one credit card machine per location. These days, you have a choice between a traditional countertop credit card terminal and a point of sale (POS) system.

Countertop terminals can process transactions, but most models offer little or no other functionality. A POS system, on the other hand, can handle things, such as inventory management, employee scheduling, and a host of other features, to help you run your business. Naturally, POS systems cost more than most countertop terminals, although tablet-based systems (such as ShopKeep) are more affordable (and mobile) than a standalone POS terminal.

Whatever type of equipment you decide to purchase, make sure it’s EMV-compatible — i.e., can take a “chipped” card. EMV (Europay, Mastercard, and Visa) is now the standard method for accepting credit and debit cards in the United States. Since the EMV liability shift in October 2015, you can be held responsible for a fraudulent transaction if you accept an EMV-enabled card using the magstripe instead of the chip. These days, EMV-compatible terminals are widely available and less expensive than ever. With most customers now carrying EMV cards, there’s really no good reason to continue using a magstripe-only card reader.

If you want the latest and greatest in card acceptance technology, it’s pretty easy to find a terminal or POS system that accepts NFC-based payment methods. NFC stands for near field communications, and it’s found on payment systems such as Apple Pay, Google Pay, and Samsung Pay. NFC technology is built into most modern smartphones, tablets, and even smartwatches. It’s a technology that’s gaining in use as more people become aware of its availability and convenience.

Regardless of what type of terminal or POS system you decide to get for your business, we highly encourage you to buy your equipment outright rather than signing up for a lease. Equipment leasing is still being pushed by sales agents who cite misleading arguments about the low upfront cost and the possibility of writing off the lease payments on your taxes. While these arguments are technically true, they mask the reality that leasing a terminal or POS system will cost you far more in the long run than buying.

Equipment can come with four-year contracts that are completely noncancelable. Over the term of the lease, the monthly lease payments will far exceed the cost of buying the equipment. Adding insult to injury, you won’t even own your equipment when the lease finally expires. Instead, you’ll either have to continue making monthly lease payments or buy the equipment (often at an inflated price). For more details, see our article on why you shouldn’t lease a credit card machine.

Accepting Online Credit Card Payments

If your business is eCommerce-only, you’ll have it a little easier because you won’t need a credit card terminal or POS system. However, you will need either a payment gateway or a virtual terminal to accept payments from your customers.

A virtual terminal is a software application that turns your computer into a credit card terminal. Mail order and telephone order businesses use them to enter their customers’ credit card data manually. They can also be combined with a card reader (usually USB-connected) to accept card-present transactions. A virtual terminal can replace a dedicated countertop terminal for retail merchants if you add a card reader.

A payment gateway is a web-based software service that connects your eCommerce website with your processor’s payment networks. Payment gateways allow customers to enter credit card data from wherever they are as long as they have access to the internet. Most merchant services providers charge a monthly fee (usually around $25) to use a payment gateway. You might also have to pay an additional $0.05-$0.10 per transaction for the use of the gateway in some cases.

Authorize.Net is one of the most popular payment gateway providers, but there are many others today as well. Most of the larger processors now offer their own proprietary gateways that include the same security and ease-of-use features, such as invoicing, recurring billing, secure storage of customer payment information, etc., that you’d find in a more well-known gateway. For more information on payment gateways, see our article, The Complete Guide To Online Credit Card Processing With A Payment Gateway.

Depending on how many products you sell on your website and the options you want to give your customers, you may or may not need to use an online shopping cart in conjunction with your payment gateway. Shopping carts allow you to feature products, conduct secure transactions online, and perform various other functions related to running your business.

You’ll want to ensure that your chosen shopping cart is compatible with your payment gateway before setting up your site. Most of the popular shopping carts today are compatible with almost all of the more well-known payment gateways. For more information on online shopping carts, see our article, Shopping Carts 101: How To Choose A Shopping Cart for Your Business.

Accepting Mobile Credit Card Payments

When Square first introduced its original card reader in 2009, it was revolutionary. For the first time, merchants could accept credit or debit cards using their smartphones or tablets. Square was (and still is) a great choice for very small businesses, startups, and merchants who operate seasonally. Naturally, they’ve spawned a lot of competitors, and today, almost all merchant services providers offer some type of mobile payment system.

These systems inevitably include both an app for your smart device and a card reader. Unfortunately, many of the apps are very basic and don’t offer the depth of features that Square does. Only recently have EMV readers become more popularized than magstripe-only readers, connected to a mobile device through Bluetooth. These card readers are more expensive than the older models, but they’re still cheaper than a traditional countertop terminal.

For businesses that need to accept transactions out in the field, mobile readers are lighter and far less costly than wireless terminals, which usually run at least twice as much as their wired brethren and require a separate wireless data plan. They’ve become so popular that you can even see fast food restaurants use them as extra checkouts for drive-through lines during rush times. For more information on mobile payment systems, please see our article on why accepting credit cards with your phone is the easiest option.

How To Set Up Credit Card Payments For A Small Business In 5 Easy Steps

Below are some steps to follow to set up credit card payments for your business. We’ve grossly simplified the process, of course, since some of the steps require you to do more research and compare prices. Nevertheless, we hope the list makes getting the process started a little easier.

1.  Find A Payment Processor

There are a lot of payment processors out there, but it’s not too hard to quickly figure out which ones you should focus on. For that, you’ll need to have a good idea/guess on your average monthly processing volume.

If you think you’ll process less than $10,000 per month, look into third-party processors, such as Square, Stripe, and PayPal. If you think a merchant account provider makes more sense, then once you decide if your business is mostly online, mostly in-store, mostly mobile, or a combination, you can focus on the processors that specialize in those areas. Lastly, make sure your business is not considered high-risk, because if it is, then you’ll probably have to work with a specialist processor to set up credit card processing.

We’ve got plenty of reviews to help you through the process.

2.  Negotiate Rates & Terms

Once you’ve identified a handful of possible candidates, call them and get quotes. In addition to asking about the per-transaction fees, don’t forget to ask about the incidental fees as well, as those can add up very quickly. It’ll be difficult to get a true apples-to-apples comparison on the price, given all the pricing models out there for card processing, but if you make sure that your contract can be terminated at any time, even if you do make a mistake, you won’t be stuck with a bad processor for a very long time. Just remember that interchange rates are not negotiable, but markups are negotiable.

Here’s our article explaining the various pricing models in the credit card processing industry if you wish to go for a deep dive. If you’re unsure about the legalese of the contract itself, here’s some general overview help.

3.  Choose Your Hardware & Software

While you’re negotiating with a prospective processor, some of them might try to entice you with “free” equipment. Typically, these are not free and might turn a contract that initially was terminable at will into a fixed-term contract with an early termination penalty. So be careful when free equipment is offered. Otherwise, we recommend buying the equipment outright (or finance the purchase with a bank loan).

Note that some equipment, such as Square’s hardware and software or Clover equipment, are proprietary, so you won’t be able to use them if you switch processors. Try to keep this in mind as you pick amongst your choices. Lastly, since digital wallets are being used more and more by consumers, think about getting NFC-capable equipment so that you can add another layer of convenience for your customers.

4.  Launch Your Business

This might mean actually launching your business, changing processors, or maybe going from in-person cash-only to online sales. No matter which, there’s a lot involved in doing all that, from getting a physical location/online store, to hiring employees, to getting all the legal paperwork ready. Some of these we cover on this website, but most we do not. In fact, there’s so much involved that we won’t even attempt to cover everything here. We will assume you got the best advice from your available sources, that your grand opening was a huge success, and that you got to use your brand new credit card processing service lots and lots of times.

As a part of opening your business and starting to take payment cards, you’ll discover that you’ll work with repeat customers, have fraudulent charges, failed transactions, and more. When dealing with these issues starts to get really painful, take a deep breath, and remind yourself that these are just regular hiccups related to credit card processing. Eventually, your reward in the form of increased sales will vastly outweigh your inconveniences.

5.  Monitor Monthly Statements

Unfortunately, launching your business isn’t the last — or even the most important — step. The most important step is that you should continue to monitor your monthly statements and revisit your credit card sales data as well.

Sometimes, processors charge merchants incorrectly on per-incident items. It’s not necessarily because your processor is bad. It might be a simple data entry mistake. But if you don’t monitor your statements and speak up, then no one will correct the error. By the time you realize these extra charges months or even years later, the processor might refuse to refund you 100% of the overpayment. We’ve seen such complaints on the Better Business Bureau website, so we know they really do happen.

Even if you’re too busy to monitor your monthly sales trends, you probably should do so quarterly and then yearly. This way, you can discover trends, such as seasonal fluctuations, card usage preferences, and similar. All this information can help you decide if your current processor truly is the best for your business or that you should go out and negotiate a better price if you choose to change processors.

What’s The Best Way For A Small Business To Accept Credit Cards?

The payment card business can be a complicated one, and each business that takes credit and debit cards is different too. So it’s almost impossible to have a “best way” for accepting credit cards. However, in this article, we’ve tried to outline some steps and give general guidance on finding the right processor and the right equipment for your business. We hope you use this very brief guide for general step-by-step instructions on how to get started but also understand that the actual process is much more complicated and takes a lot more time.

What is best for your business depends on what you plan to sell/what service you plan to provide, the seasonality — if any — of your goods or services, and your business’s volume, to name just a few issues for you to consider. When you start your business, a lot of these are just guesses, and, of course, you’re allowed to change the focus of your business as you continue to operate. All these factors can mean that the great processor you started with might not be the best processor as time passes, so you might need to change processors.

Finding the right credit card processor for your small business might sound daunting, but if you break the project down into smaller steps (such as the five steps we suggested earlier) and take each step one at a time, you’ll be able to find the best way for your small business to accept credit cards.

Share your experiences with us below!