Why Merchant Processing Fees Are a Good Investment

| March 26, 2015 | Financial Management

Smiling worker with clipboard in greenhouseIt seems like small business owners are willing to spend money on all sorts of business expenses, from the critical to the frivolous. There’s one expenditure, however, that gets pushback, but is an important business investment: merchant processing fees.

These fees are a small percentages of the total sale of a product or service that compensate payment processors for a valuable service: enabling you to get paid quickly and keeping the cash to your business flowing. I always advocate practicing “cash flow yoga” – taking money in quickly and letting it out very slowly, because consistent cash flow is critical for your business success. Using a merchant processor helps you to do that.

Some services, like accepting payments your customers want to use, are just necessary as a small business owner, and need to be factored into your pricing as a cost of doing business. But I’m all about getting a good deal – so shop around and get the best rates you can.

If you’re a small business that works with individual consumers outside of a retail setting, you’ll need to set up a PayPal account. You may also choose to set up a merchant account as they can have lower fees. You’ll want to do your research and decide what option(s) make sense for your business.

If you try to avoid merchant processing fees, you risk antagonizing prospective buyers and losing opportunities. Here are two examples of what’s at stake:

You Risk Losing Clients
A colleague of mine had a young graphic designer that she loved working with. The designer was talented, professional, and delivered great work within deadlines. The designer had a very reasonable hourly rate, as she had recently left her corporate job to start her business.

The designer insisted on being paid by check to avoid processing fees even though my colleague strongly preferred paying online. My colleague paid by check, but she found it to be a hassle.

A year later, the designer raised her hourly rate – doubled it, in fact. My colleague thought the rate was fair because of the designer’s great work (but certainly not the deal it used to be). My colleague almost fell off her chair when the designer again pushed back about online payment because of the processing fees.

While my colleague didn’t mind the higher price, she didn’t want her own business to be disrupted by having to do the paperwork, and after a conversation with the designer, started looking for other designers to work with. The designer lost not only a good client, but also a great source of referrals.

You May Not Close the Deal
Let’s call this the “penny wise, pound foolish” example. A coach had a $1,500 package of services and two prospects who said they wanted to buy a package – so potentially $3,000 in revenue. The coach said he preferred to be paid by check and the prospects said they would mail checks but…you guessed it, they didn’t.

The prospects had too much time to think, or something more important came up, or whatever, and the coach lost the sales.

Now, these prospects were willing to pay immediately with a credit card. With a merchant account, he could have taken the credit card numbers over the phone, sent them a link to an online website payment page or sent an invoice through PayPal for them to pay online. See where I’m going with this? He could have signed them up on the spot, but instead, lost the prospects entirely.

The coach personally preferred to pay by check and was concerned about the processing fees eating into his profits, so he only accepted checks. Please note that he could have paid $87.30 in processing fees and banked $2,912.70 instead of a big, fat zero. Seems like a good trade, no? Note: For simplicity, I have used PayPal’s fees because they are publicly posted and easy to understand.

Just because you like to pay one way doesn’t mean that way is your customers’ preferred payment method. I would urge you to factor processing fees into your pricing, even if you need to raise your prices a little. And if someone wants to pay in cash or with a check, that’s a bonus.

Make it easy for your prospects and existing customers to pay you. They’ll appreciate it and you’ll grow your business. It’s a win-win.



Ajeet Khurana
Ajeet Khurana
Ajeet Khurana wears many hats: author, angel investor, mentor, TEDx speaker, steering committee of the NASSCOM Start-Up Warehouse, Director of Founder Institute, Venture Partner with the seed initiative of a top Venture Capital firm, and former CEO of IIT Bombay’s business incubator, among others. Before all this, he was entrepreneurial twice in the field of education and web publishing. As a lecturer at the University of Texas at Austin, he taught e-commerce back in 1993, when the term "e-commerce" had not yet been coined. An undergrad in computer engineering from the University of Mumbai, and an MBA from the University of Texas, Ajeet is presently an active name in the startup ecosystem. From starting two ventures as a solopreneur, to helping a large number of startups with their go-to-market, he has never shied from getting his hands dirty. At the same time he has helped dozens of startups raise investment. He truly believes that small business owners are driving change in the world, and need to be facilitated as much as possible. Innumerable small businesses have gained from his attitude, vast professional networks, financial acumen and digital mindset.

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