Recurring Payments for Small Businesses: Should You Offer Them?

Everything you need to know about using recurring payments to streamline your business, stabilize your cash flow, and keep your customers happy.

Does your small business do business with the same customers every month? Many small businesses do. If so, since the success of your business relies heavily on you, it makes sense that you’d welcome the chance to automate as many tasks as you can. The good news is that you can easily and efficiently collect money from your customers by setting up recurring payments.

What are Recurring Payments for Small Business?

Recurring payment, usually referred to as autopay, occurs when a company automatically charges a customer on a predetermined schedule. These automatic payments are often debited from a customer’s bank account via an ACH transfer or charged to their credit or debit card.

You likely conduct a fair number of such electronic transactions each month yourself. Consider the fees you pay for your movie streaming subscription. Or your subscription to the gym. Or your meal subscription box each month. All of those are examples of recurring billing, which happens routinely until your payment plan ends, or you cancel the subscription.

Recurring payments allow you to streamline the billing process by relieving you of the burden of tracking your customers’ payment details and chasing up invoices for payment.

What Types of Recurring Payments Can Small Businesses Use?

Before we dive into the nitty-gritty of how recurring payments work, we’ll cover the two main types of billing categories.

Fixed recurring payments

Recurring payments that are fixed (also called regular) are when the same amount of money is collected from the user during each billing cycle. Since the price doesn’t increase or decrease between cycles, this system is the most continuous and stable. With this model, you know that you’ll receive your payments on time, which can be a great feeling!

Variable recurring payments

With variable or irregular recurring payments, the bill is dependent on the usage of the customer. This happens, for example, with utility bills as the charge is based on consumption.

This is an irregular payment process because the amount owed may vary (increase or decrease) throughout the month or billing cycle.

How Do Recurring Payments for Small Businesses Work?

Recurring payments happen through electronic transfers. To receive these payments, your business needs to have a merchant account and a payment service provider.

A merchant account is an account that the customer’s funds are transferred to after payment and before they enter your business account. These funds are reviewed by a third party and in 1 to 2 days the money gets sent automatically to you.

A payment service provider is also needed to complete recurring payments. These are companies that help you accept electronic payments from customers—PayPal is one of the most popular examples of these.

Some processors have differing workflows, but here’s a quick breakdown of the main step-by-step process that recurring payments go through:

• Customer chooses option: From your website or app, the customer chooses the recurring payment option in their account or payment settings.
• Terms and conditions: Next, the customer will usually accept the terms and conditions presented after selecting the recurring payment option. The terms and conditions often include agreeing to the amount charged, payment frequency, and if there are any expiration dates on the recurring payment.
• Bank information entered: The customer will enter their credit card or bank information, which is then securely saved within the invoicing software.
• Funds transferred to payment processor: Once the customer uses the service and makes a payment (normally when the billing cycle begins), the funds are transferred to the payment processor.
• Funds approved: The payment processor will contact the acquiring and issuing bank, as well as the customer’s credit card network. Once that’s approved, the funds are released into the merchant account.
• Invoice sent: For every billing cycle (commonly month-to-month), the customer will receive an invoice that notifies them of their payment and that it has been successfully processed. You can even set it up to where the customer gets notified ahead of time that they have an upcoming payment scheduled.

The Pros and Cons of Recurring Payments for Small Businesses

Like everything in business – and indeed in life – recurring payments for small businesses have their pros and cons:

Pros of Recurring Payments for Small Businesses:

Increased convenience for customers

There’s no shortage of payment options out there, but the recurring payment option is the only one that takes all the burden off your customers.

You store the customer’s payment information in your payment gateway and automatically charge them on a set billing cycle. Your customer pays for your product or service without lifting a finger or going through a lengthy checkout process.

That added convenience can boost your customer retention rate—and, as a result, your profits.

Reduce late or missed payments

Since automatic payments happen without the involvement of your customer, you reduce the potential for late or missed payments.

When 46% of consumers admit that they’ve paid a bill late when they opted to make a one-time manual payment, recurring payments eliminate the potential for error and forgetfulness.

Save time and eliminate administrative headaches

As many as 60% of small business owners say that cash flow has been a problem, and nobody enjoys chasing down money from their customers.

When you automate your payment processing, you save yourself time and hassle. You can securely store your customers’ payment details and collect your hard-earned money with little to no manual effort.

Stabilize your cash flow

You know that cash is king in your business, and cash flow issues are among the top three causes of stress for 76% of business owners who face them.

When customers don’t pay on time, you need to stay afloat by finding money elsewhere. In fact, 63% of small business owners say they use personal funds to cover cash flow at least once a year. Recurring payments happen predictably, leading to much more consistent and stable cash flow.

Cons of Recurring Payments for Small Businesses

Correcting billing errors can be tricky

Instead of receiving a bill first before they have to pay, the customer is automatically billed, and the payment is sent through. Therefore, it can be harder for the customer to notice mistakes with recurring payments. If there are any mistakes in the charge, it may take some extra steps to get a refund for the incorrect charge.

Luckily, though, if you use the fixed recurring payment method, mistakes are easy to spot since the charge should be the same every cycle.

Some charges can be overlooked

You’ve probably experienced a time when you’ve forgotten about an unwanted subscription and you’ve overlooked the charges. This can easily happen with recurring payments, since it’s a very hands-off way of paying for a service.

For a business owner, overlooked charges can become a hassle when dealing with an upset customer.

Services can be halted

In some cases, if a customer’s payment method is declined, recurring payments can be halted. This disruption can be problematic for the customer since their services will be paused. It can be a hassle for you as you will have to go through the process of halting the service. As a business, be sure to have the customer tie an account that usually holds a high balance, such as their checking account, rather than a credit card.

To avoid this, set up some friendly reminders (like an email) that the next scheduled charge is approaching, so the customer can either make sure their card has sufficient funds or cancel if needed.

Need help with this issue, or any other financial question relating to your business? An accountant is one of the best sources of that assistance. Contact us today and let’s talk about how we can help you.