April 5, 2020

Small Business Credit Crunch

Among the goals of any well run company should always be expense control. I had a boss that always stated it was all the small expenses that kill a business. Receiving money with regard to goods or services is the absolute goal of a company. In a small business transactions, selling a widget to a consumer, cash is usually the preferred method since there is no cost when a business accepts money for goods. Many other forms of transaction are acceptable in the retail and wholesale markets.

In the wholesale market segment a buyer may obtain consideration and specific terms intended for payment of goods sold, like 30 or 60 days before payment is in fact due. By delaying receipt associated with payment this costs the seller money. In the retail world cash can be king but credit card payments are typically accepted. When a business chooses to accept credit card payments and you swipe your card in the little machine on the counter, a third party merchant services suppliers (MSP) is utilized. They assist in the process of taking your money from the bank card account and paying the retailer, but there is a 3rd party handling fee.

The merchant services/credit card company charge structures vary in a couple different ways. All the different credit card companies and MSP’s charge some nominal fee for performing as the conduit for the money flow on each transaction. It could be 1% in order to 3% +/- depending on the credit card company and MSP contract and the volume or number of transactions. Each MSP has a multi tear, multi action formula for each and every transaction, therefore the devil is in the details. The 3rd party merchant service fee structure (the credit card swipe machine) also varies depending on volume and type of deal.
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Whenever I pay with our debit card, and the retailer asks me “debit or credit? ” I always tell them to do whichever is better for them, and then I do debit so the retailer does not have to eat a 3rd party transactional fee. In most cases the employee behind the counter does not even know that debit card transactions save the business money and they should suggest that way of payment if a customer has no preference.

A small business that accepts multiple kinds of credit card payment must factor in the cost associated with merchant service fees. If they do accept credit it is likely covered in the mark up and income margin for all the products they sell. If this expense is not factored into the business plan a 3% fee upon each transaction could be very costly to small business owners over time.

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