How Recurring Payments Work for Small Business Owners

BarkBox. Birchbox. BoozBox. Bean Box. Once upon a time, recurring payments were limited to rent and utilities. Now, if you can think of a noun, you probably can get it in a box. Subscription service companies and companies like Amazon, who promote asubscription service model, operate on a recurring payment model.

The increase in recurring payments alongside subscriptions is good news for small businesses. That’s because customers are increasingly comfortable authorizing recurring payments for everything from gym memberships to software licensing fees, which cuts down on payment processing labor and canincrease customer retentionand satisfaction. Accepting recurring payments can also improve the accuracy of cash flow projections and help your customers make payments on time.

What is a recurring payment?

A recurring payment is any type of payment set up to process periodically without requiring additional action on the part of the customer or paying party. Payments for subscription services, utilities, and memberships all frequently use a recurring payment system. Payment plans, which allow customers to split up large purchases over a period of time, are also a type of recurring payment. Recurring payments are also sometimes referred to as automatic payments.

重复支付可以是固定的,意思the payment amount is the same every time, or variable, meaning the payment amount may change based on usage. Subscription services (such as a digital subscription toThe New York Timesor a quarterly vitamin delivery service) typically have fixed fees, as do memberships (like a boxing gym membership or membership in theCloud Appreciation Society). Some recurring utility payments (like garbage and recycling pickup) are also fixed, while other utilities like water and electricity bills are calculated based on usage.

How do recurring payments work?

To accept and process recurring payments, businesses must have both apayment processor(also known as a payment service provider) and a merchant account. A merchant account is a specific type of business bank account that is set up to accept recurring payments.

Here’s an overview of how a recurring payment system using a payment card works:

• A customer purchasesgoods or servicesand elects a recurring payment.
• The customer authorizes the payment details. This includes the terms and conditions, payment amount, payment schedule, and payment end date, if applicable.
• The customer submits their payment information—in this case, acredit or debit card number—through the payment gateway and agrees to have the payment information saved.
• The payment processor receives the information through the payment gateway and alerts the customer’s credit card company, the customer’s bank, and the issuing bank.
• The customer’s bank approves the transaction, and money is transferred to the merchant account.
• Funds are transferred from the merchant account to the business’s bank account.
• The process repeats on a pre-determined schedule, with the payment processor initiating each transaction and providing the customer with an invoice.

Recurring payment methods typically include payment cards—either credit or debit—andACH debit. Some payment processors also offer recurring invoicing—but in this case, the customer must take action to complete the payment. Although recurring invoicing doesn’t offer the same level of predictability as automated payments do, it can still be a time-saving option if your customer won’t agree to a recurring payment model or if their preferred payment method (such as paper check or cash) can’t be automated.

What are the advantages of recurring payments?

• Efficient for both customer and merchant
• Eliminates the risk of late or missed payments
• 建立客户之间的信任nd merchant

Accepting recurring payments can save time and improve customer retention, customer relationships, and cash flow prediction accuracy. Small business owners can also benefit from setting up recurring bill payments, which reduce administrative burden and ensures bills are paid on time.

1. Efficient for both customer and merchant

Recurring payment systems are efficient for both businesses and customers. Your payment processor can automate invoicing (known as recurring billing) and automatically initiate an ACH debit or a credit card charge, saving time and reducing the potential for human error. Accepting recurring payments can also make it easier to anticipate financial liquidity.

For your customers, automating payments can eliminate the hassle of administrative tasks like ordering more coffee filters or opening and processing heating bills. The same benefits also apply to your business: setting up automated withdrawals for utilities and other recurring bills can save time.

2. Eliminates the risk of late or missed payments

Missed payments are a hassle for both customers and merchants. On the merchant side, businesses must follow up with customers to collect payment. This takes time and may require more than one attempt. Missed payments can also make your projections for cash on hand inaccurate.

On the customer side, missing a payment can result in a late fee. And a missed utility payment can damage your credit, or even result in the lights going out in your offices. Recurring payments ensure that you never miss a payment or incur a late fee.

3.建立客户之间的信任nd merchant

Recurring payments can help in building trust with your customers and improving customer retention. Customers appreciate the ease of payments, the ability to make large purchases on a payment plan, and the convenience of receiving goods and services on a set schedule.

Recurring payments also reduce the barrier to purchase. While one-time payments require a customer to act to make a purchase, recurring payments require a customer to act to avoid making a purchase. Customers are busy, and recurring payments can help prevent a customer’s hectic schedule from inhibiting a purchase.

What are the disadvantages of recurring payments?

Recurring payments are popular with customers and merchants, but they don’t come without risk. Disadvantages of recurring payment systems include increased transaction fees and the potential for errors or fraud.

1. Fraud, errors, and accidental charges

一个increa重复支付礼物sed fraud risk because customers don’t need to actively approve individual charges, and payment card information can be stolen. Errors andcredit card chargebacksare also a risk.

If your electricity company accidentally overcharges your business (or charges you twice), you won’t notice the mistake until you review bank account withdrawals and credit card statements. During a one-time transaction, you might notice the error quicker.

2. Higher transaction rates for merchants

Increased risk can also come with increased fees, and payment processors typically charge merchants higher transaction rates for recurring payments than for one-time transactions. These rates vary by payment processor, but frequently range from 3% to 3.5% of total transaction cost, plus a flat per-transaction fee.