An entrepreneur's guide to the different forms of customer payment

Many small business owners just starting out find that banking enough sales to simply survive can provide more than enough to worry about, so concerns about the different ways customers might pay your business once you do make a sale often get overlooked. But understanding the myriad options for payment-and the advantages and disadvantages of each-can be an integral part of achieving long-term success. And make no mistake, consumers do have a lot of choices these days in how they choose to make purchases.

In fact, according to the Federal Reserve's most recent Survey of Consumer Payment Choices (SCPC), released this past January, American consumers now can choose from among nine different payment instruments for making purchases and paying bills each month. What's more, that same survey found that the average American has already adopted five of those nine options for purchases and uses four out of the five at least once a month. So, if your business's potential customers are clearly picking and choosing how they would like to pay, so too should your business think about how you'd like your customers to pay you.

Helpful Tip: To see the entire Fed SCPC survey online, go here:, or for a nice statistical roundup of the survey's data, check out

Advantages: Cold, hard cash has for centuries been the preferred way to pay for purchases and, thanks to its convenient nature, it still outstrips all other methods when it comes to use in face-to-face retail transactions. Paying with cash immediately completes the purchase-an attractive benefit for the customer-while the business gets the flexibility of being able to immediately use that cash elsewhere. For financially struggling small businesses, the liquidity afforded by cash payments can be a critical means of survival, allowing them to quickly re-purpose today's sales revenue into tomorrow's inventory, payroll, or profits. What's more, thanks to its straightforward nature, cash lets heavily cash-based businesses enjoy the benefit of having to spend less time on bookkeeping since cash-based accounting is relatively simple. And though counterfeit currency does exist, fraudulent cash payments are relatively rare when compared to the number of illegitimate electronic and credit card-based purchases made each year.

Drawbacks: At first blush, the idea that cash payments could be an inconvenience or even a hindrance for small business owners might seem counter-intuitive. But cash does have its faults, some of which are closely related to its benefits. Its unparalleled liquidity, for example, makes it a popular target for thieves, so any heavily cash-based small business must also make special accommodations for things like physical security, rigorous point-of-sale cash vs. receipts reconciliation, revenue chain of custody, and weekly (if not daily) bank deposits. Likewise, cash payments can act as a kind of self-limiting device on product or service prices, since, according to the SCPC's latest findings, American consumers carry an average of $79 in cash on their person. As a result, customers can reasonably be expected to make cash purchases at, say, a restaurant or dry cleaners, but if your small business's prices rise much beyond that per-person average, you might find you're losing some business if you insist on cash payments.

Helpful tip: For more pros and cons of cash-based payments, go to

Advantages: Though the usage of paper checks has significantly waned in popularity thanks to the rise of debit cards, checking accounts continue to be a favorite payment instrument among a broad swath of American households and the number-one way consumers pay recurring bills. In fact, besides cash, which essentially has a 100% penetration rate, checking accounts are the next most common payment instrument of consumers, having been adopted by more than 91% of Americans. This number still stands substantially higher than the adoption rates for online banking bill payment (52.5%), credit cards (78.3%), and even debit cards (80.2%). So, even though check payments don't offer business owners the same flexibility as cash, you should strongly consider the potential for lost customers before implementing a no-checks payment policy. This is an especially critical point for small wholesale or business-to-business operations, as many business customers only pay vendors via invoice and company check. And even if your business is more retail-oriented, letting customers pay by check--just as with debit or credit cards--means their potential purchases won't be limited by the amount of cash on hand in their wallet or purse. Plus, with the advent of new Check 21 regulations, the several-day wait for funds that once was a major drawback of accepting payment by check is a thing of the past. As a result, almost all checks can now be processed and paid within one to two business days and, occasionally, on the same day the check was written.

Drawbacks: Despite the digital advances that have made check processing faster and more efficient, businesses must still wait some amount of time before they actually receive payment for a sale or transaction. Because of this time lag, payments by check expose the payee to a greater risk from bounced checks and fraud, situations that can be particularly devastating for small businesses with tight cash flow. To mitigate these risks, an entire industry of check-processing service firms has sprung up. These firms allow their business clients to scan in customer checks instantly so they can be verified as legitimate. Some of these check processing firms will even eat the cost of a bounced check for you, should it occur, thereby eliminating almost all of the risk entailed with accepting checks. But these check-processing services aren't free, of course. As an industry standard, most check-processing service firms levy a 1.0% to 1.5% fee on all transactions plus an additional $0.15 or $0.30 per-transaction fee. In addition, some check processors also charge things like monthly minimum and statement fees, which can quickly add up. For small businesses with especially thin margins, like a mom-and-pop grocery store, these fees could eat up almost all the profits on a transaction.

Helpful Tip: To get free quotes on check processing services and compare prices, you might try BuyerZone's online comparison tool here,