Different payment methods for start-up businesses

Top of the list of any start-up business’s ‘to do’ list should be ensuring you get paid.

There are lots of ways customers can pay for your goods and services – from cash to digital wallets – but not all are suitable for every situation, and some come with additional costs for using them.

Customer payments are the lifeblood of any business.

Poor payments can lead to cash flow issues which may risk the viability of your business, so it’s crucial to find payment methods that are suitable and efficient.

Different businesses − such as e-commerce stores or high street shops – may use different payment methods but each one should be as simple as possible for customers to use.

The same goes for business-to-business transactions.

Frictionless payment systems can encourage timely payments, which means less time spent chasing late or missing payments.

For many small businesses, such as cafés or pop-up retailers, the choice used to be limited to cash.

But advances in payment systems that use mobile broadband have made it easier for small businesses to take credit card payments quickly and cheaply with minimal fuss, too.

Online stores can use a wide range of new payment systems, including payment gateways such as PayPal, that provide tracking, invoicing, and reporting.

With several different ways of taking money, how do you know which is best for you?

Payment methods for business

There are four main ways smaller businesses can consider receiving payment and each payment method has its pros and cons.

Cash

Paying cash is a straightforward transaction.

While cash payments have declined – down from over 80% of all transactions in 1990 to just over 20% in 2020 – cash is widely recognised and accepted.

Pros of cash payments

• easy and recognised payment method
• customers may expect your business to accept cash payments
• no card or service fees are involved
• receive money straight away.

Cons of cash payments

• manual counting and calculation are needed to record takings
• may be unsuitable for higher-value purchases
• can be vulnerable to physical theft
• physical space is needed to store cash securely
• can be susceptible to counterfeit cash payments.

Cash may be best suited to start-ups that sell lower-priced items and sectors such as hospitality, such as pop-up shops, cafés, bars, and newsagents.

Debit and credit cards

A convenient way to pay, cards are widely accepted by businesses.

According to UK Finance, around half of all payments made in the UK in 2020 were by card, with a quarter of all UK payments made by contactless.

Pros of card payments

• 69% of UK adults have a credit card
• quick and convenient at checkout, especially with contactless
• less physical risk as no cash is kept on site
• customers from overseas can make purchases without exchanging currency
• suitable for both small and large purchases.

Cons of card payments

• may exclude customers unable to own a credit card due to their credit history
• can take time for transactions to process before receiving into your account
• may have to pay transaction fees (these can be higher for credit cards)
• you need to rent or buy a credit card reader for physical stores
• card readers can require wi-fi or telephone line access
• customer cards may be declined
• credit card fraud.

Debit and credit cards are best suited to consumer-facing businesses such as shops and online stores.

Electronic payments

Digital and online payments are made by transferring money electronically, and range from bank transfers (known as BACS), to online payment systems such as WorldPay, PayPal and Stripe.

The latter use a payment gateway to authorise payments securely and are the virtual equivalent of a credit card reader.

Payment gateways are services that securely verify customer payment details, ensuring your business receives the money, but they typically charge a fee per transaction.

Pros of online payments

• can be used for online businesses and brick-&-mortar businesses using mobile apps
• easy to use for customers to use
• services such as Klarna, PayPal, and Clearpay offer ‘buy now, pay later’ schemes, allowing customers to spread the cost
• secure way to make larger purchases
• automatic payment calculations, including VAT, saving time, and reducing errors.

Cons of online payments

• can take time for money to process and appear in your account
• it may not be suitable for in-store purchases
• risk of fraudulent payments and identify theft
• service providers may charge a fee for using their payment gateway
• may not be suitable for some customers, such as those without internet access or less computer literate customers
• customers can dispute payments for any reason, with amounts sometimes automatically refunded by the gateway provider.

Digital and mobile wallets

Payments can be made using a digital or mobile wallet, such as Apple Pay and Google Pay.

These wallets are stored on a device such as smartphone or smartwatch and allow customers to pay without using a physical card or cash.

Wallets store customer cards safely and securely with authentication and data encryption.

They’re often protected by multi-factor authentication, offering protection if the device is stolen.

Pros of digital wallets:

• customers don’t require a physical card for payments
• secure and encrypted credit card data – often, the digital wallet encrypts the credit card number
• many smartphones feature wallet apps
• quick checkout process that can be used online or in-store
• contactless payments
• there is less risk of fraud as the individual is set up securely on the device.

Cons of digital wallets:

• requires buying or renting a credit card reader that handles contactless digital wallet payments
• may not be suitable for all customers, such as people without a smartphone
• you may need to pay a fee to the digital wallet service provider.

While not as common as card payments, mobile payments have accelerated since the pandemic, with 10 million users in the UK.