This is the fifth installment in our series, “Establishing Best Practices for Extending Credit in Today’s Economy.” In our previous blog posts, we discussed getting organized to offer credit to your customers, best practices for processing credit applications and creating credit agreements.
In this blog post, we will focus on best practices for ensuring payment.
Strategies for Getting Paid
There are several common forms of payment that businesses accept.” Cash is always a welcome form of payment, though a poor choice for debt repayment because of potential theft and control issues with staff.”
Accepting checks is also a poor payment method for debt repayment because of identity verification and NSF risks.” However, it is a common approach for manually run payment plans.” In these situations, the business obtains a series of checks from the customers representing the total number of payments to be made and then each month deposits one of the checks as payments come due.” While this might seem like a simple approach, the risk can be high.” Future checks could bounce and incur NSF fees for the business and cause collections issue.” Also, the staff has to remember to deposit each check on time and keep the other checks secure from theft.
Accepting credit or debit cards as payment are a more effective payment option, but carry a higher transaction cost for the business.” Merchant fees associated with credit and debit cards can range from 1.5 percent to 6 percent of the transaction amount.” Even under this approach, the business still needs to remember to process the payment each month and deal with failed payments due to expired credit cards or insufficient credit available.” Most businesses know that manually reconciling credit card transactions is time consuming and challenging, which is an added cost above the transaction fee.
Automatic debit of a customer’s bank account is cost effective and efficient.” This process, which uses the ACH network, is the preferred payment method for professional lenders and other businesses that manage large volumes of recurring monthly payments.” The transaction cost associated with a successful ACH transaction is much lower than a credit card transaction; and if a payment is unsuccessful, there is no charge to the business for NSF handling like there would be with a bad check.” While ACH payments are more cost effective to the business, there is a tradeoff of several days delay in receiving payment into the business bank account due to the way ACH transactions get processed by the banking system.” The good news is that once an ACH transaction settles, there is very little risk of the transaction being reversed — unlike a credit card transaction that provides a long time period for the credit card holder to challenge a transaction.
So What Forms of Payment Should a Business Accept Under a Payment Plan?
Following the lead of professional lenders, it is recommended that payments be handled automatically via periodic ACH transactions directly debiting the borrower’s bank account.” As an alternative, for cases where the borrower doesn’t have a bank account but does have a prepaid debit card, payments could be tied to the prepaid debit card at a cost to the merchant similar to those paid for credit card transactions.
Using credit cards for loan payments is frowned upon by the credit card companies and should be avoided to ensure credit card agreements are not violated. Accepting checks or cash should be avoided except as manual payments since they involve greater risk and more effort by the business.
Effective Automation is Key
Automating the payment process for recurring payments pays big benefits to a business.” It reduces repayment risk, lowers transaction-handling costs, and frees your staff to spend their time more effectively.” Additionally, automated payment platforms provide a robust set of capabilities and reporting to assist with the overall payment process and help efficiently perform reconciliation and settlement tasks.
Unfortunately, payment-processing services come with a range of services and capabilities making selecting the best service provider often difficult.” Making your selection solely based on price often results in more work for the business as it will need to stay in control of the entire process.” The lack of integration with the overall lending process also impedes the effectiveness of standalone payment processing services since this integration is critical for the overall management and control of the lending process.
A robust, easy-to-use system that is integrated with the lending platform provides a rich set of capabilities to maximize results for even a small business with limited staff.In our next blog post on “Establishing Best Practices for Extending Credit in Today’s Economy,” we will discuss best practices for handling missed payments and defaults.