Payment methods for businesses

We review the different payment methods that are available to business owners and their benefits and limitations. Find out which is best for you.

13 December 2021

Payment methods for businesses

Did you know that in light of the recent pandemic, 30% of consumers now shop online in the UK? So, finding the right payment options for them can result in happier customers and more sales for your business.

This article takes a look at some of the different payment options that are available to businesses, along with their benefits and limitations.

Online payment methods for businesses

The way that money is processed and transferred has evolved rapidly in recent years. We’re no longer limited to traditional payment methods like cash, card, or manual bank transfers. So, it’s important to be flexible and offer a range of options to your customers. Plus, research by Xero suggests that businesses that offer online payment methods get paid twice as quickly.

Let’s look at some of the different online payment methods available to businesses owners, and their compatibility:

Bank transfer (BACS)

When it comes to B2B, the most common payment method is bank transfer. BACS is used to make direct payments from one account to another. BACS offers direct payments without the high transaction fees.

However, you have to deal with sort codes and account numbers every time. And, if the payment fails, you won’t know until you check your account, potentially leading to cash flow problems.

To find out which payments are the most popular, we asked 500 SMEs how they manage payment terms. For B2B businesses with orders between £500 and £15,000, we found that:

  • 96% accept bank transfers,
  • 47% accept card payments
  • 47% accept cash or cheques
  • 34% accept an online solution.

Yet, when asked about how their customers actually pay, 80% said this was done via bank transfers (compared with card payments at just 13%, online solutions at 10%, and 7% opting for cash or cheque). So, while it’s great that lots of customers are paying digitally, there’s still a long way to go.

Open banking

Open banking is certainly the newest online payment method on this list. Launched in 2018, it allows banks and financial institutions to open up their data to regulated payment providers.

Essentially, open banking allows financial institutions to provide innovative payment solutions via automation and integration of software. Open banking gives businesses greater flexibility and control over things like payment terms and personalisation. The benefit to the customer is an increase in the speed of transactions, more choice, and a reduction in costs.

iwocaPay, our online payment service, is a great example of how open banking can support both your business and your customers. Your customers get to choose whether they want to pay their invoices upfront, or spread them over three monthly instalments (subject to approval). It’s a two-click solution that makes things much faster for your customers. Whichever option they choose, you’ll still be paid in full and upfront.

Open banking allows us to integrate iwocaPay with Xero. This means that you can integrate your dashboards and send invoices directly from Xero using our branded theme. What’s even better: your iwocaPay and Xero dashboards will update each other every time a customer pays. So, this means less manual checking and better cash flow management.

Online card payments

Online card payments are another popular option when it comes to business payments. Simple and secure, card payments are protected against fraud through the use of the CVV number. When a transaction is undertaken, the details of the customer are compared against their CVV number.

Money can be transferred on the same day if the transfer is between two accounts banking with the same organisation, or up to three days otherwise. So, it’s important to be conscious of your cash flow if you’re waiting on payment via card. Around 78% of all retail transactions were made using card payments in 2020.

The drawback of card payments is that you’ll be subject to a merchant service charge for every credit or debit transaction you accept. This can quickly add up when you're dealing with larger payments, particularly in B2B. Alongside this, chargebacks are possible with card payments. If your customer successfully disputes a payment with their bank, which can happen due to several reasons, then your payment could be returned. This can lead to all sorts of unexpected problems when you’re trying to manage a business.

Direct debit

Direct Debit is a form of BACS transfer. The advantage of enabling customers to use a direct debit service is that you’re guaranteed to get your payment on time and the customer is freed up from viewing, approving and actioning invoices you’re sending them. This could be a suitable option if your customers are making repeat orders of the same value over an extended period.

But – similar to card payments – direct debits come with limitations. The direct debit indemnity scheme means customers retain the right to cancel any payment, and request a recall if they believe that funds have been taken incorrectly. While most customers are honest and happy to pay, you might run into an issue where an indemnity - which refunds the customer without question - is incorrectly approved and your payments are refunded.

Standing order

Standing orders are a less common payment method. They’re generally free for both the payer and the payee. You can process orders the same day they’re set up and use them for recurring payments. Standing orders tend to suit payments and invoices that are fixed in total. They’re popular among small businesses, clubs or organisations with less than 25 customers. If you ask your customers to set up a standing order, it’s important to know that they can cancel it at any time without giving you notice.

Mobile payments

Mobile payments are payments made for products and services through a device, such as a mobile phone or a tablet. This technology enables people to move money around to contacts using services like PayPal or Venmo. Set up is quick and easy but transaction fees are high. And, while Apple Pay, Google Pay and Microsoft Pay are all free to use, they still come with card charges and the risk of in-person connection issues.

In-person payment options

We’ve covered the different online payment options for small businesses, so let’s look at some of the in-person alternatives.

Card payments

A simple swipe and the money is in your account. However, you’re still open to the transaction fees listed above. You’ll also need to purchase a card reader and make sure that you have a trusty WiFi connection.

Cash or cheque

These options are much more common in a B2C setting. Your customers can either pay in cash over the counter or write out a cheque - which is a written form that instructs their bank to pay a specific amount of money to your business.

There are several things to think about when accepting cash or cheques:

  • it’s easy to make a mistake when writing cheques
  • they can sometimes take a few days to clear
  • it’s much harder to trace cash payments
  • you'll need to manually count your takings
  • You’ll need to store your cash in a physical location
  • there’s room for theft or human error.

Alternative business payment methods

We’ve no doubt that the number of alternative payment methods will continue to grow. One particular standout is cryptocurrency, which is becoming more popular among larger enterprises. While crypto payments like Bitcoin are a hot topic, their cash value is currently volatile. So, you’ll need to be confident that you have other sources of income should the market suffer a dip.

How to choose the right payment method for you

You should consider a few factors when choosing the right payment options for you, such as: your financial experience

  • the size of your business
  • the industry in which you operate
  • whether you have a physical or online presence (or both)
  • your ability to track payments
  • how digital-savvy your customers are.

Why you should accept new payment methods

Ultimately, it’s important to be flexible with your customers and provide multiple payment options where possible. It’s all about making your customers feel confident and safe when paying for your products or services.

What works for bigger businesses can be counterproductive to a smaller company, so be wary of a one-size-fits-all model and instead be open to new technologies that could help you save money.

This takes us back to open banking and how it has really transformed how we can collect payments from customers. Flexible terms, instant payments without the chargeback risks, and the opportunity to integrate with other software really seal the deal when compared with other options.

How iwocaPay is re-inventing business payments

While looking for ways to help small businesses grow, we noticed that up to 70% of our small businesses were coming to us with cash flow issues. It became clear that bridging the gap between payments owed was an issue for lots of business owners.

So, we launched iwocaPay, which benefits both the seller and the buyer. As a seller, you get paid in full regardless of how your customer chooses to pay. Meanwhile, your customer can either pay upfront or spread the cost of their payment across three monthly instalments (subject to approval).

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Charlotte is a Senior PR & Communications specialist at iwoca. She's been sharing news and insights about the finance industry for over three years.

Article updated on: 24 March 2022

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