The pros and cons of accepting different payment methods for your business

29/07/2019

payment methods

payment methods

Do you ever find yourself wondering what the best way is to receive payments against invoices for your business? If so, you probably already know that there are lots of ways, both old and new!

Each of these ways have their own advantages and disadvantages. Some tend to have far more financial disadvantages than others, and should probably be avoided whenever possible.

Here we examine the best ways to receive payments – and the pros & cons of each method for your business.

Cheques

The use of cheques has dropped massively thanks to modern technology, yet a surprising number of businesses are still using them to pay employees and suppliers. It’s very likely a few of your customers may still prefer to pay you by cheque.

Pros
  • Can now be processed electronically via ATMs and Mobile Banking.
  • It costs nothing to accept a cheque and most banks won’t charge you to deposit one.
Cons
  • Getting a cheque does not guarantee payment. Cheques can bounce, and this can cost you money and challenges in managing your working capital.
  • Sometimes when you deposit a cheque, your bank will put some of the funds on hold temporarily.
  • If your bank does not have state of the art technology, you will have to take a trip to your bank and wait in the infamous banking line to deposit your payment.
  • Many businesses that pay by cheque do so via mail. Millions of letters get lost by postal providers every year- cheques should never be mailed!
  • International cheques may take up to 2-3 weeks to get cashed, thus further delaying receipt of the money you need to run your business.

Wire Transfers

Wire transfers are a popular method used worldwide to send payments both domestically and internationally. These transfers use wire networks that essentially act as a messenger between the banks in an electronic money-sending transaction.

A wire transfer requires a considerable amount of trust between the payer and the payee, as a lot of details need to be shared between the two.

Pros
  • Payments via wire transfer go directly into your bank account.
  • Wire transfers can be used to receive money from employers/clients overseas.
Cons
  • Can take up to 5 business days (and sometimes longer) to be processed, meaning you could be waiting a while for your payment to come through.
  • Oftentimes the recipient will be subjected to a receiving fee by their bank, meaning you never get paid 100% of your invoice amount. For example, in Canada, some banks charge a $15 fee to receive a wire transfer.
  • You will have to gather all of your bank details and share them with the sender. Sometimes a call or a trip to the bank will be necessary to obtain SWIFT codes, Intermediary bank SWIFT / Routing code, etc.
  • Usually, wire transfers are denominated in a major currency like the US Dollars. When selling US Dollars at your bank (e.g., to receive a converted amount in Canadian Dollars), you would be paying a conversion fee as a percentage of the amount you are receiving to your bank based on their current USD buying rates.

Cash

One saying we’ve all heard is that “cash is king” – but has its time come and gone?

Being paid in cash is not very common outside of certain industries, and while it sounds great it is not without its problems.

Pros
  • Instant cash in hand, no waiting on funds to become available.
  • There are no transaction fees with like there are with wire transfers.
Cons
  • Cash is riskier to carry. If you carry cash you may be a victim of theft and lose all your earnings.
  • Fraud risk – Cash can be easily stolen at a cash pickup point.
  • You will have to make frequent trips to the bank to make cash deposits, which can take up a lot of your time – and you have to rely on banking hours!
  • Cash on your company’s premises means there is the potential of theft from both insiders and criminals.
  • If your business is in retail or otherwise needs to regularly deal in cash, you may have to invest in secure storage, 24 x 7 surveillance, security vans, etc.

Irrevocable Letter of Credit (ILOC or LC)

You may not have heard of an Irrevocable Letter of Credit – they are quite common for large value contracts but no so much for smaller values or where trust is already established between buyers and sellers.

An LC is a guarantee to the receiver, issued as a commercial document, by a bank. They are most commonly used to facilitate international trade between two parties that are unfamiliar with each other.

Pros
  • LCs are issued at your client’s request in your favour.
  • An LC means that the bank must pay you, even if your customer defaults.
  • You can issue an LC for both domestic as well as international contracts.
Cons
  • Once the document has been issued, it cannot be modified without both parties’ consent. The language and phrasing in the documents is crucial.
  • If not done by an experienced professional, you could end up being burned due to an unforeseen loophole you unknowingly created.
  • To ensure things go smoothly, you will have to talk with your bank. You may even have to arrange a meeting with a specialist, and this can all be rather time consuming.

Money Service Business (MSB)

An MSB is a non-bank financial institution that transmits payments or converts currency.

Money service businesses are a great way to both send and receive money internationally and domestically.

Pros
  • Many MSBs use state of the art technology to which banks do not have access.
  • Some MSBs ensure payments are received with 1 business day, if not instantly.
  • More often than not, using an MSB is several times cheaper than using wire transfer.
  • MSBs adhere to FINTRAC regulations in the same manner as a bank.
Cons
  • Some MSBs are not geared up to handle business transactions and are limited to personal remittances.
  • You may need to look around to ensure you find the best MSB for your needs.
  • You want an MSB with the right banking arrangements, a transparent fee structure, modern technology based systems, and great customer service.

My recommendation

Using an MSB has become the preferred choice for many businesses who need to send and receive payments internationally.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Conor Hawkins

Author: Conor Hawkins

Conor is a former journalist who also has experience in the PR industry. Originally from Ireland, he moved to Toronto back in 2018. He works as a full-time writer with REMITR and also dabbles in some copy editing.

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