If you’re a small business owner, you likely take credit cards and debit cards as payment. Plastic is convenient for most consumers but has drawbacks for business owners. Credit and debit cards come with fees ranging from 2% to 4%. Though this may not seem like a problem for small-ticket items, it can easily add up before you know it. The problem is even more costly if you sell big-ticket items or collect sizable bill payments like rent or tuition. Thankfully, there is an easy, cost-effective solution: Pre-authorized debits for small businesses.
Pre-authorized debits are arrangements where a business or individual authorizes another party to withdraw funds directly from their bank account on a recurring basis. This is often used for regular payments such as subscriptions, memberships, utilities, or rent. They usually use the following steps in transactions:
- Agreement: The customer signs a PAD agreement specifying the amount and frequency of the debits. This can be for fixed or variable amounts.
- Notification: The business must notify the customer about the amount and date of each debit, especially if the amounts are variable.
- Processing: The funds are automatically debited from the customer's bank account on the specified dates and credited to the business's account.
Benefits of Pre-Authorized Debits
Small business pre-authorized debits (PADs) have several benefits over credit cards and cash.
- Improved Cash Flow: Regular, predictable payments improve cash flow management.
- Reduced Administrative Costs: Automating payment collection reduces the time and cost of manual billing and collections.
- Convenience: The business and its customers benefit from the convenience of automatic payments, reducing the likelihood of missed or late payments.
- Customer Loyalty: Easier payment processes can enhance customer satisfaction and loyalty.
Let's look at cost savings in more depth the cost. The average PAD costs around $0.29 per transaction. Compare this to as much as 2.53% (Visa and Discover), 2.64% (Mastercard), or 3.45% (American Express). In addition, there might be fees from the payment processor that provides the POS terminals or services for your online payments.
Another benefit of PADs for small businesses is security. Payments Canada and the Canadian Banking network oversee all PADs, which protect your business and customers from fraud. PADs can also be revoked, cancelled, or even changed, making it harder for fraudulent transactions to be finalized beyond repair. Transactions are also vetted through the bank network, and the crediting and debiting banks participate in the process, which is something they don’t necessarily do with credit card payments.
Finally, PAD processing times are also favourable for small businesses. Typically, PADs take 3 to 5 business days to post. By comparison, credit card payments typically take 2 to 3 days. The slightly longer posting time is well worth the money you save on fees and creates a buffer for fighting off fraud. Would you rather pay MasterCard $50 per collected rent fee or $0.29 to a PAD processor?
How you can use Pre-Authorized Debits
In Canada, PADs are regulated by Payments Canada and the federal Canadian Payments Act. Businesses must comply with specific rules, such as obtaining explicit, written authorization from customers and providing clear information about withdrawal terms. Additionally, customers have certain rights, including the right to dispute any PAD they believe is incorrect.
There are several ways to facilitate regular debits from a customer’s account.
One is to collect a customer’s personal and banking information with a paper form, which can also serve as a signed PAD agreement. This form can then be provided to your bank or third-party payment processor, which will set up the PAD payments as indicated on the agreement in terms of amount, date, period (weekly, monthly, quarterly, annually), and duration.
You can also set up PADs over the phone, but there are additional rules to follow. The customer must either solicit your services by calling you or requesting them during a conversation. If you initiate collecting PADs in the discussion, you must have a preexisting relationship with the customer before making the phone call.
The easiest way these days to collect small business PADs is online. Most business models can accommodate directing customers and clients to a payment portal. The payment processor you use should be able to have a payment form that integrates into your website and your accounting software. Not only that, but they will handle all the backend logistical and legal components of the transaction, so you don’t have to worry about setting them up or managing them. Additionally, they will have security measures to ensure every transaction is legitimate.
Typically, PADs are best for recurring charges, whether fixed charges like rent, tuition, membership fees, subscriptions, or variable amounts like a utility bill based on usage. But PADs are also excellent for one-off sales, especially for big-ticket items and invoice payments.
How to prep your business for accepting PADs
So then, how do you onboard clients and customers for PADs? All you really need to do is collect their banking information – like account number and routing number – and get their permission to debit their account. If you have a payment processor, this process is even easier because it will be integrated into your business operations and accounting.
There are some best practices to follow when it comes to PADs. It’s courteous to send a reminder email or text message before the periodic PAD is debited from their account. This is in addition to providing them with a receipt for the initial setup of the PAD agreement or a copy of what they filled out if it was signed on paper. If you set up the PAD on the phone, you must also provide a written receipt such as a mailed paper copy or email.
When collecting PADs, you are required to keep the documentation on file for two years. You don’t need to share the particulars of this process with customers, but it is a best practice to provide some proactive reassurance that you store all banking information securely.
Let your customers know that they can cancel their PAD agreement at any time because, legally, you are required to do so if they indicate as much in writing or verbally. Additionally, consumers like that the ball is in their court, so anytime cancellation is an additional selling point for you.
Final Thoughts
Small business PADs are cost-effective, secure, and timely. Recurring PADs are also excellent for keeping the payments coming in regularly. While credit cards can get lost or stolen, bank account numbers are permanent.
If you are interested in learning how Enkel can help you streamline and manage your receivables process, get in touch with us today!
