Does your business involve collecting recurring payments from customers, clients, or tenants? Do you have a payroll? Do you sell big ticket items and give customers the option of making several payments? Do you make large or recurring purchases for your business? If you answered yes to any of the above questions, there’s a great way to automate transactions, cut card processing fees, and prevent problems arising from lost or expired card numbers. It’s pre-authorized debits (PADs) for small businesses. Though you may have heard of PADs, you may not be familiar with how great they are with any of the above business types – until now.
What are pre-authorized debits?
PADs involve sending money directly from one bank to another through the banking network. This network uses vendor and customer bank account information like account and routing numbers to complete the transfer of funds.
PADs are sent by operators in several batches every business day. There are no credit cards or debit cards involved, which of course means no fees from card companies. Considering that card processing fees from the likes of VISA, MasterCard, and Amex range from 2% on up to almost 4% per transaction, small business PADs present huge savings opportunities.
Small business PADs can be facilitated by a merchant bank used by the vendor, or by a third-party payment processor (TPPP). Typically speaking, bank-managed PADs are fine but TPPPs will likely offer integrations that provide a better customer experience.
Who should collect pre-authorized debits?
Actually, businesses of all sizes should use PADs, especially if they are involved in any of the following industries:
Real Estate: imagine the ease of collecting rent with PADs from every tenant, on time and hassle-free. Cash and cheque payments can’t be enforced, and they carry the risk of loss until deposited. Card numbers can expire or change. Nothing beats collecting rent directly from a tenant’s bank account through scheduled payments.
Education and recreation: Private schools and other educational or recreational institutions – like afterschool programs and sports leagues – should also leverage PADs services for small businesses. Parents and adult students are busy people who might forget to pay their tuition on time, but they won’t need to remember that if payments come directly from their bank account.
Health and Wellness: Gyms and spas offering monthly memberships should certainly collect their payments over the PADs network. This is especially true for gym owners or healthcare providers who are actively involved in their business and who don’t want to spend time dealing with bounced, late, or missing payments. Healthcare providers collecting out-of-pocket payments – even if they aren’t recurring – should also consider using PADs, because card numbers may change between patient visits, but bank account numbers will probably not.
Subscription Services: The subscription service model is very popular today, for everything from streaming video to business software. Most of these services are sold online, and the ease of using a card number seems attractive. But a significant amount of customer churn could be eliminated by using PADs for small businesses.
There are a number of other businesses that should use PADs some of the time, such as a business that offers subscriptions or memberships. For example, returning to gyms and health clubs, while it makes sense to charge a monthly membership with PADs, it does not make sense to collect anything other than cash or card for a smoothie at the juice bar.
That brings us to the topic of businesses that should not use PADs, of which there certainly are some. Brick and mortar retail and dining venues should not use PADs for customer transactions. Most shoppers don’t have bank accounts and routing numbers memorized, and looking up banking info is less convenient than pulling out plastic.
Why should I accept PADs?
As mentioned, the biggest pros to using small business PADs are the lack of card processing fees and the stability of using bank account numbers instead of card numbers. If your business offers an annual subscription of $100, for example, imagine saving $2 – $4 on every customer (plus flat fees for credit card payment processors). As you know from running a business, small margins add up and for businesses that operate on recurring payments, another benefit to PADs is that you will always get your payments on time – a benefit that is priceless.
A second benefit is for businesses that sell high-priced goods and services. Collecting PADs gives customers the chance to pay in installments. It’s frustrating when a customer makes that first payment and then loses their credit card, which puts you in the position of having to call or email or text them until they update their payment info. That frustration can be avoided by using PADs. In regards to the fees, the savings are even greater. If you took $30,000 of pre-authorized debits in a year, you would save $900 of credit card fees.
There are some cons to using PADs. You do need to collect additional information such as a name and account and routing number. If you are collecting an PADs payment over the phone (this is only allowed with existing customers) you need to follow a certain script. But these slight hassles are outweighed by the pros of saving money and getting paid on time.
How can I collect PADs?
By this point, you’re probably wondering how to set up PADs for your small business. As mentioned, you need to collect PADs with the help of your bank or a TPPP like Rotessa.
Bank-assisted PADs tend to be very low-fi in terms of integrations and user experience. That’s why a TPPP is a must-have for a customer-facing business. Thankfully, TPPPs are incredibly easy to set up, integrate wonderfully into accounting software, and provide beautiful layouts that can plug right into a website for the benefit of your customer experience.
Once you’ve created an account with a TPPP like Rotessa, collecting PADs is really just as easy as sending your customers a PADs authorization form via email. The TPPP will handle all the other backend details, charging a small flat fee per transaction instead of an onerous percentage. Customers making a payment are responsible for filling in details like their name, bank account and routing number.
So if your small business involves collecting payments, you’ve got to explore the money-saving, stress-reducing option of PADs for small businesses. You’ll be able to avoid churn on subscriptions, collect rent on time, and of course, save sizable amounts of money over the course of the business year. Rotessa is a great payment processing option that provides a totally free PADs authorization form tool to provide to your customers. There are no setup fees and no monthly minimums to meet.
Rotessa also has accountant and bookkeeper partners like Compass Accounting CPA Ltd. At Compass Accounting CPA Ltd, they recommend Rotessa as a payment tool for our clients to streamline their accounts receivable process and improve cash flow. If you are interested in learning about how Compass Accounting CPA Ltd can help you manage your receivables using Rotessa, get in touch with us today.