Customers overwhelmingly prefer to pay with debit and credit cards. Credit card processing is essential for a small business to maximize its profitability.
- Small businesses nationwide might be losing billions by not taking credit.
- Businesses that are traditionally cash-only and have been for quite some time might be missing an opportunity to make more money.
- Cash-only businesses may have simpler operations and fewer customers, but credit card processing can expand revenue and drive new business.
- This article is for owners of cash-only businesses who are considering accepting credit cards.
To avoid credit card processing fees and sidestep the need for additional swipe and chip hardware, a surprising number of small businesses still don't accept credit cards. Unfortunately, not accepting credit cards could be hurting your bottom line. Here's a breakdown of why some businesses don't accept cards, what you might be losing out on by refusing credit card transactions, and how you can get affordable credit card processing for your small business.
What is a cash-only business?
A cash-only business is a company that only accepts and issues cash payments. For a cash-only business, checks, ACH payments, wire transfers, and other forms of payment never enter the picture. Despite the prevalence of these electronic payment methods, you've likely encountered plenty of cash-only businesses.
Types of cash-only businesses
The following types of companies are commonly cash-only businesses:
- Food trucks and other street vendors
- Babysitters, dog sitters, landscapers, and other people hired for short-term, intermittent at-home services
- Vending machines
- Some restaurants and coffee shops
- Nail salons
- Legal cannabis dispensaries
The people and companies providing these services have largely remained cash-only businesses, even as credit card and electronic payment technology has proliferated. This could be for various reasons, from practical considerations to circumstances surrounding the industry.
If your company is a cash-only business outside these sectors, though, you might want to consider accepting credit cards. We'll break down the pros and cons after we discuss why cash-only businesses continue to exist.
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Why some businesses still don't accept credit cards
There are several reasons why some businesses do not accept credit cards. Some businesses face external constraints, such as the card networks' decision not to support legal cannabis transactions. Others might simply prefer to deal in cash because they always have. Here are some of the most common reasons cash-only businesses don't accept credit cards.
Cash-only businesses are extremely common in certain places in the United States, such as New York City, where locals know to keep cash on hand or else risk being unable to pay for things. Generally, very high-traffic areas (like dense urban centers with ample wealth or a large percentage of unbanked people) and remote areas (like ultra-rural areas with limited internet service) are more likely to have cash-only businesses than suburbs, towns, and midsize cities.
In urban areas with a plethora of customers in the vicinity, small business owners may be able to operate at full capacity without accepting credit cards, simply because customers are willing to pay in cash. Businesses in such areas can turn away non-cash customers without alienating their local community, because they have so many other potential customers nearby.
By contrast, if a grocery store in a small city doesn't accept credit cards, it might quickly gain a negative reputation and go out of business. But in a dense metropolis, a cash-only deli is just one of many delis in a multi-block radius, so customers who want to pay in credit will simply go elsewhere, while customers who don't mind paying cash will patronize the cash-only establishments without thinking twice.
Lack of internet connection
In rural areas, internet connectivity is sometimes the reason businesses do not accept credit cards. They may also choose to only accept cash because they have a lower volume of customers or a larger percentage of unbanked customers. Since it does cost a business money to accept credit cards, the interchange fees might simply not be worth it for business owners in remote areas.
Like urban dwellers, customers in rural areas are likely to carry cash for purchases, understanding that internet connectivity can be a problem. Thus, they will also be less put off by cash-only establishments than residents in most towns, midsize cities and suburbs.
Some small business owners prefer operating on a cash-only basis for a more nefarious reason: because there's less of a paper trail when tax season rolls around. When business owners report their profits to the IRS at the end of the year, it is up to them to track and honestly report cash purchases. Credit card purchases can be cross-checked with credit card companies, but cash is easier to conceal. Of course, not all cash-only businesses are engaging in illegal activity, but it does happen.
Hesitancy to adopt new business practices
Finally, some businesses don't offer credit card processing simply out of habit. Small mom-and-pop shops, especially those that have been in business for a long time, are often highly resistant to change and may have put off credit card adoption so long they no longer even consider it.
Key takeaway: Reasons that cash-only businesses remain prevalent include location, poor internet access, illegal under-the-table payments, and minimal desire to change long-standing business practices.
The pros of not accepting credit cards
There could be some benefits to not accepting credit card transactions, even if they typically increase profitability.
No credit card processing fees
Any business that accepts credit card payments can attest to the challenges of credit card processing fees. For starters, many business owners find it difficult to comprehend credit card processing agreements. Additionally, credit card processing can cost a small business thousands of dollars per month, so if your company can't afford substantial additional expenses, you may find cash-only operations appealing.
No pending payments
If you've ever paid for something by credit card, you know that credit card payments rarely clear right away. Usually, payments take one to three business days to clear (or longer for certain transactions). If waiting for cash to hit your accounts isn't feasible for your company, then you might prefer the cash-only route.
You must track your company's spending and earning through either cash or accrual accounting. Although many small business experts advise using the latter, a 2018 survey found that one-third of small businesses use cash accounting. That's because cash accounting focuses solely on cash in and cash out rather than additional, sometimes complex business concerns. Cash accounting may give a more realistic depiction of cash flow for a smaller business.
The cons of not accepting credit cards
Although some companies can feasibly survive as cash-only businesses, in other cases, not accepting credit cards can be detrimental. Here's why:
Digital payment methods are increasingly prevalent.
Like it or not, the world is becoming less and less dependent on cash. Young people and tech-savvy consumers of all ages are flocking not just to credit, but to cashless and card-free transactions via such apps as Apple Pay and Google Pay, and major retailers like Starbucks and McDonald's are offering alternative payment methods. Cash-only businesses were already losing billions of dollars a year as of 2013, and as this trend continues, businesses that don't even accept standard credit cards will be viewed as even more outdated.
High-income customers use cashless payments more often.
A 2018 study by the Pew Research Center showed a steadily climbing trend toward cashless payment transactions, especially among high earners under 50.
"Roughly 3 in 10 U.S. adults (29%) say they make no purchases using cash during a typical week, up slightly from 24% in 2015," the report reads.
The report notes the difference between high-income and low-income consumers, pointing out that "adults with an annual household income of $75,000 or more are more than twice as likely as those earning less than $30,000 a year to say they do not make any purchases using cash in a typical week (41% vs. 18%)."
You could lose money by not accepting credit cards.
As the expectation for customers to pay for goods and services through cashless transactions grows, the odds that you're losing money by refusing to accept credit increase as well. This is especially true if you're trying to appeal to high-income people and people under 50.
Customers are even less willing to pay cash when the purchase cost is more than $25, so if you're not a low-cost retailer, you should seriously consider allowing credit card transactions. Multiple studies from banking institutions and independent research associations show that fewer Americans are carrying cash, and the trend appears to be continuing.
Key takeaway: The pros of cash-only businesses mostly pertain to simpler operations, and the main cons involve the potential for fewer sales.
Affordable credit card processing
Most small business owners have three major concerns about accepting credit cards: interchange fees, chargebacks, and the adoption of new technology (such as swipe or chip systems). However, there are many affordable options available to small business owners.
There are transaction fees associated with credit card processing, but they are lower than you might think. The fees vary by type of credit card and are significantly lower for debit card payments than for credit card payments. The most widely accepted debit and credit cards have fees of 0.05% to 2% of the purchase price, which is why many retailers only accept certain cards and institute the legally allowed $10 minimum on card purchases.
A chargeback is when a customer who has paid for a transaction with a credit card gets their money back. The most common type of chargeback is when a customer returns a purchase and is issued a refund, but a customer can also request (though they might not necessarily receive) a chargeback if they feel they were unfairly charged for a good or service. This might occur if an employee accidentally charges a customer twice for the same good or service or otherwise overcharges them, but customers might also attempt to receive fraudulent chargebacks.
Chargebacks carry a processing fee, which is paid by the business owner and is part of why some businesses post policies such as "no refunds" or "store credit only." Offering store credit allows a retailer to give the customer their money back without paying a chargeback fee to the credit processing company. If your business has a high percentage of returns or refund requests, you may want to institute a policy to offset chargeback processing costs.
Credit card processing software and hardware
If it's been a few years since you last considered implementing credit card processing, you might want to revisit it, because the days of bulky POS systems that require thousands in upfront costs are in the rearview mirror. While those systems are still around, they're no longer the only option; in fact, it's much cheaper to set up a credit card system than it ever has been.
There are lots of lightweight POS-style solutions that are ideal for small spaces (and even mobile businesses), such as Square, which makes it easy to swipe on the go. There are online-only credit processing solutions too, like PayPal, which works very well for both low-volume and high-volume online businesses and even side hustles.
Key takeaway: Credit card processing options with low fees and low-cost technology are available.
Money-saving credit card processing policies
A cash-free society might not be just around the corner yet, but refusing to implement the systems necessary to accept credit cards could seriously hurt your bottom line. Here are some ways to accept cards while keeping your processing costs as low as possible.
1. Ask if the card is debit or credit.
Ever wonder why some retailers ask if you want to pay with debit or credit? It's because the interchange fees for debit cards are much lower than for credit cards. Asking a customer this reminds them they can pay with debit, which could help you cut down on monthly fees.
2. Set a credit limit.
It's legal for businesses to set a $10 minimum for credit card purchases, which can offset the costs associated with credit card purchases and eliminate interchange fees on small sales.
3. Consider a surcharge policy – carefully.
Credit card processing services always charge fees for accepting payments, but some businesses choose to use surcharge policies to pass the fee on to the customer. Before you start a surcharge policy, however, you should be aware of all the laws and regulations surrounding surcharging and how it may affect your business, such as by upsetting your customers.
Key takeaway: You might be hesitant to implement credit card payments in your business, but there are easy ways to keep your costs low.
Max Freedman contributed to the writing and research in this article.