Are You Hurting Your Small Business by Being Cash-Only?
Every once in a while you may find yourself encountering a small business that doesn’t accept credit cards. Usually it’s a nail salon or a mom-and-pop shop, but I’ve even had to talk some freelancers out of the cash-only model.
In all fairness, there are some advantages to accepting cash. It allows you to keep your prices low because you don’t have to account for credit card processing fees. You also ensure that the cash is available immediately, whereas credit card transaction can take two business days or more to show up in your bank account.
However, these two reasons alone are not enough to avoid accepting plastic all together. Small businesses can accept cash all they want – it’s when they are cash-only that they can run into problems.
Those operating on cash-only models also tend to make a couple of assumptions. First, they think they will make more money because they are avoiding credit card processing fees. Second, they think if they only accept cash then the IRS won’t notice if they don’t claim as much income.
The reality is both assumptions are completely false. In fact, small businesses could be shooting themselves in the foot if they don’t accept credit cards. Here just a few of the many reasons why small businesses should move away from a cash-only model.
Less People Are Carrying Cash
Thanks to rewards programs, mobile wallets and the simplicity of swiping a piece of plastic, less people are carrying cash. This means small businesses are losing money because people can’t pay them.
Some may argue that you actually make more money because you’re avoiding credit card processing fees, but it’s better to lose 3 percent in fees than miss out on an entire sale because someone couldn’t pay cash.
Studies from 2011 showed that only 27 percent of consumers pay for things with cash, whereas 67 percent preferred plastic. If that was back in 2011, imagine what it’s like now when people can pay for their Starbucks latte with their smartphone.
Customers Who Use Cards Spend More Money
Here’s an interesting fact about accepting credit cards: The same study mentioned above also found that people who pay for things with plastic tend to spend more money.
This makes perfect sense. You can’t actually see the money leaving your wallet like you can with cash; debit cards are connected to whatever cash you have in your checking account and credit cards are attached to a credit limit.
It’s almost as if using a card is less finite than using cash, and therefore customers who use plastic spend upwards of 120 percent more than their cash-carrying counterparts.
It’s Much Easier (and Cheaper) to Accept Credit Cards Now
You no longer need a point-of-service system to accept credit cards at a place of business. Now we have card readers that attach to our phones thanks to payment processing services like Square, Intuit GoPayment and PayPal Here.
Not only does this make it easier, it also makes it more cost effective. The fees for Square are only 2.5 percent per transaction or a monthly flat fee of $275. Compare this to the 3 percent you can see with credit card processors and the fact that you can never really budget for fees with traditional processing systems because of all the factors that go into determining them.
The fees for traditional card processors depend on who issued the card, whether or not it’s approved, what kind of merchant is processing the cards, etc. It’s a mathematical nightmare, which is one of the reasons small businesses avoided them. Now they have the option to budget for flat fees with mobile credit card processors.
You Can’t Fool the IRS
Unfortunately, one of the reasons some businesses remain cash-only is because they think they can fool the IRS and keep more of their money.
First off, the IRS already knows this and does their due diligence. If you get audited, the IRS is going to notice something is off.
Second, if you make more than $10,000 in cash from a single transaction or two related transactions, you are required to fill out a Form 8300. This is so much more cumbersome than just accepting credit cards.
Cash-Only Makes Accounting More Difficult
Part of the beauty of accepting credit cards is the amount of time it will save you and your accountant in managing the business finances. As most small business owners will tell you, time is money. As such, accepting credit cards makes accounting more efficient and you can spend your newfound time finding ways to make more money.
Credit card payments go straight into your bank account, which can then be connected via the internet with your accounting software. This is much easier than trying to manually figure things out with cash.
Additionally, if you have a large sum of cash lying around in your business, it’s also a major security risk. You do not want to run the risk of losing money in case of a break-in or robbery.
There are a couple of exceptions in which accepting plastic may not make sense for your business. For instance, if you have an established customer base of regulars and they know you only take cash, then it may not make sense to switch things up and disturb their process.
However, just keep in mind that less people are using cash because of the ease of cards, electronic payments and mobile wallets.
Do you accept credit cards in your business or have you remained cash-only? Comment below and let us know.