TYPES OF BUSINESS PAYMENTS PRO’S AND CON’S

hand1Business Checks:

A negotiable instrument (document) that instructs and authorizes the financial institution upon which it is drawn to pay a specific amount from the “drawer” (the signer or payor –the party making the payment) to the payee (the party receiving the check).

Pros:

Checks are a widely accepted payment method. The check writer does not need to know the payee’s bank routing number and account information.

Cons:

Costs are high, including postage, purchase price of check stock, toner, and labor of signing, stuffing and mailing. Many people handle and see checks, so account numbers can be stolen/compromised, mail can be stolen and/or copies taken, creating the opportunity of fraud against the check writer’s account.

Wire Transfer:

The electronic transmittal of funds intra-day from one financial institution to another involving an unconditional order to pay a certain amount to a beneficiary upon receipt, or on a day stated in the order. Funds are irrevocable. Each wire transfer is a single message sent individually.

Pros:

A highly-secure, near-real time mechanism that ensures domestic or international delivery and final

settlement.

Cons:

Fees are charged to both the sender and recipient; fees for international wire transfers can be high. The payor must know the payee’s bank routing number and account information

Credit/Debit Cards:

Credit cards allow cardholders to make purchases or obtain cash advances using a line of credit granted by the issuer of the card. Credit cards allow cardholders to have a continuing balance of debt, subject to interest being charged. Debit cards allow cardholders to make purchases or withdraw available cash from their own checking accounts.

Pros:

Accepting these payment types might boost sales; cards are easy to use and widely accepted; funds are

secured/guaranteed from the cardholder. The payor does not need to know the payee’s bank routing

number and account information.

Cons:

Potentially high cost of acceptance (monthly, equipment and interchange fees), usually most expensive

with credit. Chargeback amounts and fees are incurred when a customer requests a reversal  of a charge for reasons such as claiming fraud, dissatisfaction, or non-receipt of service/product.

Internet Bill Pay:

Electronic payment service that facilitates both one-time and recurring bill payments. Provided by either a financial institution or a non-bank provider.  Provider sends an ACH payment or check on behalf of bill payor.  Electronic bill payment is commonly offered through a bank’s online banking service, allowing

a depositor to send money from his checking account to a creditor or vendor (such as a public utility)

to be credited against a specific account. Non-bank providers offer bill pay services for businesses. electronic invoicing (e-invoicing) can be a very useful tool for the accounts payable department. It centralizes all transactional documents in one location on a web server so they can be easily found and processed. E-invoicing allows vendors to submit invoices over the internet and have those invoices automatically routed for processing.

Pros:

Saves time associated with paying bills. Can produce substantial cost savings compared to the traditional approach of printing and mailing bills and payment remittances. An added benefit is a significant reduction in the use of paper. With e-invoicing, invoice arrival and presentation is almost immediate.

Cons:

If payment is made via check, checks mailed may take 5+ days to reach their destination. A check may save the payor’s account number on the check, which can enable fraud. Depending on the bill pay service provider, checks for bill payments initiated may be outstanding until paid, so payors need to be

aware of their true account balance. The payor must know how to identify the payee to the bill pay system being used so the payment can be accurately delivered

Automated Clearing House (ACH)

Electronic payment network that can be used to push (credit) or pull (debit) funds. Transactions are processed in batches (instead of as single items as in the case of a wire transfer or a check) with a one-or two-day settlement timeframe. Used for Direct Deposit of payroll, direct debit of recurring bills, and various other use cases. An ACH credit is an ACH entry originated to make a payment to another account; for example, for a buyer to pay a supplier for a purchase. The buyer’s account is debited by the buyer’s bank and the buyer’s bank sends the payment to the ACH network. The supplier’s bank picks up the payment from the ACH network and posts the credit to the supplier’s bank account.An ACH debit is an ACH entry that pulls a payment from another account; for example, used by a supplier to pull (debit) funds from the buyer’s account for a purchase.

Pros:

ACH typically has lower fees per transaction than other types of payments described here. Transactions are typically seen by fewer people than check transactions (e.g., only the payroll or accounts receivable clerk might see an ACH transaction), reducing chance for fraud. In major disasters (e.g., Hurricane Katrina), ACH may process without delay, while paper checks may be more difficult to deliver and/or more easily lost. Employees and companies may receive payments faster when using ACH to send

credits.

Cons:

Unlike wire transfers, which are irrevocable, ACH credit entries received are not final until settlement between banks takes place.  Recurring ACH payments are not guaranteed –the accounts on which they are drawn must have good funds in them. The party originating the transaction must have the receiver’s bank routing number, account

number, and authorization.

*Excerpt from The Small Business Owner’s Toolkit. Remittance Coalition, Volume 1, 2015

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