How to Accept Credit Card Payments as a Small Business

The adage that cash is king isn’t as true anymore. According to recent research from Capital One, over 80% of shoppers prefer to use cards over cash. In other words, if you're a small business owner, you could miss out on sales by not accepting credit cards.

Yet credit card companies and processors make money in part by charging fees to merchants, so it’s important to compare your payment gateway options. Whether you do business online, in person, or both, here's how to accept credit cards as a small business.

Note: There's little difference between credit and debit card processing. For simplicity's sake, we use "credit cards" to refer to credit and debit cards.

3 Ways to accept credit card payments

Small businesses can accept credit card payments in person, online, or by phone. Here's a quick overview of each method.

In-person credit payments

In-person payments are common for brick-and-mortar retailers, mobile businesses like food trucks, and on-site service providers such as landscapers and plumbers. You'll need a point-of-sale (POS) system and a card reader to accept in-person credit card payments.

A POS system is the hardware and software you use to accept payments and do various other tasks, like tracking sales and updating inventory. A card reader is a component of the POS. It extracts information from your customer's credit card and sends it to the payment processor.

The type of card reader you'll need depends on how and where you do business:

• Countertop: These devices are used at a check-out counter (typically alongside a cash register), allowing your customers to swipe, tap, and dip their cards to make payments.
• Mobile: These devices connect to your phone or tablet and are ideal for on-the-go businesses such as mobile dog groomers, on-site repair services, food trucks, and craft fair vendors.
• QR code: The customer scans a QR code, bringing them to a payment page where they can input their card details on their smartphone.

Online credit payments

The easiest way to accept online credit card payments is through a payment service provider (PSP) like PayPal, Shopify, Square, or Stripe. You'll have to connect the PSP to your e-commerce website, which is generally straightforward with modern website builders. Once set up, customers can securely enter their credit card information on your check-out page to make purchases.

Over-the-phone credit payments

If your business accepts phone orders, you can manually enter the card information into your POS terminal (a "card-not-present" transaction) or through your PSP's virtual terminal site, which lets you process transactions from any device with an internet connection. Because phone transactions pose the greatest risk for fraud, they generally incur the highest processing fees.

Merchant account vs. payment service provider

Merchant accounts and payment service providers (PSPs) enable your small business to accept credit and debit cards, but they work differently. A merchant account is the traditional way companies accept credit cards. It's a specialized bank account for processing and settling electronic payments, including credit and debit cards. Once your account is approved, you receive (or buy) the necessary equipment to process payments, paying any agreed-upon fees.

PSPs like PayPal, Square, and Stripe can be the quickest and most straightforward way to accept payments—and often come with fewer fees. Your business becomes a "sub-merchant," licensed to process transactions through the PSP merchant account. However, PSPs have some restrictions, including limiting how much a consumer can spend in a specific timeframe, so compare several before deciding which one to go with.

Credit card basics for businesses

How credit card processing works

Four parties comprise every credit card transaction:

• The customer who is making the purchase;
• The merchant (seller) accepting the payment;
• The acquiring bank (aka "acquirer" or "merchant acquirer") processing the transaction on the merchant's behalf, routing it to the issuing bank and;
• The issuing bank (aka "issuer") issuing the card to the customer, ultimately approving or denying the transaction.

Here are the basic steps in the credit card transaction process:

1. The customer uses a credit card to make an in-person or online purchase.
2. The card reader or online payment gateway transmits the card information to the payment processor.
3. The payment processor sends an approval request to the issuer via the card network. (The four major U.S. networks are Visa, Mastercard, American Express, and Discover.)
4. The issuer confirms that the card is valid, hasn't been flagged as lost, stolen, or frozen, and that the cardholder has enough funds to cover the transaction.
5. The issuer sends an approval authorization code to the payment processor via the card network.
6. The payment processor sends the approval to the acquiring bank and the business’s payment terminal.
7. The acquiring bank retrieves the funds and holds them in the merchant account. The funds (less fees) are then transferred to the business’s main bank account, typically within a few days.

How your business gets paid

Once the issuing bank approves a transaction, the payment processor debits the amount from the customer's account and credits your merchant account. The funds are transferred to your main business bank account within a few business days.

Benefits of accepting credit card payments

As mentioned, over 80% of consumers prefer paying with plastic over cash, but what are the benefits for the business owner?

• Improved sales: Credit cards are the most common payment method—and consumers typically spend more when using plastic instead of paying cash—so accepting credit cards can boost your bottom line.
• Accept payments anywhere: It's easier than ever to accept credit cards, whether you're a brick-and-mortar retailer, on-the-go business, online shop, or an artist on the craft fair circuit.
• Easy, secure deposits: Transaction funds go straight into your business bank account, so you can avoid the hassles and risks of having cash and bringing deposits to the bank.

Drawbacks to accepting credit card payments

There are a few drawbacks to consider when deciding whether accepting credit cards is the right choice for your business:

• Costs: Initial set-up, equipment, and credit card processing fees can impact your company's bottom line.
• Chargebacks: If a customer disputes a charge, the issuer can debit the amount from your account, and you could owe a chargeback fee.
• Fraud: Accepting credit cards exposes your business to risks, including fraudulent transactions and data breaches.

Fees for accepting credit card payments

Businesses have to pay several fees when accepting credit cards:

• Interchange fees: These fees go directly to the issuer for each transaction. The fees vary depending on the type of card used (credit or debit), your business's industry, the region where the transaction occurs, and whether the transaction is processed online, in-person, or over the phone. Typically, the fee is a percentage of the transaction plus a fixed amount, such as 2.70% + $0.10.
• Assessment fees: These fees go to the card network (i.e., Visa, Mastercard, American Express, or Discover). Some networks charge higher fees than others.
• Payment processing fees. These fees are paid to the company that accepts the credit card payment and transmits the transaction to the payment network. Depending on your processor's pricing structure, you'll pay flat-rate, tiered, subscription, or interchange-plus pricing.

How long does it take for a credit card payment to process?

Once a customer makes a credit card purchase, it takes two to four business days for the payment to process and reach the merchant’s bank account.

TIME Stamped: Compare at least three processing companies

Choosing the right credit card processor can take time and effort. It's helpful to compare at least three options, paying attention to fees, supported payment methods, fraud detection and prevention tools, and dispute management. You'll also want to consider each provider's customer service, including feedback on the Better Business Bureau (BBB) and review sites like Trustpilot. That way, you can find an option that best fits your needs so you can focus on running and growing your business.

Frequently asked questions (FAQs)

Can someone pay me with a credit card?

In today's increasingly cashless society, numerous online and mobile applications—including Cash App, PayPal, and Venmo—can be used to pay a business with a credit card. If you're sending money, remember that using a linked bank account (instead of a credit card) is usually cheaper. Payment apps generally charge about 3% of the transaction amount when you use a card to send money.

How do small businesses take card payments?

Small businesses can accept card payments online, over the phone, and in person using a countertop or mobile card reader. How a small business takes payments depends on where and how it operates. For example, on-the-go businesses like mobile dog groomers may use a mobile card reader, while e-commerce shops accept payments online.

What is the cheapest way to take credit card payments?

The cheapest option depends on sales volume. If your company brings in less than $5,000 monthly, a payment processor with a flat-rate pricing model may be the most affordable solution. Businesses with higher sales volumes might find subscription-based plans or volume-based discounts more beneficial. It's a good idea to shop around and compare at least three options to find what works best for you.

Do I need a business bank account to accept credit card payments?

If your business accepts credit card payments, you'll generally need a business bank account to receive funds once the payments have been processed. Still, you can accept credit card payments as an individual using services like PayPal, Stripe, or Square.