PayPal vs. Processing Credit Cards for New Online Businesses
New businesses are not only challenged with the question of how to make money, they also need to figure out the best way to process the transactions. I hope that this post will help you to make a good decision as to the best way for your small business to process transactions.
How Credit Card Processing Works
There are three separate expenses incurred by businesses who accept credit card payments, they are:
The cost of machinery- A simple hand-held credit card processing machine is likely to cost $50 per month to rent. The more advanced pieces of machinery obviously cost more.
The monthly rate paid per credit card company- Upon processing any transaction of a credit card company (such as Visa) that company charges the business a flat monthly rate. That flat rate could be about $10-$20. If you consider processing a few different types of credit cards, those flat monthly rates can get expensive. . The business only pays for months that they process a transaction through that credit card company. As a result, there are small businesses that refuse to take certain types of cards, not because they don’t have the ability to process them, but rather because it is just not worth it to pay the flat monthly fee.
The rate charged by credit card companies per transaction- Credit card companies usually take a percentage out of each purchase as a processing fee, much like PayPal does. The rates that PayPal, and other similarly low fuss money processing services, charge per percent of the transaction are higher than what the credit companies charge if you work with them directly. The reason that working with credit card companies rather than PayPal can be more expensive is due to the two previously listed reasons. Therefore, using services like PayPal or Google Checkout is cheaper for businesses that are just getting started out, and don’t have much income yet. This will be explained further in the next paragraph.
Credit Card Processing for Established Businesses vs. New Businesses
It is usually worth it for established businesses, that make a lot of sales, to pay the initial fees involved with credit card processing. For big businesses these initial fees end up only being a small percentage due to the large amount of sales. However, for newer businesses, who make a limited number of sales per month, those monthly processing fees end up being a hefty percentage of the amount that they make on sales. For those types of businesses, it is preferable for them to pay a flat percentage of their sales to their transaction processing service.
That is the difference between PayPal and regular credit card processing. This should explain why so many online mini-businesses use PayPal, while more established companies opt to processes credit card transactions without using a third party like PayPal.
Scott Hersh is a business blogger for BCAblog.com the official blog of BCA: leaders in merchant cash advances.