Table of Contents
A recurring payment is a way for small businesses to collect ongoing revenue from customers in exchange for regularly delivering goods or services. It provides a consistent revenue stream while also reducing the burden of manually processing payments. Explore different ways to structure recurring payments, how to set up recurring payments, and what policies you’ll need in place before you get started.
Key Points
• A recurring payment automatically charges a customer at regular intervals.
• Recurring payments may be fixed or variable, depending on what makes the most sense for the products or services your business provides.
• One of the biggest benefits for your company if you choose to accept recurring payments is getting a predictable revenue stream.
• Creating clear cancellation and refund policies helps ensure that your company stays in compliance with state and federal regulations.
What Is a Recurring Payment?
A recurring payment is a billing method that automatically charges customers on a set schedule. Often used with a subscription business model, a recurrent payment means that a customer agrees to store their payment information with you and let you charge them at regular intervals for the product or service you provide them. The money can then be deposited into your business checking account.
There are advantages to recurring payments. As a small business owner, you get a steady stream of payments, while customers get the convenience of not having to submit payment manually for each and every bill. You can set up recurring payments for any time intervals you want, including annually, quarterly, monthly, or even weekly. Choose what makes the most sense for your business model, and consider offering a small discount for longer commitments (such as paying for a monthly service on a quarterly basis). Incorporating recurring payments could even help cover expenses normally paid through a small business line of credit.
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Fixed vs Variable Recurring Payments
There are two different types of recurring payments that small businesses can implement: fixed or variable.
With fixed recurring payments, your business charges the same amount every billing cycle. Both you and your customer can predictably budget with no surprises. A freelance social media manager, for instance, may charge a flat retainer fee each month in exchange for the same services provided to the client.
Variable payments, on the other hand, are not the same each billing cycle. The final price depends on factors like usage or service level. A consulting firm may itemize its bill based on the number of hours used by the customer, or a housecleaning business could have deep-clean add-ons available in addition to routine care.
Common Examples of Recurring Payments
There are many ways businesses can offer recurring transactions to customers. Here are a few ideas across industries to help inspire you.
• Service plans: A pest control company could offer a recurring quarterly contract that covers monthly routine treatment, while a lawn care company could automate a monthly charge for mowing services.
• Memberships: Both online and in-person communities can routinely charge membership dues.
• Subscription box: Send customers a regular box of products, such as snacks, gifts, or refills, without having to make an individual sale each and every time.
• Digital access: Businesses can offer access to online resources, such as courses, worksheets, videos, and more, while charging a regular fee.
You don’t need to be a major streaming company to expand your company’s revenue with recurring payments. Think of what problems you can solve for your customers on a regular basis and make it easy for them to pay.
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Benefits of Recurring Payments
There are many potential advantages to recurring payments, including the following.
• Improved customer relations: Automated payments simplify the customer experience and can even increase retention rates because they don’t forget to pay.
• Predictable revenue: Accepting recurring payments creates a stream of more reliable income, especially once you get data on monthly turnover rates. And since payment dates are already established, you know exactly when to expect a big revenue boost, which can make it easier to plan your business goals.
• Increased productivity: Instead of manually sending out invoices and chasing down payments, you or your accounting team can focus on other tasks while you watch recurring payments roll in without all the manual labor.
• Lower costs: Automated payment software can help you cut back on the time it takes to manage manual payments. Plus, it can notify customers when their billing information has expired, reducing failed payments.
Once you start to see the benefits of incorporating recurring payments in your small business, you may not want to go back.
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How to Set Up Recurring Payments
To set up recurring payments, select a billing software with the right capabilities for your business needs. Your credit card processor may offer this service or you could use a subscription management platform, e-commerce platform, invoice software, or another payment gateway – whichever one makes sense for your business model.
Once you select your automated small business payment system, you’ll need to collect information from your customers and set up the billing parameters through your system. Set up billing terms and conditions so your customers know what to expect when it comes to frequency, autorenewals, cancellations, and what happens if their payment fails.
After initiating the launch, you’ll manage the recurring billing software on an ongoing basis to make sure all the payments have gone through.
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How to Manage and Cancel Recurring Payments
Here’s what to expect in terms of the ongoing maintenance of recurring payments. You’ll need to do the following:
• Cover the associated costs: Most payment processors charge a fee for running recurring payments. Usually it’s a small percentage, sometimes with a flat fee on top of that.
• Implement compliance standards: Both state and federal regulators have regulations about recurring payment fees and/or difficult cancellation processes. Research the latest standards on autorenewal policies to ensure your compliance.
• Manage failed payments: When a payment fails due to expired cards or other unintentional issues, you may lose customers who don’t actually want to cancel. Follow up on failed payments to retain the most customers possible.
For customers who do want to cancel, create (and enforce) a clear cancellation policy. It should include details like:
• Required notice period
• Accepted methods for cancelling
• When a refund may be provided
The Takeaway
Deciding to accept recurring payments can help take your small business to the next level with an entirely new stream of predictable revenue. Plus, sophisticated payment processing software can make it easy to manage customer billing and minimize failed payments.
Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.
FAQ
What is the difference between a recurring payment and a subscription?
Recurring payments and subscriptions are closely linked. “A recurring payment” refers to the transaction itself, which is scheduled at regular intervals. “A subscription” refers to the billing process connected to an ongoing service or product delivery.
Can I stop a recurring payment through my bank?
Yes, you can revoke authorization for recurring payments directly through your bank. Depending on the bank’s processes, you may need to submit an online form, call, or write a letter. If you’re still charged after making the request, you can ask your bank for a full refund.
Are recurring payments safe?
There are federal guidelines concerning safety protocol for recurring payments, but make sure you’re dealing with a reputable company before providing your financial information. Additionally, you may want to watch your account balance to avoid overdraft or non-sufficient funds fees.
What happens if a recurring payment fails?
When a recurring payment fails, the payment software usually retries the information before notifying the customer. If payment isn’t received within the grace period, service may be canceled.
How do I keep track of all my recurring monthly payments?
It can be difficult to track all of your recurring monthly payments, especially if they’re spread out across different types of bank accounts. Potential solutions include using a tracking app or keeping a manual list of your automated expenses.
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