What Are Merchandise Finance Charges?
Merchandise finance charges refer to any fees associated with obtaining credit, borrowing funds, or repaying loans. These can include penalties for carrying a balance, interest rates on credit cards, and charges for foreign transactions. Businesses that are mindful of their expenses will want to minimize unnecessary fees related to financing their operations. Making informed financial decisions and selecting the right credit card provider and payment processor can help keep these additional costs low.
How Do Merchandise Finance Charges Work?
When you borrow money, there’s always a cost involved. Banks typically charge interest on loans, while credit card issuers impose finance charges. A finance charge encompasses any transaction fees and interest accrued on borrowed funds, along with a variety of other charges.
Triggers for Finance Charges
Businesses can incur finance charges on their credit cards in several ways:
Carrying a Balance
If a business doesn’t pay its full balance by the due date each month, it will incur interest on the remaining balance unless it has a card with a 0% APR, which is rare for business credit cards. The charge is calculated based on the card’s APR and the unpaid balance, which is added to the total owed. Carrying a balance often results from inadequate financial planning or cash flow issues.
Credit card companies usually set low minimum payments compared to the total balance, which can include interest charges or a flat percentage added to the minimum.
Strategies to Avoid Late Payment Fees
To avoid incurring late payment fees, businesses can implement several proactive strategies:
- Automatic Payments: Setting up automatic payments reduces the risk of missing a payment. You can choose to pay the minimum, the statement balance, or a fixed amount each month. However, ensure sufficient funds are available to avoid overdraft fees.
- Payment Reminders: Utilize notifications on your phone or email to remind you of upcoming payment deadlines.
- Adjust Payment Dates: If your payment date coincides with a time when funds are low, consider negotiating a different date with your credit card provider.
- Understand Your Fees: Review your contract to comprehend potential late fees, enabling better financial decision-making in the future.
Balance Transfers
Transferring a balance from one card to another can incur balance transfer fees and potential interest. It’s essential to be aware of your business credit card terms before making such transfers.
Foreign Transactions
Using your credit card for foreign transactions—whether in a different currency or country—often results in foreign transaction fees, which can be significant. However, regulations in the European Union mandate that banks charge the same rate for euro payments within the EU as they do for domestic transactions.
Cash Advance Fees
A cash advance fee is a short-term loan taken against your credit card’s line of credit. Cash advances can be obtained from ATMs, in-person at banks, or through convenience checks.
Monthly or Annual Fees
Be aware of the costs associated with maintaining your credit card to avoid overpaying on monthly or annual fees.
Additional Business Costs Linked to Credit Cards
While finance charges are a significant consideration, processing credit card transactions involves additional costs.
Credit Card Processing Fees
Credit card processing can incur various fees that add up if you don’t shop around for competitive rates. When selecting a payment processor, aim for a provider that balances cost and the services your business requires. Look for features such as:
- A merchant services account with a global payment gateway for diverse currencies and payment methods.
- PCI Level 1 security to protect customer payment data.
- Reasonable rates that align with your growing business needs.
- A flat-rate payment option for easier budgeting.
Chargebacks
A high chargeback ratio can be costly for businesses due to incurred fees beyond the chargeback itself. To mitigate this, implement strong merchant protection measures to prevent fraudulent chargebacks before they occur. Seek a merchant services provider known for robust chargeback protection and fraud prevention technology.
Strategies to Reduce Unnecessary Payment Costs
While credit cards come with inherent costs, businesses can take steps to minimize these charges:
- Encourage Recurring Payments: Promoting direct debit or recurring payments can lower transaction fees. Instead of processing multiple payments separately, consolidating them can save on fees.
- Automate Transactions: Regularly review banking practices to identify areas for cost savings. Automating transactions like standing orders can save both time and money.
- Shop for Better Deals: Invest time in ensuring you have the best possible deal from your bank. Compare monthly or quarterly fees and transaction costs, and approach your bank with your findings to negotiate better terms.
Balancing Business Costs with Exceptional Service
Finance charges and payment processing fees are just two of the many expenses associated with running a business. While it may not always be possible to avoid finance charges entirely, reducing them is a realistic goal.
Start by aligning your workflow with critical credit card deadlines and optimizing related costs, such as payment processing and chargeback fees. These small adjustments can accumulate and significantly impact your bottom line.