What is a recurring payment? Tips, types, and info to simplify billing

Your business needs a lot from you, so it makes sense that you’d welcome any opportunity to put tasks on autopilot. We have good news: Recurring payments allow you to collect money from your customers with little to no elbow grease required.

Intrigued? We thought so. We’re digging into everything you need to know about using recurring payments to streamline your business, stabilize your cash flow, and keep your customers happy.

What is a recurring payment?

Recurring payment happens when a business automatically charges a customer on a set schedule, also known as autopay. These automatic payments are typically charged to a customer’s credit or debit card or are deducted from their bank account through an ACH transfer.

You probably make a few electronic payments each month yourself. Think about your movie streaming subscription payments. Or your gym membership. Or your monthly meal subscription box. Those are all examples of recurring billing that occur automatically on a cycled basis until your payment plan expires or you cancel the subscription.

With recurring payments, you don’t have to worry about keeping track of your customer’s payment information, saving you time in the billing process.

Types of recurring payments

Before we dive into the nitty-gritty of how recurring payments work, we’ll cover the two main types of billing categories.

Fixed recurring payments

Recurring payments that are fixed (also called regular) are when the same amount of money is collected from the user during each billing cycle. Since the price doesn’t increase or decrease between cycles, this system is the most continuous and stable. With this model, you can stay at ease knowing that you’ll receive your payments on time.

For example, if you’ve signed up for a magazine or newspaper subscription, or even your favorite streaming service, you’re billed through fixed recurring payments.

Variable recurring payments

With variable or irregular recurring payments, the bill is dependent on the usage of the customer. This happens with water and electricity bills as the charge is based on consumption.

This is an irregular payment process because the amount owed may vary (increase or decrease) throughout the month or billing cycle.

How recurring payments work

Recurring payments happen through electronic transfers. To receive these payments, your business needs to have a merchant account and a payment service provider.

merchant account is an account that the customer’s funds are transferred to after payment and before they enter your business account. These funds are reviewed by a third party and in 1 to 2 days the money gets sent automatically to you.

A payment service provider is also needed to complete recurring payments. These are companies that help you accept electronic payments from customers—PayPal is one of the most popular examples of these.

Some processors have differing workflows, but here’s a quick breakdown of the main step-by-step process that recurring payments go through:

  1. Customer chooses option: Within the website or app, the customer chooses the recurring payment option in their account or payment settings.
  2. Terms and conditions: Next, the customer will usually accept the terms and conditions presented after selecting the recurring payment option. The terms and conditions often include agreeing to the amount charged, payment frequency, and if there are any expiration dates on the recurring payment.
  3. Bank information entered: The customer will enter their credit card or bank information, which is then securely saved within the invoicing software.
  4. Funds transferred to payment processor: Once the customer uses the service and makes a payment (normally when the billing cycle begins), the funds are transferred to the payment processor.
  5. Funds approved: The  payment processor  will contact the acquiring and issuing bank, as well as the customer’s credit card network. Once that’s approved, the funds are released into the merchant account.
  6. Invoice sent: For every billing cycle (commonly month-to-month), the customer will receive an invoice that notifies them of their payment and that it has been successfully processed. You can even set it up to where the customer gets notified ahead of time that they have an upcoming payment scheduled.

Advantages of recurring payments

Recurring billing is fairly popular among consumers. In 2017, the average customer paid a little over 6 bills per month automatically.

Why did they go that route? Well, automatic payments offer several benefits for both the consumer and the business.

Increased convenience for customers

There’s no shortage of payment options out there, but the recurring payment option is the only one that takes all of the burden off your customers.

You store the customer’s payment information in your payment gateway and automatically charge them on a set billing cycle. Your customer pays for your product or service without lifting a finger or going through a lengthy checkout process.

That added convenience can boost your customer retention rate—and, as a result, your profits.

Reduce late or missed payments

Since automatic payments happen without the involvement of your customer, you reduce the potential for late or missed payments.

When 46% of consumers admit that they’ve paid a bill late when they opted to make a one-time manual payment, recurring payments eliminate the potential for error and forgetfulness.

Save time and eliminate administrative headaches

As many as 60% of small business owners say that cash flow has been a problem, and nobody enjoys chasing down money from their customers.

When you automate your payment processing, you save yourself time and hassle. You can securely store your customers’ payment details and collect your hard-earned money with little to no manual effort.

Stabilize your cash flow

You know that cash is king in your business, and cash flow issues are among the top three causes of stress for 76% of business owners who face them.

When customers don’t pay on time, you need to stay afloat by finding money elsewhere. In fact, 63% of small business owners say they use personal funds to cover cash flow at least once a year. Recurring payments happen predictably, leading to much more consistent and stable cash flow.

An illustration of a chart showing the pros and cons of recurring payments

Recurring payments disadvantages

Although recurring payments help simplify the billing process, there are still some drawbacks. Here are some caveats of recurring payments that are minor, but important to keep in mind.

Correcting billing errors can be tricky

Instead of receiving a bill first before they have to pay, the customer is automatically billed and the payment is sent through. Therefore, it can be harder for the customer to notice mistakes with recurring payments. If there are any mistakes in the charge, it may take some extra steps to get a refund for the incorrect charge .

Luckily though, if you use the fixed recurring payment method, mistakes are easy to spot since the charge should be the same every cycle.

Some charges can be overlooked

You’ve probably experienced a time where you’ve forgotten about an unwanted subscription and you’ve overlooked the charges. This can easily happen with recurring payments since it’s a very hands-off way of paying for a service.

For a business owner, overlooked charges can become a hassle when dealing with an upset customer.

Services can be halted

In some cases, if a customer’s account is declined, recurring payments can be halted. This disruption can be problematic for the customer since their services will be paused. As a business, be sure to have the customer tie an account that usually holds a high balance, such as their checking account, rather than a credit card.

To avoid this, set up some friendly reminders (like an email) that the next scheduled charge is approaching, so the customer can either make sure their card has sufficient funds or cancel if needed.

Example of how to set up recurring payments

You’re sold on the benefits of recurring billing, but how do you get started? Here are some quick instructions to set this up in QuickBooks:

  1. Select “New+” and choose “sales receipt.”
  2. Select the customer you want to bill automatically.
  3. Select the product or service you want to bill them for on an ongoing basis.
  4. Choose a credit card as the payment method and enter the customer’s payment details.
  5. Choose “make recurring” and enter a name for your template.
  6. Choose “scheduled” under the template type.
  7. Enter the interval you’ll use as that customer’s payment schedule (such as weekly or monthly).
  8. Enter the start date for automatic billing.
  9. Enter how many times you want to charge your customer on that recurring billing schedule.
  10. Save your template.
  11. Have your customer sign the authorization form to give you permission to automatically charge their credit card.

You can read the full instructions for this process here.

If you’d rather not store your customer’s payment data and charge their credit card or debit card automatically, you can also set up recurring invoices using these instructions. The invoice will be sent to your customer automatically on a set schedule, but they’ll need to pay manually.

Best practices for using recurring payments

An illustration of a chart showing 6 recurring payment best practices

The very premise of recurring billing is that it’s supposed to be easy, but that doesn’t mean you can roll it out and watch as the magic happens. There are a few best practices you should know to do this right.

1. Set up reminders for account updates

You’ve probably had it happen before: Your credit card expired, and you were mailed a new one with a shiny new expiration date. You had to update that payment information in dozens of places, and of course, you forgot one. You received an email saying your online payment couldn’t be processed because of incorrect payment details.

It’s a familiar plight for your customers too, which is why you should use your payment solution to set up alerts when payment information is incorrect or about to expire.

That way, you can notify your customers when they need to update their credit card information—before you even try to process their payment.

2. Offer flexibility with payment schedules

You might be concerned about your business’s cash flow, but remember that your customers worry about managing their income and expenses too.

That’s why it’s helpful to offer different payment plans and frequencies. Particularly if your products or services are more expensive, some customers might not be able to cover a large monthly charge. Breaking it up into weekly or biweekly payments might be more manageable.

Be flexible with the payment schedules you make available to your customers so they can choose the frequency that’s right for them.

3. Make it easy to cancel

While recurring billing should hopefully boost your customer retention, there will come a time when a customer wants to pause or cancel their payments. When that happens, they shouldn’t need to jump through endless hoops.

Unfortunately, 42% of consumers say they’ve found it difficult to turn off recurring charges. If the payment process is easy, the cancellation process should be too.

Whenever you enroll a new customer in automatic billing, provide them with instructions to update their payment information as well as cancel their subscription when they need to. Hiding those details will only breed frustration.

4. Maintain a connection with your customers

Your billing and invoicing might be happening on autopilot, but remember that businesses are still built on relationships.

Remember to maintain a personal connection with your customers. Send a regular newsletter or a holiday card and check in with them periodically to ask for feedback about your product or service.

Do what you can to continue to foster that relationship and fuel brand loyalty. Your payments are low touch, but your business shouldn’t be.

5. Ensure security is top of mind

Customers’ security is important, so make sure that is a priority when going about the recurring payment process. Since they’ll possibly be sharing important information, such as their bank details, it’s on you to make sure that you keep their data secure and that your business is PCI compliant.

This also plays into ensuring your business policies are transparent. If you fail to make sure this private data is secure and you aren’t transparent, you can risk losing customers and hurting your reputation.

6. Gather updated card information from the user

To avoid errors in the recurring payment process due to something like insufficient funds, ensure you always have updated card or bank information from the customer. You can do this by sending a message or notification to ask the user to update if anything has changed or confirm that their current information is correct.

Recurring payment FAQ

Have a few more questions about how recurring payments work in QuickBooks? Have no fear—we have answers.

How much does it cost to use recurring billing in QuickBooks?

Using recurring billing in QuickBooks doesn’t require an additional charge beyond your QuickBooks subscription. Simply set up a recurring sales receipt and enter the necessary information.

When will I receive funds in my bank account from QuickBooks recurring payments?

The estimated wait time for credit card payments to be transferred to your bank is 5 to 7 banking days. ACH deposits can take 7 to 10 business days. However, most funds usually reach your business account within 2 to 3 business days from the original transaction.

Get your money without the headaches and hassles

There aren’t many aspects of your business that run without your involvement. But when you set up recurring payments, you can put your billing on autopilot and streamline the accounting process.

Doing so means less work for you and a more streamlined experience for your customers. How’s that for a win-win?

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