How to Establish a Refund Policy for Your Business

By Suzanne Kearns

4 min read

If you’re in business long enough, it’s bound to happen: A customer wants to return a product or cancel a service and get a refund, sometimes for a product that is perfectly fine. When this happens, it’s wise to have a refund policy already established so you can point to it when responding to the customer. If you don’t have a refund policy for your business, here are some tips on how to create one.

What Does the Law Say?

Federal law states that retailers are only required to issue a refund if the product or service is defective, or if you break the sales contract. If you sell to customers in their homes, place of business, a place that you rent on a temporary basis, or someplace else other than your normal retail location, the federal “cooling-off rule” gives customers three days to return or product or cancel a service if their purchase totals $25 or more.

In addition, there are state laws you need to be aware of. Check the refund laws in your state to be certain your policy is in compliance.

What to Include in Your Refund Policy

To protect your business and make sure customers know what to expect, you should put your refund policy in writing, then post it where your customers can see it. In a retail location, post the policy near the checkout counter, and if you run an online store, make sure your visitors see it before they check out. Here is what the policy should cover.

  • How long does the customer have to return an item? Unless your state dictates the time frame in which a customer is allowed a refund, this will be entirely up to you. Some companies, like Zappos, have built their reputation on liberal refund policies that allow customers to return items for any reason. For Zappos, shoes can be returned up to one year after a purchase. Others, like Target, give their customers 90 days to return an item, with certain exceptions. You should write your policy according to the type of product you sell. For instance, if you sell clothing and offer a 60-day return, the product could be out of season by the time the customer returns it, and you might have to mark it down just to resell it. Decide what’s best for your business and your customers when setting your time frame.
  • What condition should the item be in? It’s important to establish the condition of the items you will accept for a refund. For instance, although Target allows customers to return items for a full 90 days, it won’t accept the items if they are opened or damaged. And Nordstrom, known for its lenient return policies, makes an exception for special occasion dresses. If the tag is removed, customers can’t return it for a refund.
  • Will you require a receipt? You will have to determine whether or not you will accept returns when the customer doesn’t have a receipt, or is returning a product with a gift receipt. Some retailers, like L.L. Bean, don’t require a receipt, while others, like Best Buy, not only require a receipt, but a photo ID as well.
  • Will you charge restocking or reshipping fees? You need to provide the customer information about what happens if they decide to return an item that isn’t defective. Will you charge them to restock or repackage the item like Sears does for some of its products? And if the customer needs to ship the item back to you, who pays for it? Some state laws dictate how you enact these policies. For instance, if you do business in New York and want to charge a restocking fee, you must prominently display that policy where customers will see it prior to the purchase. But if you do business in New Hampshire, you are not required to post a notice.
  • How will you issue the refund? Finally, you need to determine how your business will financially handle a refund. Some stores issue the refund based on how customers pay. For instance, if they pay for a product in cash, they will receive a cash refund, and if they pay with a credit card, their card would be issued a credit. Other stores only issue store credit, which is obviously financially best for the business, but might make some customers unhappy. Some retailers get around this by giving their customers a choice.

Establishing a refund policy makes good business sense, but keep in mind that you may be asked to bend the rules sometimes, and you should think about how you will handle it. For example, if your best customer tries to return a product 31 days after purchasing it, and you have established a 30-day refund policy, what will you do?

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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