Can a Small Business Charge a Credit Card Fee? Pros, Cons, & Alternative Solutions

When you shop at other small businesses, you might notice that they charge different prices depending on which payment method you use. It’s often cheaper to pay with cash, and more expensive to pay with a credit card.

This is because credit card companies charge businesses for allowing their customers to use this payment method, and many small businesses already have a small profit margin. Passing the fee on to customers – who can choose to pay cash to avoid the fee – helps small businesses keep their doors open.

At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. That means we’ve answered plenty of questions about surcharges, including:

• What is a credit card surcharge?
• Are credit card surcharges from businesses legal?
• Should businesses pass on credit card fees to customers? How? What are the pros and cons of each method?

Credit Card Surcharges

As we mentioned, small businesses prefer cash payments to avoid credit card surcharges, which are fees imposed on the business by credit card companies for charging credit cards. They are essentially processing fees.

How much do credit card companies take from businesses? Since they take a certain percentage of each purchase, it depends on a business’s sales. They can lose 2-3% of each purchase to Mastercard or Visa, or they can lose 3.5% to American Express. 

This may not seem like a lot for a small purchase, but it adds up quickly if a majority of a business’s sales are paid by credit card. This applies to most industries, but especially small retailers.

Where Credit Card Surcharges Are Legal

Most search results around this topic are from customers who are upset that they are being charged extra to use their cards. They can’t believe it’s legal – so, is it?

It’s legal in the United States for credit card companies to add a surcharge to business transactions. 

It’s also legal in most states for businesses to pass these fees to their customers. (It’s not legal in Connecticut, Maine, Massachusetts, and Oklahoma, so look at alternatives in the next section if you’re in these states). 

Credit Card Surcharge Rules

There are a few rules from the credit card companies that you need to follow, though, if you want to pass the surcharge to your customers. These include:

• No overcharging. You can’t overcharge customers for the surcharges to make a profit in this area. You should also make sure your state doesn’t have caps on how much of the surcharge you can pass to customers.
• No debit card fees. You can’t apply surcharges to debit card transactions, even if they’re run like credit cards. Credit cards only!
• Notify credit card companies. You must notify them in writing at least 30 days in advance that you will start passing on the surcharge to your customers.
• Notify customers. You must clearly disclose the surcharge in writing at your front door, cash register, and on the receipt as a separate line item. Customers can report you to the authorities for not doing so.

Remember, you also cannot do this if you’re in Connecticut, Maine, Massachusetts, and Oklahoma. However, you may consider alternatives in the next section.

Passing Credit Card Fees to Customers vs. Alternative Solutions

To pass those credit card surcharges on to your customers, you need to follow the rules above. Then, you will either need to manually add these fees each time a customer pays by credit card, or you can pay for a third party to automate it.

While no third-party surcharge service is exactly the same, they will often charge a small fee for their service. It’s still cheaper than the small business paying the surcharges, and it cuts down on the repetitive labor of manually entering those fees.

Not a fan of either of those options? Luckily, there are alternative solutions! They are essentially different ways of doing the same thing. Please do your research or ask your accountant if your selected method is in legal compliance for your area.

These include minimum purchase amounts, convenience fees, and cash discounting. We’ll also talk about our recommended method.

Minimum Purchase Amounts

We see this one a lot. Many small businesses only allow credit card purchases if the total is over a certain dollar amount.

The pros: 

• Legal in all U.S. states (Check your local laws and credit card companies’ rules.)
• No extra fees for customers
• May encourage customers to opt for add-ons to meet the minimum purchase requirement
• Offsets surcharges for lower-value purchases

The cons:

• May not offset surcharges for higher-value purchases

Convenience Fees

If you do a lot of business online, this can help close the gap of credit card surcharges! Just make sure to disclose the fee prior to the purchase.

The pros: 

• Legal in all U.S. states (Check your local laws.)
• Familiar and inoffensive to customers
• Convenience fee can exceed credit card surcharge
• Can also apply to debit cards

The cons:

• Only for online payments

Cash Discounting

This is when there are two prices listed – a default price for credit card purchases, and a discounted one for cash purchases. It can be thought of as a reward instead of a consequence, which makes for happier customers!

The pros: 

• Legal in all U.S. states (Check your local laws.)
• Discounts are perceived better than added fees

The cons:

• The initial need to raise the default costs of all items
• Extra work to add discounts at the register
• More cash means more bank deposits required
• Potential perceived unfairness if a customer doesn’t have enough cash on hand

Even if payment isn’t due immediately, sometimes it’s better to get 96.5-98% payment now with a credit card (factoring in the surcharge) instead of a 100% payment with cash later. It’s up to you!

Our Recommended Method

As we mentioned, with the cash discounting method, you need to raise the default price of all items. However, you can just build the cost of credit card surcharges into the default price of all items and then not offer a cash discount or add any fees in.

We believe many businesses are already following this method, and it goes around many technicalities and legalities.

The pros: 

• Legal in all U.S. states (Check your local laws.)
• Avoids extra work to cash-discount items
• Prevents extra bank deposit requirements that would be needed with extra cash on hand

The cons:

• The initial need to raise the costs of all items
• Overall higher prices may cause customer dissatisfaction and discourage the purchase of optional add-ons
• Customers may take business elsewhere if you have good competitors

Some advice that we offer is based on what we think is best for all small businesses, based on our 50+ years of expertise. 

However, when you partner with a year-round accounting service like us, you also get advice that’s curated for your business’s unique situation. This means we can help you way beyond tax season!

Make Informed Financial Decisions

Now that you know what credit card surcharges are, how they’re legal to pass on to customers in most states, and alternative solutions to make up for these fees (including our recommended method), are you ready to check out monthly accounting services?

If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:

Not ready to talk? That’s okay! First, learn more about what it’s like to work with CSI by clicking the image below: