Why you should never (or always) accept credit card payments as a freelancer

Recently on a Facebook group for freelancers that I’m a part of, the topic of the best way to collect payments from clients came up.

A surprising number of high-end freelancers — most of whom make six figures per year like I do — are accepting all of their various project fees via credit card, most often via Stripe connected to Freshbooks or Harvest.

The arguments I’ve heard from the pro-credit-card camp are all centered around getting paid quickly and easily, and avoiding the hassles of dealing with the bank or with paper checks.

I’m a little bit at odds here with many other freelancers, some more successful than me, but I don’t think you should accept credit card payments as a freelancer, with two (very) important exceptions.

I do accept some credit card payments (more on that later), but I collect money with a mix of wire transfers, ACH, and yes, old-fashioned paper checks.

Let’s talk about why the simplicity of just accepting credit cards isn’t the great deal that some make it out to be.

If you’re like most freelancers, you’re getting several dozen payments a year for thousands of dollars each that adds up to high five or low six figures.

Using credit cards in this scenario is insane.

Let me go through the advantages of accepting cards and explain why they don’t hold up for me.

I love Stripe. Being able to quickly and easily accept credit cards has been a game-changer for hundreds of thousands of businesses since Stripe entered the market. And accepting credit cards via Stripe is super convenient, I grant you. You can get setup and start accepting payments for thousands of dollars in a few minutes, and they’ll hit your bank account tomorrow. That’s pretty incredible.

But you pay a fee for that speed and convenience. The standard fees for accepting cards (via Stripe or many others) is 2.9% + 30 cents. Let’s just round up to 3% for convenience of calculation.

That’s 3% of your gross revenue. That’s how much the speed and convenience of credit card payments is costing you.

“But Ryan, it’s only 3%! I get to keep 97%!”

If you do $200k in freelance over the course of a year — which is a very realistic goal by the way — that’s SIX THOUSAND DOLLARS in credit card fees. That’s absolutely insane. Yes, you’re still going to get $194k, but that doesn’t diminish the value of the $6,000 you’re passing on.

We’re not very logical, especially when it comes to money. We often are willing to make completely different decisions when the underlying facts are the same, based on the way the choice is presented to us. So people are willing to drive across town to save $5 on a $20 purchase, but won’t drive across town to save $5 on a $2000 purchase.

Illogical.

Put it this way: what if one of your clients said they were going to pay you $12,000 total in three weeks if you spend a few hours at the bank, but you could skip the bank and get paid tomorrow if you took $6,000. Would you do it?

Of course not! But that’s effectively what you’re doing by taking credit cards.

“But Ryan, I get paid so much faster!”

Yes, you get your money a little bit faster, but it’s kind of like paying 3% in interest for a one-week loan. You know who else will lend you money at 3% interest for a week?

Payday lenders.

Why are you so concerned with getting this money right now instead of in a week or two? I would suggest that if cashflow is that much of a concern for you, you may have other financial issues in your business and personal life that you need to deal with.

I don’t know how to say this without it sounding like bragging, but I typically keep enough cash on hand to float at least a month. That’s separate from my emergency fund, too, just “working capital”. So I don’t really care if a client pays this invoice tomorrow or three weeks from now. I’m going to get it before I need it.

I’ve been freelancing for a long time and I wasn’t always able to have that much float, but it’s a good goal to work up to.

“But Ryan, I hate dealing with paper checks!”

Hey, I’m with you. It’s sad that in 2015 we don’t have a better alternative for handling payments with minimum hassles and fees. Having Stripe just dump the money into your account the next day is awesome.

But you’re paying for that convenience. How much are you paying?

I should total it up, but I bet I get somewhere in the neighborhood of 20 – 30 different checks over the course of a year. My wife is also a freelancer and probably gets another 5 – 10 checks. So yeah, that’s a lot of checks.

However, when I get a check, I don’t immediately jump in my car, drive across town to the bank, and then get in line to deposit it. That’s ridiculous!

Instead, I put the check in my wallet and deposit a stack of them later when it’s convenient to do so. I almost always deposit at the ATM, so it takes about 5 mins (and I often need to get cash out too), and I probably only do this twice a month or so. Smaller checks can be deposited via mobile deposit (my stupid bank limits me to $2500 / check and $5k / month on mobile deposit), making it even more convenient.

So let’s say I go to the bank 25 times per year for 10 mins each time, both of which I think are probably high. That’s about 4 hours per year.

If I accepted all of my payments via credit card, it would cost me more than $10k / year in credit card fees. I’m sorry, but I’m not willing to pass up $10k for the convenience of avoiding the bank every other week for 10 mins. I’m going to be switching banks soon so I can do 90% of my deposits via mobile deposit, making this even more convenient.

Here’s another way to think about it: if you had a client that offered you $10k / year to swing by the bank for 10 mins every other week, would you do it? Maybe you wouldn’t, but I definitely would 🙂

I’m all about buying convenience in my life, but not all outsourcing is equal. For $10k / year, I can have someone clean my house twice a month, eat out at a decent restaurant with my wife every week, pay for all of my coffee for the year, AND have someone babysit my daughter one night every week FOR A YEAR.

All for going to the bank every other week for a few mins?

What I really want is something that’s as easy to use as a credit card payment for my clients, but that just charges a flat fee. Even a high fee; I’d much rather pay $10 / payment instead of 3%. Dwolla and ACH take a few days and are free or near-free, but a pain for each side to setup. If you have suggestions here, please let me know!

Another issue I have with credit cards is chargeback risk. Even when the money is safe and sound in your bank account (or long since spent), you still may not be safe. The cardholder has a long period during which they can dispute the transaction and get their money back. In some cases, up to four months later!

Yes, a dispute investigation will be opened, but you probably won’t win. While I haven’t had to deal with this personally, my understanding is that the networks nearly always side with the cardholder, not the merchant.

How gung-ho about credit card payments will you be the first time that thousands of dollars for work already performed gets yanked out of your bank account?

Admittedly, this is a really low risk, but you don’t have this risk at all with checks. Once the check clears (which can actually take up to a week behind the scenes), the money is safe.

I think I’ve made my point.

At this point in the article, I’ve made a good case about the very high cost of the speed and convenience that credit card payments represent.

But wait a minute.

Remember when I said earlier that there are two important exceptions?

Why you should always accept credit card payments

I think the real case to be made for credit card payments isn’t in the speed or convenience for you, but for your clients.

And not because it’s nice for them or better service, but because it might be the difference between them being your clients and being a lost lead or a former client. Yes, it’s nice for your clients if they can pay all of your invoices via credit card, but having that option for two types of payments in particular goes beyond “nice to have” to “absolutely critical”:

  • Initial deposits
  • Recurring payments

You want as little friction as possible for these two points in particular, because they’re psychological “escape hatches”.

Other types of payments are different. A milestone payment or the final payment at the end of a project isn’t the same to a client psychologically. You’re almost always going to get those payments. I’ve literally never had a client refuse to pay money they owed. I’ve had one startup that went under before they paid their final bill, but that’s a risk you take when you work with startups 🙂

But initial deposits and recurring payments are different.

For the initial deposit, the client hasn’t really committed yet. They can still back out, and they might if they spend too much time thinking about it and get paralyzed by fear or indecision.

Once a customer has decided that they want to buy what you’re selling, you want to make it as easy as possible for them to make the actual purchase. I want potential customers to read some of my stuff or a proposal I write for them and think:

“We must hire this guy! Oh hey, there’s a button that says ‘Buy Now!’, perfect!”

I really don’t want them to think:

“We must hire this guy, and we’re ready to cut a check as soon as he sends us an invoice.”

I want the whole thing to feel seamless and easy for them.

And then for recurring payments, every month is a psychological “escape hatch” for clients. They have to stop and think about the amount of money they’re paying and really think about if it makes sense to continue, etc.

Let me be clear: I want my clients to stop paying me if they don’t feel like they’re getting good value anymore. However, I’d much rather the default be that we’re going to continue working together and I’m going to continue to get paid until one of us actively decides that it doesn’t make sense anymore.

Momentum is important, and I want it to be in my favor.

Sending an invoice to a client every month and having them actively cut a check is a momentum-killer.

There’s an important point to be made here though: having credit card payments for ongoing monthly engagements isn’t enough; you need to have auto-recurring subscription payments. You don’t cut them an invoice that they pay with a credit card.

No, they’re subscribed to a monthly service you offer, and they can cancel at any time.

Ok, so then just do your initial deposits and any recurring payments via credit card, but the rest via check, right?

Well, that’s a little disjointed for clients, but there’s a bigger issue than that:

I think your goal as a consultant should be to have all of your payments be initial deposits or recurring payments.

That means you should either collect 100% of your fee upfront, or have your client on a recurring subscription of some kind.

That might sound crazy, and it’s certainly not common — a depressing number of freelancers accept work without any upfront deposit — but it’s doable.

I estimate that more than 60% of my client revenue falls under either initial deposits or recurring payments. So I’m not all the way there yet, but I’m making progress.

And there are great reasons to do it that start to shift the entire way you relate to your business and to your clients.

So to wrap up, for years in my thinking about this, I have led myself astray by focusing on the costs of the credit card payments (relative to the benefits to me) for the same reason that freelancers who love credit cards talk about how convenient it is for them:

We’re all thinking about what is, not what will never be.

I was thinking about the cost of the payments that are made to me, and not really thinking about the cost of the payments that won’t ever be made to me. I don’t mean clients who owe me money not paying me because it’s inconvenient (they always pay); I mean people not becoming clients or staying clients because it’s inconvenient.

More broadly, I was falling victim to thinking of my business as a collection of disconnected transactions, when it’s actually a series of sales funnels. And avoiding leaking clients from each point of those funnels by removing friction may be worth 3% in what you get in net profit from the client over the course of your relationship. Hell, it might be worth 30%.

But that’s an article for another day.