Running your own business can be an exciting, profitable, and liberating venture. But as great as being a business owner can be, it also comes with its fair share of risks.
While you may ideally grow your business into a major contender some day, for the first few years (if not decades), you'll inevitably be operating as a "small business" -- and that puts you at a distinct disadvantage compared to your larger competitors. In the business world, many small businesses ultimately fold because they fail to overcome the structural problems associated with being small, and more often than not, that's because of numerous small fees which add up to big trouble over time.
Debit and Credit Card Processing Fees
Every time a customer buys your products or services with either a credit card or a debit card, you pay what's called a processing fee in order for that transaction to go through. Of course, credit and debit cards account for billions of dollars in transactions around the world each day, so you definitely do want to tap into this market -- but with processing fees eating away at your profits with each and every transaction, how can you make the best of it? Well, first it's important to understand how processing fees are actually calculated in the first place: there's the "base cost" (aka interchange) charged by the debit/credit card company itself (think Visa, Mastercard, Discover, etc.), and then there's the "markup cost" (aka processing rate) charged by the processing company that you work with (think Square, PayPal, Chase Paymentech (traditional processing) etc.) The combination of this base cost and markup cost is called the processing fee or "merchant discount," and it is what you pay for each transaction.
The big box stores and other major retailers have enough clout to negotiate lower processing fees with the big banks and major processing firms, so they almost always pay lower fees per transaction than the smaller mom and pop operations do. This is usually achieved by the big box store convincing their processor to drop the markup cost from the processing fee and just charge them the base costs instead, usually for a low cost subscription fee.
So, how can you as a small business owner compete with your bigger competitors, even though they're probably paying far lower processing fees than you do? Simple: you switch to a processor that will forgo the markup costs and only charge you the base costs. A good example of this would be Payment Depot, which is essentially the Netflix of credit card processing. For a small monthly subscription of $20, they will process your cards at the lowest rates that normally only the big box stores can get. That means it's only base cost (which goes to Visa, Mastercard, Discover, etc.), plus 25 cents per transaction. Compare that to traditional processing, which adds a markup of 1-2 percent on all transactions (which equals a 2 percent markup cost on top of the 1 percent base cost for debit transactions).
If we imagine monthly credit card sales of $20,000, that means you as a business owner would save up to $400 per month using Payment Depot, as opposed to traditional processing. That's $4,800 per year in savings, and those are savings that almost all big box stores already enjoy -- so, as a small business owner, you'll definitely improve your odds against the big boys by making the switch.
Settling Up with the Tax Man
Another area where small businesses are at a critical disadvantage is taxes. While many people typically imagine the business tax rate as being fairly straight-forward, the truth is that there are nearly 4 million words in the U.S. Tax Code, and multi-million dollar accounting industries which are solely dedicated to finding loopholes in it.
According to a recent study, the end result of this bloated tax code is that many small businesses wind up paying tax rates that are more than double that of large corporations. From pork barrel subsidies to overseas tax havens, big companies can afford to hire skilled accountants who pore through the Tax Code looking for ways to reduce their tax burden. Most small businesses, on the other hand, usually do their own books and have, at best, a few accountants on the payroll -- which makes interpreting tens of thousands of pages of dense tax laws rather difficult.
Even more unfairly, big businesses can afford to hire lobbyists to represent their interests in Washington -- something that most small businesses simply can't afford to do, which means that their voices aren't always heard by the people writing the laws. The best way for any small business owner to fight back on this front is to join an organization like the National Federation of Independent Business and work with other like-minded small businesses to lobby for their collective interests in the nation's capital. One small business can't necessarily afford to hire lobbyists, but hundreds of them working together certainly can.
Negotiating with Wholesalers
It's not just big processing companies and powerful politicians that small businesses have trouble reaching out to; the wholesalers and suppliers who create and ship the products that small businesses sell also prefer dealing with big companies. Since big companies place orders which are typically larger and more consistent -- and thus provide them with a steady stream of profits -- most wholesalers are amenable to providing these big companies with bargain prices if it means continued business in the future. Not so with small businesses, whose orders are often too small or too inconsistent to provide enough leverage to get bargain prices from the wholesalers.
So, how can a small business convince its wholesalers to give it the same discount prices that the larger competitors enjoy? This is one area where you don't necessarily need to sign a new contract or hire a lobbyist to get what you want -- you just need to build the kind of solid relationships that good business is based on.
If you've ever heard the old adage that "it's not what you know, it's who you know," well, this is exactly the kind of situation it was talking about. Get to know the people who own and operate your wholesalers. While you may not enjoy the bargain prices right away, you can bet that over the years, a business relationship that also includes a bit of friendship will yield plenty of benefits for both you and your business.
While running your own small business can be a deeply rewarding and exciting enterprise, you definitely need to play it smart to stay ahead of your competitors, even if they have far more resources at their disposal than you do. By following these tips and avoiding all of the small fees which frequently help bury small businesses, you'll be far more likely to thrive well into the future.