2 articles Small Business

Accounts payable: Paying suppliers and vendors electronically in Canada

Electronic money transfer

Previously, I discussed the disadvantages of using physical means of payment — specifically, cheques — for paying your small business’s suppliers and vendors. In this article, I will review some electronic alternatives to cheques.

Electronic payment options for small businesses

There are quite a few options that all offer advantages over cheques.

Pre-Authorized Debit (PAD)

If you have a vendor that bills on a regular basis and you have a good business relationship, the easiest long-term option for you would be to sign a Pre-Authorized Debit (PAD) agreement. It does take some initial setup, since you need to provide them with your bank information (often with a void cheque) and they will withdraw funds when a bill is due. This can work well with a credit card company or a utility provider. Smaller providers, such as a bookkeeper, can also bill this way. There will be no charge to you, and there is no need for active involvement on your part (or your bookkeeper), since the payee initiates the withdrawal.

Credit card payments

Some of your suppliers or vendors probably accept credit card payments. This can be convenient for both parties, and in some cases the vendor might regularly auto-charge your card. There are fees on the receiving end, which means this is not a widely accepted method of payment, especially for your smaller suppliers and vendors.

Online bill payment

Some companies pay banks to include them in a list of online payees. To pay a bill, you need to first set up the payee through your online banking interface by searching for the payee and entering your account number. Then to transfer the funds you need to enter the amount. There will be no charge to you, but this option does require active involvement on your part. The payment is processed by the next business day, although it might take a few days for your payee to recognize it as received.

Interac e-Transfer

The vast majority of Canadians have heard of Interac e-Transfers. To set up a payee, you simply need to enter their email address. To send funds, you need to enter the amount and likely create a password which the payee enters as they accept the funds. Some payees have configured automatic deposit, so that they don’t have to enter a password — the funds are deposited in their account as soon as you initiate the payment.

There may be a charge to you, depending on your banking arrangement. One of my clients that uses e-Transfers pays $1.50 per payment. Other clients pay nothing, as it’s included in their banking plan. This option requires active involvement on your part. Payment is processed the same day, provided that the payee accepts the payment.

Electronic Fund Transfers (EFT)

Electronic Funds Transfers (EFTs) are a lesser known arrangement for small businesses, and are usually included in a higher tier banking plan. They’re roughly equivalent to Automatic Clearing House (ACH) payments in the USA.

An EFT requires you to know both the recipient’s bank details. You might need to request a void cheque and enter the information yourself. Then the process is similar to an Interac e-Transfer, except there is no need to create a password, and the funds are automatically deposited without requiring any acceptance on the payee’s part. This payment process does require active involvement on your part. Funds are usually transferred overnight.

You can speak to your bank to see what options are available, and the associated fees. One of my clients that uses this method pays $0.85 per transfer.

Wires and alternatives for international payments

Wires are a reliable method to send funds, especially internationally. You would need quite a bit of information, especially for international wires, such as IBAN / SWIFT numbers and the recipient’s bank address. Wires are also expensive. They can cost anywhere from $15 to $70, with additional fees on the recipient’s end, and that’s not counting any potential foreign exchange costs.

A wire is fairly quick (can be completed overnight) and does require active involvement on your part. However, if there is foreign currency exchange involve, consider using a third-party service such as Wise (formerly TransferWise) or OFX, where you can save a significant amount not just on the wire transfer fee, but also on the foreign exchange fee and spread.

What to consider when evaluating the options

The electronic options above are all quite reliable and are less prone to fraud and error as compared to cheques. As long as you enter all information correctly, the recipient will receive the funds relatively quickly. You also have more control over the process, since you don’t need anyone to print cheques and mail them.

There are still limitations and other factors to consider when evaluating your electronic payment options. As well, your suppliers or vendors might all prefer different methods of payment. Sadly, there is no silver bullet in comparison to cheques.

Dollar limits

Online bill payments, Interac e-Transfers, and EFTs can all be subject to bank limits. I have some clients who have a daily $3,000 maximum for cash outflows. Maximums can often be increased if you speak with your bank.

Domestic vs. international

Your payment method may be limited only to domestic transactions, whereas you’d have to use a different method for international payments.

Data entry and detail

Do you have a lot of time for manual administrative work? You have to make sure all information such as email addresses and bank account numbers are entered correctly. And each time you process a payment you have to enter it yourself, unless you allow a bookkeeper or assistant full access to the bank account, which brings us to the next consideration.

Tiers of approval

Not all business owners want to give employees full access to the company’s online bank account. A lot of business owners continue using physical cheques simply because it allows a segregation of duties: a bookkeeper prepares cheques and does all the admin work, the owner signs, and the bookkeeper then mails the cheques. The above electronic payment options do not generally allow for tiers of approval, except in cases of specialized banking arrangements (for a fee, of course).

Troubleshooting on the payee’s side

Most people want to receive money, right? Well, I would answer “yes”, but not everyone is so good at actually getting this accomplished. Take an Interac e-Transfer for example: some of my clients (and their vendors) routinely neglect to check their emails, or maybe the email goes to spam, or maybe they gave the wrong email address to begin with. I’m not saying they are all scatterbrained. It’s just that not everyone is particularly detail oriented and maybe they are too busy to look at some things.

Now, you can say that if a payee misses a payment email, or deposits it but forgets about it, it’s fully their problem. I agree. But how much time do you want to spend resolving disputes and checking old emails to prove your innocence?

Inability to auto-schedule or defer

Unlike a post-dated cheque, not all of the above methods allow you to schedule multiple payments in advance or defer a payment to a later date. This means you can sometimes only process payment when you are available.

Time and cost

The transfer of funds itself, when fully electronic, should not be costly. However, some are more costly than others, and cost is almost measured in terms of your time.

Record keeping

Every business owner needs accurate reports to know how the company is doing. For example, what are the remaining unpaid bills and when are they due? Let’s say you had a change of staff or you got super busy and now you’re behind on your bookkeeping. How will you sort out who was paid and when and for what? You may have to spend time checking old bank statements and sorting through old emails.

It’s clear that for even a moderate transaction volume, the above electronic payment options may not give you a useful “paper trail”.

And what about updating the actual books? Well, you need to manually mark each bill as paid on the proper date. There is definitely an administrative burden.

Is there still a better way?

When it comes to these payment options, like most things in life, there are pros and cons. It can be tricky to manage multiple payment options while managing your small business as well, nevermind the challenges in receiving payments from your clients!

In my next article, I will review two payment systems available in Canada and that I’ve used, Plooto and RBC PayEdge (formerly WayPay), which attempt to address some of the challenges with electronic payments.

About the author

I am a Chartered Professional Accountant working somewhere in Canada. I provide controllership, training, and consulting services to small and medium sized businesses. I also work with non-profit organizations. I write only about my experiences in the business world and I am not selling or advertising any company or service, including my own. Audrey Silva is my pen name.

Dear Canadian businesses: It’s time to stop using cheques

Void cheque

Many of us Canadians stubbornly cling to cheques: we write cheques, we receive cheques, we deposit cheques. It’s time to stop. They’re expensive, insecure, and inefficient.

The status quo is comfortable

Many businesses know that it’s important to find ways to optimize operations and decrease costs. Studies show a significant decrease in business costs resulting from the switch from cheques to electronic forms of payment.

Unfortunately, change can be a big hurdle. As a Chartered Professional Accountant, sometimes when I make a recommendation to a client, such as moving to a different type of payment, I have to convince not just the owner of a business, but in the case of a larger entity or a charitable organization, I have to speak to several people on the board of directors, most of whom are quite reluctant to consider something new.

If you’re a cautious person, especially when it comes to payment processing, you’re not alone.

But don’t get stuck in the past

I was once speaking to a potential client. This client’s bookkeeper had been with her for a couple of decades, but the bookkeeper was about to retire.

As we spoke, she revealed to me that she does not trust technology and in fact she refuses to even use online banking. No matter how much I tried to explain that the only one in charge of her account is herself, she still preferred going to the branch for each transaction, often daily. She explained that the branch was close to home and she didn’t mind.

I did not take on this client. I just felt it would be too difficult to justify my rate in such an inefficient operation. If your business gets stuck in the past, you’ll have significantly fewer choices in terms of qualified people you can hire.

Cheques are not secure

Have you run into any of the following scenarios yet?

  • The bank makes a mistake and allows a fraudulent cheque to be processed.
  • The cheque does not reach the correct destination in the mail.
  • The recipient makes an error, such as misplacing the cheque.

On the more innocent side, a vendor can deposit a cheque but later forget, or they can make a mistake when reconciling bank statements, and then complain that they didn’t receive payment. Depending on how much time has elapsed, it can take time and resources to resolve the situation — as a busy business owner, what do you want to focus your time on?

Some more sinister things happen too, such as cases of actual fraud. Maybe it hasn’t happened to you, but it’s not as rare as you think. Below are two examples from my own experience.

A client issued a cheque and it cleared. No issue on our side. However, a while later the vendor complained about not receiving payment. It turns out they never received the cheque in the mail. It’s not very difficult for a fraudster to intercept mail and deposit it in a similarly named company, which is likely what happened based on the bank investigation that followed. The investigation took several weeks.

Another client had a cheque clear… but it wasn’t a cheque my client ever issued. Based on the investigation, it looked like the fraudster engaged in some photocopy magic and created a whole bunch of fake cheques with different account numbers and made deposits in various banks to see if anything cleared. In fact, when we saw a copy of the cheque it didn’t even have my client’s name on it.

The good news: because the second client had fully transitioned to using electronic payments, as soon as we logged in to online banking, the cheque was so noticeable it was practically yelling at us to do something. We immediately contacted the bank and got the funds back. The next day, the same thing happened! Clearly the fraudster caught on that ours was a real bank account. We again got the funds back, and unfortunately had to close this account. Transitioning bank accounts was relatively smooth because we had no cheques in transit.

The hard costs of cheques

A new business cheque book can cost anywhere from $100 to $300. A company with multiple bank accounts (such as CAD and USD), or a company that needs its logo on cheques, will sometimes spend more. Let’s say each paper cheque costs $1. I am not including the cost of mistakes or void cheques.

Then, if it’s impossible to hand someone a cheque in person, it needs to be mailed. Let’s say that’s $1 in postage. So, at a minimum, a company spends $2 just to get a cheque out the door.

As we know, banks charge fees. Some banks charge a fee for each cheque that clears. If you want to avoid this you might have to maintain a minimum balance or change to a different fee tier. And what about correcting for errors? A stop payment can easily cost $10 each. Each cheque can end up costing $3-$4.

Paper paper everywhere

If a business is organized, the owner takes the cheque stub, staples it to the original invoice, and neatly files it. Or maybe in your company, you pay someone else to do it. Some companies have very few payments, so it’s not a big deal. But some have a lot.

How much paper do you store in your office or in a storage space? How easy is it to find later? Is your paper secure and protected? Could the time and money managing paper be spent better elsewhere?

The physical can tie you down

As I write this at the beginning of summer 2020, when Canada is experiencing various shut downs related to COVID-19, I sometimes wonder about that potential client that visits her bank branch every day. I can only hope that her business is able to operate and that she’s safe.

How are you managing your business during the pandemic? Do you physically go to your office or bank? Does the bookkeeper drop off a stack of cheques for you to sign on your porch, in a plastic bag to protect them from the elements?

You’re not all in the office anymore

Imagine this: a charity needs to pay a supplier. The bookkeeper issues a cheque. Each cheque requires signatures from any two of the signatories on the board. They all live in completely different parts of the city.

Usually, an employee (or sometimes, a volunteer) has to get to each signatory and then bring the cheques back for mailing. Or maybe the charity requires that you come in to sign cheques on location. Even during normal times, this can be a bit of a pain.

Now, imagine you’re a signatory on the board and there is a pandemic. You are worried because you have an immuno-compromised family member. But you need to sign those cheques immediately because the charity is in financial trouble and it’s organizing an emergency online fundraiser and the web developer wants to be paid right now or else it won’t happen.

There are alternatives!

I hope I have convinced you that it’s time to start looking at other options. You probably know of, or have even used, some forms of electronic payment. But how can they be used by your business in an efficient manner?

There are many alternatives to cheques, including Interac e-Transfers, EFT/ACH, wires, and companies that specialize in accounts payable payment processing. In subsequent articles, I will explain these in more detail!

About the author

I am a Chartered Professional Accountant working somewhere in Canada. I provide controllership, training, and consulting services to small and medium sized businesses. I also work with non-profit organizations. I write only about my experiences in the business world and I am not selling or advertising any company or service, including my own. Audrey Silva is my pen name.