MAKING A PAYMENT - Welsh Government
MAKING A PAYMENT
There are many different ways of making and receiving payments. Some businesses have to convert currency from customers overseas into their own currency. The Euro has removed the problem of currency conversion for the countries of the European Union that have adopted it.
Cash
Cash is the most commonly used form of payment. Notes and coins are a quick and easy way to pay for items. Once cash is handed over for goods and services received the transaction is complete. Being paid in cash offers businesses several advantages:
➢ A business receives the payment immediately, without having to wait for a bank to transfer money into its account. This enables the business, if it so chooses, to use the money immediately.
➢ Payment in cash ensures that a business does get paid. Other forms of payment such as cheques are more open to fraud.
Payments in cash also have its disadvantages:
➢ A business paid in large sums of cash will have to arrange to move the money to a bank. This may involve the expense of using a security firm to prevent the money from being stolen in transfer.
➢ A business that is paid just in cash can only sell direct to its customers and not on the Internet or mail order.
Cheque
To be able to make a payment by cheque a business (or person) must have a current bank account and be issued with a cheque book containing a number of cheques. A cheque acts as an instruction to a bank to take money out of the drawer’s account and put it into the payee’s. Businesses often use cheques to pay invoices from other firms.
Paying by cheque has several disadvantages:
➢ Sellers of products will not receive their money immediately. It can take five working days for the cheque to clear through the banking system.
➢ In some circumstances the seller might not receive payment because the cheque “bounces”. This means that the purchaser does not have enough money in their bank account to pay the cheque.
➢ Some banks charge buyers a fee for each cheque that the write and charge sellers for paying cheques into their bank accounts. All banks will charge customers fees and interest if they go overdrawn.
There are also advantages to pay by cheque:
➢ Buyers may have bank guarantee cards. These guarantee that the amount on the cheque will be paid into the seller’s bank account (usually limited to £100).
➢ Buyers know that writing out a cheque means that the money will not leave their bank account for several days. This means that they may receive a few extra days’ interest on the money.
Credit Cards
Although there are many different types of credit card, they are all similar in many ways:
They are plastic payment cards that allow the cardholder to make payments
The holder can use the credit card to borrow money up to a limit agreed with the issuing company
All cards charge interest on money that is borrowed, some charge an annual fee also.
Cardholders have to make a payment on their card each month. They can make a minimum payment or pay the full amount owed.
The advantages to credit cards are:
➢ For purchases credit cards are an easy method of borrowing money
➢ Credit cards are accepted by most businesses and can be used in may foreign countries
➢ Buyers can borrow money without being charged any interest for up to four weeks
The disadvantages of credit cards are:
➢ Sellers have to pay a fee to the credit card each time one of their customers uses a card. This is about 2% of the amount paid.
➢ Some credit card companies charge very high interest rates on credit cards. They can be a very expensive way of borrowing money.
Debit Cards
Debit cards look very similar to credit cards but there are differences:
• Debit cards cannot be used to borrow money
• They are linked to a bank or building society account. Card holders must have money in their accounts to be able to use their debit cards
• Debit cards provide sellers with an immediate payment. Money is moved from the buyer’s bank account to the seller’s account as soon as the card is used.
Many businesses prefer to receive payment by debit card, as they do not have to pay a fee.
Direct Debit
Direct debit allows customers to pay regular bills automatically. A direct debit is an agreement under which a business selling goods and services can take money from the customer’s bank account. Paying by direct debit has its advantages for both buyers and seller:
Direct debits are free: buyers do not have to pay to use this method of payment
Buyers do not have to remember to pay regular bills. The direct debit scheme does this automatically.
Sellers know that they will receive payment on time.
Sellers can save time and money, as they do not have to pay cheques into their bank account or send out invoices to customers.
Credit Transfers
Credit transfer or direct credit, is a method of payment that allows money to be moved directly from one bank account to another. Electronic transfer of this kind is used by businesses in different ways:
Many businesses pay their employees each week or month by credit transfer.
Increasing numbers of businesses pay their suppliers using credit transfer.
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