How to Accept Recurring Payments as a Small Business

Recurring payments allow businesses to collect payments while also offering the customer a good experience.
NerdWalletNov 11, 2020

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Recurring payments are an efficient way for a variety of different types of businesses to collect payments while also offering the customer a good experience. Setting up these payments requires a little backend work, but nothing that your payment service or merchant services provider couldn’t help you with.

Different payment service providers have different approaches and fee structures when it comes to executing these payments. Let’s take a closer look at recurring payments: What they are, how they work and the types of businesses that might want to use them.

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What are recurring payments?

Recurring payments are repeated payments made to your business based on a predetermined schedule. These payments are unique in that the customer does not need to be physically or virtually present for the payment to be processed. Instead, the customer agrees to share their payment information (typically a debit or credit card) with a business’s payment processor and for their card to be charged based upon a prearranged payment schedule. The payment schedule could be yearly, monthly, weekly or even daily. You can also set an expiration date on recurring payments, or allow them to continue for an unlimited amount of time.

There are two different types of recurring payments: fixed payments and variable payments. With a fixed recurring payment, a customer is charged the same amount every time, as is the case with a magazine subscription or gym membership. A variable recurring payment means the amount owed is subject to change from payment to payment. Examples of variable recurring payments include usage-based charges like utilities or a phone bill.

The benefits of recurring payments are obvious: It saves both the merchant and the customer time, and it optimizes the checkout experience. In addition, automating payments improves customer retention. Operating with recurring payments also makes it easier to predict cash flow.

How do recurring payments work?

In order to process recurring payments, you first need to get a merchant account or payment service provider. Both allow you to accept payments electronically, which is how recurring payments are processed.

A payment service provider handles all aspects of electronic payments, including processing, securing and depositing the funds in the merchant’s business bank account. A merchant account, on the other hand, is a special type of bank account through which funds from credit and debit card purchases are deposited. If you use a merchant account, you’ll also need to find separate solutions for processing and security.

How you set up recurring payments will differ depending on whether you accept payments online or via invoice. For businesses that use invoices, recurring payments will be charged every time invoices are processed. For this to work, customers must agree to save their payment information within a business’s invoicing software. When the business processes its invoices in accordance with its payment schedule, the customer should receive an email or some other form of digital receipt informing them that their payment has been processed. Some businesses also notify customers ahead of time that their recurring payment will soon be processed.

For online purchases, customers typically opt-in to recurring payments during the initial checkout process. After that, subsequent payments are processed automatically, without the merchant or customer having to perform any action. Customers will still typically receive some sort of digital notification when their payment has been processed.

What happens when a recurring payment is processed is the same thing that happens when an electronic credit card payment is processed: The payment processor contacts the merchant’s bank (known as the acquiring bank) and the customer’s credit card network (such as Visa or MasterCard).

The credit card network contacts the bank that issued the customer their credit card (known as the issuing bank). The issuing bank checks to ensure that the transaction isn’t fraudulent and the funds are available in the customer’s account. If the transaction is approved, the credit card network will inform the payment processor. The payment processor then puts a hold on the funds for one to two business days to ensure that the charge isn’t fraudulent. Afterward, the funds are released into the merchant’s account.

Businesses that use payment service providers typically don’t have to wait one to two business days for their funds to become available. Instead, the payment service provider will front the funds from the purchase, minus fees, then wait for the actual funds to be deposited into its merchant account.

What kinds of business use recurring payments

There are many use cases for recurring payments. Some of the most common are:

  • Subscription services: This could include media products like newspapers, magazines or streaming services, subscription box services like Dollar Shave Club or Blue Apron or SaaS products like Shopify or WordPress. Most subscription services feature fixed recurring payments at monthly intervals.

  • Membership services: There are lots of different kinds of membership-based businesses that use recurring payments to operate more efficiently, including gyms, coworking spaces, social clubs and professional organizations. Like subscription services, membership payments are typically fixed recurring payments at either monthly or yearly intervals.

  • Government and municipal services: Offering recurring payments can ensure things like taxes and utility bills are collected in a timely manner. These types of repeating payments may vary from statement to statement in terms of cost. Specific examples include gas, water and electric bills, property tax bills and student loan payments.

  • 1:1 services: 1:1 services are those in which the provider is being compensated for its time. Examples include legal services, tutoring, childcare, cleaning services, personal training or any other type of 1:1 service that typically occurs at regular intervals. Offering recurring payments in these scenarios makes the transaction as seamless as possible.

  • Financial services: Recurring payments can play an important role when it comes to personal finance, especially in terms of saving and planning for retirement. For example, many 401(k) and IRA plans will allow you to arrange recurring contributions at regular intervals, ensuring you are responsibly saving for the future. You can also arrange recurring payments for loans so you never go into default.

How to set up recurring payments

Different payment service providers and merchant services handle recurring payments in different ways — and at different rates.


Square is a leader in the financial and merchant services space and offers a recurring payment feature via its free invoicing software, Square Invoices. With Square Invoices, you can set up a recurring invoice and assign it to customers who have a card on file. Customers can share their credit or debit card information via an online form or by having their card swiped in a Square terminal.

Square Invoices users also have the option to offer discount codes in their invoices and allow for tipping. Once you have completed the creation of your invoice, you can set a schedule for when invoices will be processed. When invoices are processed, customers with a card on file will receive an email letting them know their payment has been processed

Square Invoices are free to use (unless you upgrade to Square Invoices Plus for $20 per month), but all recurring payments come with a 3.5% plus 15 cents transaction fee.

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Stripe allows users to set up recurring payments via its Stripe Billing feature. The process is fairly straightforward. Via your account dashboard, assign a pricing plan to a product or service you wish to collect recurring payments for. Then simply subscribe a customer to that pricing plan. When you process invoices, customers subscribed to pricing plans will receive emails detailing what they owe and their payment status. You can also add additional items to invoices like one-off charges and setup fees. Stripe allows customers to pay by ACH transfer, echeck and credit and debit card.

Stripe also offers a variety of third-party integrations that allow you to integrate recurring payments into e-commerce platforms. You can opt to have a pop-up membership or subscription form embedded in your website or email. Like Square, Stripe saves customer payment information in a PCI-compliant virtual vault.

Setting up recurring payments with Stripe is completely free, but each recurring transaction will cost you 2.9% plus 30 cents. Although that price is cheaper than Square, Square also offers free POS software and a mobile card reader, making it a better option for accepting in-person payments.


To collect recurring payments using PayPal, you’ll first need to sign up for either a PayPal Virtual Terminal or a Payments Pro account, both of which cost $30 per month. Once you have set up an account, you can create a recurring charge and assign it to a product or service from your account dashboard. You will then be able to embed a “Subscribe” button onto any webpage or marketing material. When customers click the “Subscribe” button, they will be directed to a PayPal page where they can enter their payment information. PayPal will create a customer profile for all who subscribe and process payments based on a schedule you create.

Note that if customers already have a PayPal account, they can opt to use it as their payment option for a recurring payment. Using recurring payments with PayPal will cost an additional $10 per month, on top of the $30 account fee. PayPal also charges 2.9% plus 30 cents per recurring transaction, making it one of the more expensive recurring payments options.

A version of this article was first published on Fundera, a subsidiary of NerdWallet.