At some point, every small business owner will consider offering gift cards to boost sales and meet customer expectations. This consideration makes learning how gift cards work a necessity for small business owners.
Gift cards are simple, but some misconceptions surround them. We’ve put together a guide to gift cards for small business owners to help you understand the ins and outs of these powerful sales tools. We’ll start with the basics, exploring the different types of gift card programs and how gift card transactions work. Lastly, we’ll discuss gift card liability and whether you should be liable for the gift cards you sell.
Types of Gift Card Programs
Two types of gift card programs exist: ones POS software controls, and ones the Merchant Processing Bank controls. Gift cards controlled by POS software are a great option for new businesses venturing into gift card programs for the first time, as they have no transaction fees associated with them. The POS software will already have gift card functions like “activation,” “reload,” and “check balance” readily accessible. The only downside to POS software-controlled gift cards is you may need to buy an MSR reader for the gift cards. Some POS computers still come with them, and some do not.
Merchant Processing Bank-controlled gift cards are suitable for larger companies. You can offer gift cards that customers can use at different establishments if you have multiple locations or own diverse businesses under one company. For example, customers can purchase a gift card at your coffee shop and redeem it at your sports bar. Also, the Merchant Processing Bank provides customers with access to a web portal where they can conveniently reload existing gift cards or place orders for new ones. Merchant Processing Bank-controlled gift cards require customers or employees to swipe them through the pin pad.
How Does Money Work With Gift Cards?
There is a misconception about how money operates with gift cards. There is no separate account for holding the money received when selling a gift card. The money associated with the gift card enters your bank account with the rest of the sales made that day. Then, you give the customer the products and deduct the amount from their gift card balance when they redeem their gift card. That’s it. Think of gift cards as getting money from future sales today.
Although the money flow for gift cards is straightforward, reporting and accounting procedures for gift card sales can be more complex. Business owners should not report gift card money as part of the day’s normal sales when they sell a gift card. It should be a separate line under the Income section in your End of Day report. Money coming in from selling a gift card should go into a separate account for accounting purposes. The money becomes income for the day when a customer redeems their gift card.
Gift Card Liability: How Does It Work?
It is a common practice for small businesses to avoid assuming liability for gift cards. Therefore, they can always adopt the policy that customers cannot exchange gift cards for cash. However, some states require you to cover the cost of gift cards in certain situations.
Let’s say a customer buys a $100 gift card today. Then, a fire breaks out the next day, destroying everything and causing you to declare bankruptcy. Depending on the state your business is in, you do not have to reimburse that customer the $100 for the gift card they just bought. Of course, you can if you want to, but small business owners will rarely choose to do so. Unfortunately, the customer loses their $100 in this situation.
Gift cards can seem daunting at first. Hopefully, this guide to gift cards for small business owners has shown you they aren’t that complex. Often, needing to offer gift cards can be a good sign that the business is growing. Taking the time to learn how gift cards work is a crucial step in your business’s growth. Total Merchant Supply can offer your small business both POS systems and Merchant Processing Bank-controlled gift cards. Contact us today to learn more.