Small businesses in the U.S. employ nearly half of all private sector workers, and local communities often depend on them to create economic opportunity. But the Federal Reserve’s most recent Small Business Credit Survey found that 80% of respondents reported challenges related to how they send and receive payments from customers and other businesses. Dealing with fees and not getting payments fast enough were two of the most frequently cited issues.

Brian Clarke is a deputy director in Regional & Community Outreach at the Federal Reserve Bank of Boston. He’s a payments analyst, and he’s also on the survey’s outreach team. We spoke with him about the survey’s key findings – and something many people may not know about one of the most popular payment methods.

Why is it important for the Fed to ask small businesses about their experiences accessing credit and using payments?

The voices of these smaller firms, which have anywhere from 1 – 500 employees, often aren’t represented in discussions about the key issues businesses are currently facing. The annual Small Business Credit Survey typically asks these firms about their debt needs and financing challenges.

But there’s also been a growing interest in payments as technology has evolved over the past decade. We know that customer payments are the main source of revenue for small firms, so it’s important for researchers to have reliable data about the effects of these issues on their bottom lines. The 2024 Report on Payments includes data from 4,920 small employers across a variety of industries. They were asked which types of payments they use most and what their biggest challenges are.

The survey indicates the most common challenge for these businesses are related to credit card processing fees. Why is that?

Here’s something most people may not be aware of: When you use your card to buy a service or an item, the business itself does not receive the full value of your payment.

For example, let’s say I spend $20 at my local corner store. If I pay with cash, the store will receive exactly $20. But if I use a credit card, the card payment system will take a certain percentage of the profit, leaving the business with slightly less than $20. It may only be a small amount, around 2-3%, but it can certainly add up – especially now that customers use cards a lot more frequently than cash. Over time, that can impact profits, especially for small firms.

The report found that credit cards are the second most commonly accepted form of payment, followed by cash. But the most popular option is checks. Did that surprise you?

The popularity of checks being used and accepted might seem mind-boggling at first because people are using checks a lot less than they used to. But when you think about how businesses are paying each other for goods and services, it makes more sense.

This survey included small businesses across a variety of sectors. We saw that checks tend to be most commonly accepted in manufacturing, and the professional services and real estate category.

For instance, a construction company that’s ordering thousands of dollars of drywall from a supplier probably isn’t as likely to put it on a credit card; they’re going to write a check. And by using that method, they’re also avoiding those card processing fees we talked about.

Overall, and when you look at regular customers, card payments tended to be much more popular than checks in retail, and in leisure and hospitality.

Businesses also reported challenges related to how long it takes to access the funds they’re being paid. How might tech advances in payments help with that problem?

Instant payments could be huge for small businesses for this exact reason. If your customers are typically using checks, then it’s going to take several days for them to mail it, you to receive it and deposit it, and for it to clear.

But an instant payments system that handles bank-to-bank transfers, like FedNow, can condense that process into seconds: Once the payment is sent, you receive it instantly. That can make a big difference in small businesses’ cash flow, especially since their top costs are often related to employee payroll and goods.

I do think the core function of the payments system – being able to send and receive money – works well. But it’s also important to recognize the pain points businesses are experiencing and the opportunities we have to make tech advances like instant payments available to more of them.

Read more about payments innovation on bostonfed.org.