As your small business begins to grow and your payroll increases, you may consider using direct deposit to pay your employees. Though using direct deposit can improve your business’ efficiency and even reduce costs, it is not for every business. The following is a brief guide to setting up a direct deposit, including its benefits and drawbacks.

How does a direct deposit work?

When it comes to setting up your direct deposit, you have several options. You can set up a direct deposit through your payroll service provider. There are also many banks that provide an option for direct deposit as part of their payroll services. Thus, you could set up direct deposit directly through the bank where you have your business bank account. Alternatively, you can choose one of many popular and easy-to-use accounting or payroll software programs, such as QuickBooks, Peachtree, or ZPay.

Once you have decided which system to use, your employees will fill out a form with their bank account information authorizing you to deposit funds directly into their accounts. After a trial run to verify that all the account routing information is correct, funds can then transferred from your business to your employees’ accounts.

Instead of receiving a paycheck, employees will receive a receipt of payment that specifies how much money was deposited into their accounts and when the transaction was completed. This receipt can be either in paper form or can be sent via email.

What are the benefits?

Depending on how big your company is and which direct deposit option you choose, you can save a significant amount of money on payroll processing costs, including the costs of labor and paper. Moreover, direct deposit is good for your employees who no longer will have to wait for their checks to clear, and who will receive their paychecks automatically whether they are on vacation, sick leave or away on a business trip.

What are the drawbacks?

But despite all of the benefits, direct deposit services may not be for all small businesses. Direct deposits come with processing fees. These fees are usually relatively small compared to the costs of payroll with regular paper checks. If, however, you only have a few employees, then direct deposit may not be cost effective for your business.

You should also do your research before deciding on which financial institution to use. Each institution has its own fee structure that may or may not be favorable to your small business. One bank or institution, for example, may charge a flat monthly fee for unlimited direct deposit transactions, while another might charge a fee for each transfer made.