What's better: Get paid less now, or more later?

August 1, 2007 12:13 PM

AccountingFilter: Client convenience aside, does receiving "instant payment" for my services via PayPal make financial sense rather than waiting for a check to come in the mail 30 days later? Help me unlock the secrets of the Time Value of Money.

I'm sure this is a complete textbook example of TVM, but humor me.

An example:

Let's say that on July 1st, I perform work for a client, and the total for the work is USD $150.

In which scenario do I come out ahead on July 31?

Scenario A.) In which I process an "instant payment" for the client at the time of the services, and the client pays immediately via PayPal. PayPal takes out their 3%+$.30. I get the rest, and put it into my high-interest savings account which earns 5% annually and compounds monthly.

or

Scenario B.) In which I wait 30 days for a check to arrive in the mail, deposit the check's funds into the same 5% high-interest savings account. Assume that the check clears instantly, and that I have access to the full $150 on July 31.


So far, my guess is that if the 30-day window were expanded to 90 or 120 days, it would make sense to get-what-you-can right now, paypal fees be damned, but at 30 days, waiting for the check nets me more money.

I've checked out the wikipedia entry for Time Value of Money, but can't figure out the interest rate (decimal or integer?), period (month? year?). It sounds so easy, but my brain keeps getting in the way when it sees the equations.

posted by Wild_Eep to work & money (18 comments total)

If your savings account gives you 5% annually, that's only 5/12% (a little less than one-half percent, let's say 0.4%) monthly. Meanwhile PayPal is taking 3%. The 3% you lose to PayPal is far greater than the 0.4% you'll get in interest. In fact, the period would have to be somewhere around 7 or 8 months in order for it to make sense to take the PayPal hit.

The equations are fine if you want an exact number. No need to bother with them if you're just looking for a rough estimate.
posted by DevilsAdvocate at 12:34 PM on August 1, 2007

You come out ahead getting the money now, because you don't want to give clients more time in which to decide to not pay you.
posted by smackfu at 12:44 PM on August 1, 2007 [1 favorite]

As a strictly TVM issue, DevilsAdvocate nails it. Smackfu's point is good, though.

Another thing to consider with money and time: even if the later payoff is bigger, you sometimes can't afford to wait. As a "strictly accounting" question, you have to consider that there's bills to pay, etc. Sometimes it really matters that you have $150 right now.
posted by yesster at 12:56 PM on August 1, 2007

Mathematically, you come out slightly ahead getting the money now, even with the paypal hit. Because:

(150 - (150 (.03) +.30)= $145.20 (your take after the paypal transaction)
$145.20 + (145.20*.04) = $151.01 (your account after the interest accrues on your savings on July 31)
posted by desjardins at 1:00 PM on August 1, 2007

I suspect that outside the perfect (i.e. without human interference) world of mathematics, Smackfu is correct. That 2 and 7/12 percentage you'll lose with Paypal will be less than what lazy people who can't put a stamp on an envelope or write a check will cost you.

You're making the assumption that people maintain the same likelihood to pay not matter what. In the real world, this is nearly never true. Take it any way you can, >3% is cheap!
posted by Dee Xtrovert at 1:00 PM on August 1, 2007

as far as the wikipedia article, you'd use the future value equation.

Future value of your $150 on July 31 (after subtracting the paypal fee) = 145.2 * (1 + 0.04)^1
posted by desjardins at 1:03 PM on August 1, 2007

I agree with the previous posts.

Think of a small business with employees that have to be paid this month. If you allow your clients to pay their bills later, you need to bridge the gap - maybe with a credit.

So in real life, the decision should not only include TVM, but also a cash flow perspective.
posted by cwittmann at 1:06 PM on August 1, 2007

@desjardins: No, you come out ahead with the savings account, because you get $145.20 + ($145.20*0.05/12) = $145.81 on July 31st.
posted by ssg at 1:07 PM on August 1, 2007

Oops, I mean you come out ahead with the cheque.
posted by ssg at 1:08 PM on August 1, 2007

To find out how far ahead the payment would be by cheque for it to make sense to take the payment by paypal, you would use: 145.20 * (1 + 0.05/12)^x = 150 ==> x ~ 7.8 months.
posted by ssg at 1:19 PM on August 1, 2007

ah, my equations are right, my math sucked.
posted by desjardins at 1:51 PM on August 1, 2007

Thanks for all the quick answers.

My cashflow is stable, and I'm the only employee, but I was trying to determine if there was a financial advantage to getting paid right away. In terms of dollars and cents, it appears the answer is "not if PayPal is eating that much of a fee and the comparison time is 31 days".

I guess not having to deal with depositing checks would also be worth some amount of money, and should be factored into a more realistic scenario...and my clients could earn whatever rewards their credit cards offer.

I guess I'm lucky to have clients that always pay, even if the terms are Net30.
posted by Wild_Eep at 2:14 PM on August 1, 2007

If you think your clients would pay for the "convenience" of using their credit cards, you might ask them to pay the processing fee, thereby getting the best of both worlds.
posted by toomuchpete at 2:31 PM on August 1, 2007

what about opportunity cost, if your business is growing you will need cash to manage outflows.
posted by trashcan at 3:15 PM on August 1, 2007

My company just started accepting credit cards and was advised by our lawyers that it's illegal to pass the percentage the credit card companies take when we charge customers' cards - as toomuchpete suggested. It's the company's decision to accept payment in that manner and is responsible for the service charges incurred.
posted by youngergirl44 at 7:31 PM on August 1, 2007

It's not a small point about the hassle of deposit the check. If you pass by a branch anyway and have to use the ATM, it's probably negligible, but if you make a special trip, you're going to burn through that $4+ in no time at all.

Obviously, it makes more sense to not do paypal the higher the amount it. We considered it for payments because of the instant nature, but our invoices average $2 - 10,000, and there's no way I'm giving paypal hundreds of dollars.

If I urgently need money and the client is able to pay immediately and is willing, I have them drop it in a fedex box and reimburse them for it.
posted by maxwelton at 8:59 PM on August 1, 2007

One thing glossed over is the value of immediate payment versus non-payment. 30 day terms makes you a creditor ... when the work has been done the debtor has little incentive to pay on time or to pay at all compared to the position of "if you don't transfer the money now I don't start the work."

Also if the creditor goes belly up the debtor is screwed.
posted by jannw at 8:02 AM on August 2, 2007

"My company just started accepting credit cards and was advised by our lawyers that it's illegal to pass the percentage the credit card companies take when we charge customers' cards - as toomuchpete suggested. It's the company's decision to accept payment in that manner and is responsible for the service charges incurred."

Huh? I think you mean "against the merchant agreement" and not "illegal". To that end, Paypal doesn't require its users (as far as I know) to abide by the merchant agreements, so that's a moot point.

I can't think of a way that a legislature would be able to keep two parties from agreeing on who pays the processing fees for PayPal, a credit card, or anything else.
posted by toomuchpete at 8:31 AM on August 2, 2007