How Should a Small Business Handle Refunds?

By Bill Stilwell · Last reviewed October 17, 2026

The short answer

Decide in advance who can approve a refund, how much they can approve, how fast it goes out, and how it’s recorded. Send refunds back the way the customer paid, and log each one with the reason. Some federal rules, like the Federal Trade Commission (FTC) Cooling-Off Rule for certain sales made at a customer’s home, set refund deadlines, so check which ones apply to you and your state.

What this means

10.7.8 Refunds

A refund process answers four questions:

Authorization: who can say yes, and up to what amount (see 10.6.1 Spending and Refund Authority)
Timing: how soon the money goes out after approval
Method: usually back to the original payment method
Recordkeeping: how it’s logged in your books and the customer’s file

Federal rules can set the timing in some cases. Two examples:

The Cooling-Off Rule. For many sales of $25 or more made at the buyer’s home, or $130 or more at a temporary location like a fair or hotel, buyers can cancel until midnight of the third business day after the sale. The FTC says the seller then has 10 days to refund the money. The rule has exceptions, including repairs the customer asked for at home.
The Mail, Internet, or Telephone Order Merchandise Rule. If you can’t ship goods ordered remotely, or the customer cancels under this rule, the FTC sets deadlines for the refund.

Many states add their own rules. Check with your state attorney general’s consumer protection office.

16.6.6 Refund approval

No refund goes out without an approved decision from someone with the authority to make it. This protects you from mistakes and from refund fraud by staff or outsiders.

Made-up example: At Maple Street Salon, front desk staff can refund up to $50 for a service a client wasn’t happy with. Anything over $50 goes to the owner. Every refund is logged with the date, client, amount, reason, and who approved it. The owner reviews the log once a week.

Why it matters

Slow refunds become chargebacks and bad reviews (see 10.7.7 Chargebacks).
Unapproved refunds are a common way money leaks out of a business.
Missing records throw off your books and your sales tax reports.
Some refunds are required by law. Missing a deadline can be a violation.

Who this applies to

Every business that takes payment. Businesses that sell at customers’ homes, sell remotely, or take deposits need to pay the closest attention to the federal and state timing rules.

How to do it

Write your refund policy and show it before the customer pays (see 11.1.8 Refund Policy).
Check which rules apply. Do you sell in customers’ homes or at temporary locations? Do you ship orders? Look up your state’s rules too.
Set approval limits by role, in writing.
Set a target time to send approved refunds, and never longer than any legal deadline.
Refund to the original payment method through your processor, unless the customer paid cash or the law or your policy says otherwise.
Log every refund: date, customer, original invoice, amount, reason, approver, and method.
Record it in your books so revenue and sales tax are adjusted correctly (see 10.5.2 Transaction Recording).
Tell the customer when it was sent and when to expect it.
Review the log monthly for patterns, like the same service or the same staff member.

What proof to keep

Your written refund policy and the date it took effect
Proof the customer saw it, such as a signed agreement or checkout screen
The refund log
Processor records for each refund
Any cancellation forms or written requests

Common mistakes

Anyone can refund anything. Set limits.
Refunding to a different card or account than the one used. That’s a common fraud trick.
Refunding outside the processor during an open chargeback. You can pay twice.
Not adjusting sales tax on refunded sales.
Using door-to-door sales without giving the cancellation notice the Cooling-Off Rule requires.
Promising “no refunds ever” when a federal or state rule says otherwise.

When to get help from a pro

An attorney can tell you which refund rules apply to how and where you sell. A CPA or bookkeeper can set up how refunds are recorded. Questions to ask:

Do the Cooling-Off Rule or my state’s cancellation laws apply to my sales?
What must my refund policy say, and where must it appear?
How do I record refunds so my sales tax reports are right?

Bill’s note

[Bill: add a short note. For example, how you decide when a refund is the right call for SiteSmarty, or a time a quick refund kept a customer relationship or a review from going bad.]

How I did this for SiteSmarty

[Date I did this:]
[What I actually did, step by step: SiteSmarty’s refund approval rule, timing, and log]
[What it cost and how long it took:]
[What surprised me or what I’d do differently:]
[Screenshot or photo to add, with private info blurred: the refund log]
[Result so far:]

Questions people ask

Do I have to give refunds? It depends on what you sell, where, and how. Federal rules like the Cooling-Off Rule require them in some cases, and your state may add more. Your written policy covers the rest.

How fast should a refund go out? As fast as you reasonably can, and never later than any legal deadline that applies.

Should I refund to the original card? Usually yes. It keeps records clean and lowers fraud risk.

Who should approve refunds? Someone with written authority. Small refunds can be delegated with a dollar limit.

Audit check

Line	Question	Pass looks like	Fail looks like	Evidence to collect
10.7.8 Refunds	Are refunds sent on time, to the original method, and recorded in the books?	Every refund logged and matched in the books. Sent within the policy and legal timing.	Refunds missing from books. Sent late. Sent to a different account.	Refund log matched to processor and bookkeeping records
16.6.6 Refund approval	Does every refund have an approver with the authority to approve it?	Written approval limits. Approver named on every log entry.	No limits. Unknown approvers.	Written approval limits, refund log

Where this fits

Do this first: 10.7.7 Chargebacks, 10.6.1 Spending and Refund Authority

Do this next: 10.8.1 General Liability Insurance

Sources

FTC, "Buyer's Remorse: The FTC's Cooling-Off Rule May Help" (checked October 17, 2026)
FTC, "Business Guide to the FTC's Mail, Internet, or Telephone Order Merchandise Rule" (checked October 17, 2026)
Electronic Code of Federal Regulations, 16 CFR Part 429 (checked October 17, 2026)

This page explains general rules and Bill's own experience. It is not legal, tax, or insurance advice. Talk to a qualified professional about your situation.