Voice over Internet Protocol, or VoIP, uses a company's broadband Internet connection to place phone calls over the global computer network instead of via traditional wire-line phones. The key appeal of VoIP for small and medium-sized businesses is that the technology has the potential to save money, but you have to weigh those savings against the risks.

"This is one more way to get additional value out of that Internet connection," says Mike Wagner, director of World Wide Marketing at Linksys. "Initially users got broadband to browse the Web, but now you can use it to make unlimited calls in the U.S. and Canada for $29.95 a month, and international rates start around four cents a minute."

There are different ways to use VoIP: either download software and use your computer with a headset, contract for a monthly service and connect using your regular phone with an adapter, or use special small business VoIP hosting services. Deciding which technology is right for your business will depend on the size of your organization, the phone features that you want, and whether the firm has numerous satellite offices that run up large phone bills through internal calls alone.

Free VoIP Services

A home-based business or one with only a few employees could conceivably switch to VoIP by downloading free software from the Internet from such services as Skype and making calls using a computer and a headset. Skype software is free. Calls costing only the price of your Internet connection to other Skype users, or run a few pennies a minute for domestic calls to people with traditional phones. Radio Shack's VoSKY Exchange offers Skype software for the business office for $800.

The potential business risks include having your company's phone service down in the event of an electrical outage, a computer crash, virus or worm. In addition, the free services have no provisions for connecting emergency 911 calls.

Telephone Replacement Service

For a small office, the best option may be a for-pay VoIP service that enables your workers to use a traditional telephone. In order to use VoIP with a dial phone, you need an analog telephone adapter, or ATA. This device converts the analog signal (your voice) to a digital one. Most VoIP service providers -- such as Vonage or AT&T's CallVantage -- offer the adapter for free with their packages. If bought separately they cost between $50 and $100. The benefit of going with a service is that is easier to reach non-VoIP members, emergency 911 calls go through and packages tend to offer bulk usage for one monthly price, similar to cellular phone plans. They also provide integration with desktop computer applications, including your address book, Web browser or Microsoft Outlook, enabling such features as quick lookup and click-to-call dialing.

Caution: some adapters won't work with every VoIP, so check with the provider.

VoIP Hosting

Medium-sized companies with several offices spread over a geographic region have other VoIP needs that eliminate fees for calls between locations and thus reduce overall phone bills. For these firms, VoIP hosting services, such as those offered by Covad or Packet8 and other companies, may be best. Many hosted services deploy VoIP over PBX (Private Branch Exchange) systems -- telephone systems owned by a private business instead of a common telephone carrier. These features allow small and mid-sized companies to use an unlimited number of extensions in geographically diverse locations. Some of the hosting services are appealing because they eliminate high telephone bills for intra-company calls between branch offices, but they can cost between $10-80 per line per month and also come with startup fees. At the same time, they provide more reliability and guaranteed levels of service.

Here are some popular VoIP service plans:

  • AT&T CallVantage - $30 unlimited calling U.S. and Canada
    Offers call logs, voicemail, speed dial, call waiting/forwarding, caller ID, fax support, directory assistance, three-way calling, and do not disturb. Not all CallVantage subscribers have E911 service (works like 911), so check before you leap.
  • Vonage - $25 unlimited calling U.S. and Canada
    Call waiting, caller ID and conference calling. Vonage offers basic 911 service to all subscribers, but you must provide them a physical address. 500 minutes: $14.99 per month. Vonage provides the best overall reliability.
  • BroadVoice - $20 per month for unlimited calling
    No 911, but unlimited calls to Europe, China, Chile, Singapore, Taiwan and Australia over broadband Internet. The $25 plan includes 14 more countries. Voice quality is average.