Use Charge Cards to Improve Your Cash Flow
Growth is a primary goal for most business owners. But sometimes you have to be careful what you wish for, as rapid growth brings with it a unique set of challenges -- especially when it comes to cash management.
Nick Seidell, chief executive officer of Integral Choice, a telecommunications consulting and sales agency he founded in 2004, discovered this in 2006 after he scrutinized his company’s monthly cash flow. “We were experiencing explosive growth in sales and revenue, but it was eating further into our cash every month,” he says.
As a service provider, Integral Choice doesn’t have raw material costs, but it does spend tens of thousands of dollars a month purchasing lead lists for its salesforce. “At that time, we had hired 20 new salespeople in about two months; so our growth was just consuming our capital,” Seidell says. “We didn’t want to take on debt; so we were looking for ways to manage the cash we had better.”
That’s when Seidell realized the benefits of paying his list vendors with a charge card. “These vendors don’t offer us payment terms -- they demand cash on delivery,” he explains. “By using a charge card, I can create my own net-30 day terms. This has improved our monthly cash flow considerably.”
It’s important to note the distinction between a “charge card” and a “credit card.” While these terms are often used interchangeably, they’re actually two different kinds of payment tools.
A credit card provides a revolving line of credit (up to a predetermined limit) that can be tapped for any reason -- to fund working capital or purchase supplies or equipment, for example. Balances can be carried over from one month to the next, with interest accruing on unpaid balances.
With a charge card, however, the balance must be paid in full each month. This makes a charge card more of a payment and cash management tool than a credit vehicle, says Gene Siciliano, the president of Western Management Associates and Your CFO For Rent.
“A charge card can help established business owners manage their cash flow peaks and valleys; or, in other words, their cash flow cycle,” Siciliano explains. “This cycle is sometimes longer than owners anticipate; so a charge card can be an excellent tool to help plug this cash flow gap.”
Seidell agrees. “By using a charge card, we can pay for our leads as they’re producing income for us, which is huge,” he says. His company also charges utilities and some other fixed and variable monthly expenses.
In essence, a charge card is a “mini line of credit,” says Siciliano, because it gives businesses access to a short-term, interest-free source of funds. “Business owners [should] establish a line of credit with a bank or other lender so that they have access to revolving credit that doesn’t have to be paid back every month. But they can supplement this by using a charge card to meet shorter-term cash flow needs without incurring any interest charges.”
Charge cards can also serve as a valuable purchasing tool. While there’s the obvious convenience of using a card instead of cash to pay for retail purchases like office supplies and business meals and entertainment, more and more suppliers are accepting charge cards as payment from their customers.
According to Jim Blasingame, host of the nationally syndicated radio program “The Small Business Advocate Show,” the average length of time companies in the United States take to pay supplier invoices is 45 days. “So a supplier can send you an invoice and wait maybe a month or longer to get paid, or it can accept a charge card and get paid right away,” he says. “They get instant cash, you get free 30-day terms -- everybody wins.”
Joel Lesser, president of LinksManager.com, a patented link management application service for Web sites, says charge cards help him identify tax-deductible expenses and allocate specific purchases to different areas of the company. “LinksManager is a growing company; so expenses fluctuate monthly. I use different cards for different types of expenses and pay for them out of specific funds,” he explains. “This makes it easier for me to document capital investment expenses that are tax-deductible, plan future spending budgets, and manage cash flow.”
In addition, charge cards provide built-in discipline to help owners avoid racking up debt and paying interest as sometimes happens, even inadvertently, with revolving credit lines. “If cash is tight, it can be tempting to let a credit card balance ride, but this isn’t an option with a charge card,” says Siciliano.
Blasingame notes that using charge cards can help owners avoid what’s known as “comingling” of their business and personal transactions. “Not keeping business and personal transactions separate can result in some serious tax and accounting headaches,” he says. “Using a charge card makes it easier to track business expenses for tax, accounting, and reconciliation purposes.”
Lesser concurs: “When you make all of your business purchases using a charge card, you don’t have to worry about storing hundreds of paper receipts in a file folder or shoe box.”
Charge cards also give business owners maximum control over employees’ spending. Cards can be issued to employees with preset spending limits, and a detailed record of each individual’s purchases is provided with each month’s itemized statement.
Seidell notes another big benefit his company has realized by using charge cards: rewards. “We charge between $30,000 and $50,000 a month; so the rewards really add up. We use them for corporate travel, and we buy merchandise to use as sales incentives, which helps grow our sales.”
Most charge cards offer strong buyer protection as well, which is another big plus for Seidell. “If I write a check to a vendor and have some kind of dispute with them later, I don’t have much leverage -- they’re holding the cash; so they’re in essence also holding the cards. Making purchases using a charge card gives me more security as a buyer.”
Don Sadler is a freelance writer specializing in business and finance. Reach him at don@donsadlerwriter.com.
