Credit Cards & Your Business

“90 Days Interest Free”, blares one billboard. “100,000 Points Upon Sign-Up” shouts another.  We have all seen the ads trying to lure us into signing up for one more piece of plastic.  And, we all know of someone that has run up a steep credit card balance and is constantly juggling to meet payments at sky high rates and hopefully eat a little bit into the principal.

Much like our personal lives, where we rely on credit cards to ease our personal cash flow, businesses will also from time to time feel the need to “make the month” by using a credit card, or take advantage of a credit card’s temporarily discounted interest rate as a means to access “cheap” financing. The problem is over time that little bit of credit card financing can grow and become a crutch, or the cheap rate expires but the principal remains and before you know it credit card debt becomes a fixture in the debt structure of the business.

In the business context this is referred to as “working capital” management.  Working capital represents the funds invested in cash, accounts receivable, inventory and other current assets.  Working capital finances the cash conversion cycle, the conversion of purchased supplies into inventory and then into the sale of finished goods or services.  When a firm is short on working capital, the cash conversion cycle needs to be accelerated to generate cash.  Unfortunately, this does not happen quickly enough and so short term financing i.e. credit cards, becomes a long term solution. We are not going to tackle the cash conversion cycle here.

Here is some guidance on credit cards.

#1 – If you can’t clear it. Fear it!

Apply the same sage advice in your personal life to your business.  If you are not in a position to clear the credit card balance at month end, stay away!  If you need to carry a balance for a month or two, ok, but only as long as you are pursuing alternative means of financing e.g. a bank loan or credit line, in the short term and changes to the cash cycle in the mid to long term.  This is what we did with one client who was carrying thousands in credit card debt across multiple cards.  Additional financing was secured on the strength of a 5 year business plan compiled by Excellerated Analysis.  The new loan was used to pay off the credit cards and finance growth.

#2 – Financing of last resort

Short of using a loan shark, credit cards are just about the worst financing method over the long term. Before you embrace them, review every means of financing at your disposal.  We recently encountered a business with $30,000 of credit card debt and $50,000 remaining in a credit line.  Suffice to say, that business got excellerated really fast.  The average interest rate on the client’s debt took a healthy plunge in a matter of hours.

#3 – Control, Control, Control!

When used responsibly credit cards offer a means for a business to delay payments, collect points & rewards and generally grease the wheels of the business machine.  However, control is key.  Maximums must be set to limit both authorized and non-authorized spending.  Spending reports should be generated to provide management access to knowing who is spending and what is being purchased.  Generally, simply knowing that there is a watchdog is sufficient to deter rogue activity.  In one extreme case, an office with a staff of 10, had 17 cards floating around with only 50% accountability.  EA was quick to point out the exposure and worked with the client to cull the excess plastic.

While we hope that no business needs it, click here for an article detailing what to do when a small business fails and there is still substantial debt.