How to Manage Cash Flow
Posted by Lydia Kim on November 17, 2009 in Business Financing, Uncategorized [ 0 Comments ]
Some businesses today are using credit cards to help finance new purchases, pay vendors, and add employees, but what happens if those credit cards don’t get paid off, or your business needs a larger line of credit? You might think credit cards and charge cards are one and the same. Both cards are borrowing money from an issuing company based on your income and information on your credit report. Both credit cards and charge cards is a means of buying goods and services on credit. But this is where the similarities between them end.
How much cash would you save/make if you didn’t have to pay business expenses for a month? Imagine this scenario. Your company spends $50k/month on marketing. Instead of paying by check or credit card, you pay with a charge card. Depending when in the billing cycle your card is charged, you could then have more than a month to pay off the amount on the card. By pushing off your payments, you kept $50k in cash in your checking account.
Businesses are using charge cards to extend their cash flow without incurring longer term debt. Sometimes a cash flow cycle is longer and the short term funding from a charge card offers purchasing power as your business evolves.
With a credit card, you have a spending limit. Business owners “borrow” this money from the issuing credit card company and have the option to either pay back the amount borrowed in full or by installments with added interest each month.
Charge cards on the other hand, do not have the option of making payments over an extended amount of time as credit cards do. A charge card is a means of making a purchase in a very short-term –it doesn’t offer you a revolving line of credit, you must pay the balance in full during a single billing cycle, but there is not a pre-set spending limit.
So Which One is Better?
Both have their advantages and disadvantages, it all depends on what the consumers are looking for and which card is a better fit for their business. Borrowers who make timely payments without being late can eventually raise their credit scores, saving money on insurance and acquire loans from financial institutions when needed down the future.
Credit cards give the flexibility for business owners to pay back in increments, giving them time to come up with the money they borrowed to pay back their credit card balance. But this flexibility could be a double edge sword as well. With no specific time limit, the borrowed balance could accumulate a with hefty interest that could make it harder for consumers to pay back later on.
You can’t carry a balance with a charge card the way you can with a credit card. Partially paying off what you may owe on a charge card could result in a costly late fee, as much a 5% of your balance, and possibly restrict your usage of the card or canceled all together. But since there is no “loan,” there is no interest accumulated in a charge card, unlike a credit card. And unlike a credit card, charge cards often comes with additional services and benefits, such as: free roadside assistance, free food at airports, free hotel upgrades and many more. The Gold Card from American Express gives travel reward points for every dollar spent (in addition to other discounts on purchases), so in the example above, you also probably earned enough points for a free round trip flight and hotel for your next business trip.