APRIL 2006VOL. 19, ISSUE III

Reprinted by permission of the St. Louis Small Business Monthly

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Credit Card...It's The New Cashby Steve Hazan

“I want to say one word to you. Just oneword...plastics.”—Mr. McGuire, “The Graduate”

What if there was a revolutionary financialsystem that could reduce your interest costs,improve your cash flow (i.e. utilize other people’smoney for free), reduce your monthly checkingaccount charges, take advantage of trade dis-counts, improve internal controls, save onpurchase order and reimbursement costs, ac-celerate procurement cycle time, automate youraccounting system and also reward you withfree airline tickets? Cha-ching! What if all ofthese benefits came from something as mun-dane as a credit card? “No way,” you might say.

A 2004 Federal Reserve study shows thatwhile paper checks are still the No. 1 method ofnon-cash payments in the United States, forthe first time this vehicle represents less thanhalf of all such transactions. At 41.9 billiontransactions, the use of checks has declined4.3% annually during the period 2000 to 2003.As a reference point, checks accounted for57% of non-cash payments in 2000. This trendis expected to continue with the void beingfilled by electronic payments and the preva-lence of debit card and credit card purchases.

Although the increased use of credit cardsover the same period has been a modest 6.7%annualized rate, compared to debit card trans-action growth at 23.5%, it must also be notedthat this is on a large base. At 19 billiontransactions in 2003, credit cards are the “mostoften used electronic payment instrument” rep-resenting 23% of all non-cash disbursements.

Business purpose cards fall into three majorcategories: purchasing cards travel and ex-pense cards and fleet cards. All provide im-proved float, robust reporting and reducedadministrative costs. We will examine each inturn.

Purchasing cards, also known as P-cards,commercial cards or business cards, enable acompany to obtain goods and services todayand take advantage of built-in float beforepayment is due. Typical expenses suitable forP-cards include postage, advertising, raw ma-terials, office supplies and Internet purchases.This interest-free loan, if paid in full each month,is a cost-effective alternative to traditional linesof credit. Users also benefit from the reductionin procurement cycle times as a result of usingP-cards.

Bank of America, General Electric and thefederal government each estimate the cost ofprocessing a purchase order/invoice at over$60. These card programs allow companies tostreamline this process by reducing the volumeof paper checks and the importation of transac-tion data directly to accounting systems whilecutting costs to approximately $15 per transac-tion. Simply multiply the number of purchaseorders by $45 to arrive at your annual savings.

Users may also be able to take advantage of

trade discounts not available under currentpayment methods. Many businesses find thatthe time needed to process an invoice, cut acheck and mail it to their vendor exceeds thediscount period. As such, many businessowners are effectively shut out of this oppor-tunity. Card to the rescue…rather than havingto cut and mail a check, you would simplyprovide the vendor with a card number duringthe discount period, thus meeting the termsoffered. To illustrate, let’s assume terms of 2/10, where a 2% discount is available if theinvoice is paid within 10 days. While 2% maynot sound like a lot, if we assume purchases of$50,000, a month this equates to $12,000 ayear—straight to the bottom line. Said anotherway, this represents a risk-free rate of return of37.24%. Not too many investment opportuni-ties like that are out there.

Travel and entertainment (T&E) cards per-mit employees to charge air travel, meals andother expenses associated with doing busi-

Card Benefits ChecklistImprove payables cash flow anaverage of 30 days.Rewards programs and/or rebates.Robust reporting enables you tonegotiate better terms withvendors.Spend controls protect yourbusiness.Streamlined reporting reducesadministrative tasks.Shifting transactions to cardreduces checking account fees.Lower cost of reimbursement andprocessing of invoices.May facilitate the use of tradediscounts.Realize interest savings vs.traditional lines of credit.Reduce checking account fees.

Reprinted by permission of the St. Louis Small Business Monthly

ness. Company administrators can institutespend controls to limit purchases to certainestablishments. For example, a traveling sales-person could be limited to purchases from aparticular hotel chain or airline vendor or evena category of merchants. Some companies usethis approach to restrict retail purchases inorder to tighten up spending controls. Be-cause large card issuers receive favorable for-eign exchange rates, which are often passedalong to the user, T&E cards may be particu-larly beneficial for employees traveling abroad.

Fleet cards are generally assigned to ve-hicles rather than individuals, and are usuallyrestricted to fuel and vehicle maintenance costs.The user inputs mileage information at the gaspump providing management with data toschedule routine maintenance at proper inter-vals. Many oil companies issue these cards;however, the user is locked into using theservice stations affiliated with the particularcard issuer. A viable alternative is a bank issued

card—either Visa or MasterCard—brandedwith broad acceptance at a variety of provid-ers. With such programs, drivers no longerneed to search for a particular gas station inremote or unfamiliar neighborhoods.

Many financial institutions offer a “one card”solution that combines the benefits of P-cards,T&E and fleet programs without having to relyon multiple providers. Depending on the vol-ume, some providers offer rewards similar tofrequent flyer or in some cases a cash rebateresulting in a new revenue stream. Look for acard that offers a robust suite of web-basedreporting options. Such tools allow a companyto allocate costs, reducing manual data entry,update accounts payable systems, monitorspending patterns or compliance with pre-ferred vendor policies and glean data for use innegotiating better terms with suppliers.

By now you are probably thinking, “This isall great, so what’s the catch?” or “How much

is this going to cost?” Cards are treated asunsecured credit by the issuer so these ben-efits may not be available to all businesses. Ifyou have borrowed on such a basis before orhave a strong history, your lender will likelywelcome the opportunity to deepen the rela-tionship. As far as cost, one large institutionin town offers a “one card” solution with airlinemiles for a $75 annual fee plus $15 per card. Asan illustration, a business with 10 users wouldpay only $225 per year.

“Ok, I’m in! How do I proceed?” The firststop should be your local banker, who is ableto give you details on the particular featuresand benefits of his or her institution’s card. Ifyour banker is unfamiliar with this tool, find onewho is. It often pays to shop around, but if youhave an established relationship, that is usu-ally the best place to go.

Steve Hazan, CTP, (steve.hazan@bankofamerica.com) is senior vice president atBank of America.