Relying on credit-card debt to run your business is all kinds of bad. Carrying a balance on these cards comes at a huge expense and just drags you further away from your ultimate profitability.
However, if you use cards intelligently, they can be a way to finance your business, extending your cash flow and paying you a dividend at the same time.
First, you must agree that the strategies rest on a very important golden rule with all credit cards: Never carry a balance subject to interest. The balance has to be paid every month.
If you aren’t prepared to commit to that, stop reading now.
Next, you need to choose the card that is right for your small business. Since you aren’t going to be paying any credit-card interest, you don’t care what the interest rate is.
Instead, look for rewards you can earn from them, such as points, cash back or other benefits, such as no annual fee. If you have a lot of transactions that can be done by credit card, the rewards are usually worth the annual fee.
Since I travel a lot professionally, I like to collect rewards. The value of the rewards are usually more than the equivalent of a cash-back card.
For example, my personal favourite credit card is the RBC Royal Bank Visa Business Platinum Avion. For every $35,000 I charge, I get a free flight travel credit worth $750 to use on any airline at any time.
That’s equivalent to a 2.14-per-cent reward – way better than the usual 1-per-cent cash-back offers from other cards. (Other banks may have similar products, so shop around).
Travel credits are always the most valuable; if you or your employees need to travel for work, they are a tax-free benefit that can be used in your business. (They’re tax-free because you are effectively reducing a tax -deductible expense.)
If you don’t travel, you can use your Avion points to buy merchandise for your business – but often flights are the better deal.
Now you need to make a list of all of the suppliers and expenses in your business that you can pay by credit card – the more, the better. If you haven’t asked your supplier to allow credit-card payments, do so.
Add to that list any suppliers who will also offer you a prompt-pay discount for paying your invoice early, and permit you to do so paying by credit card
For instance, some suppliers may offer terms such as a 2-per-cent discount if you pay, say, in 20 days, or you can pay the full price in a longer period, say, 30 days.
Next, you need to find out the grace period of your card. My card and many others come with a 21-day grace period (that’s calendar days, not business days). This is how long I have to pay the charge on my card before it starts charging me interest.
Next, you have to pay your vendors with your credit card as close to the vendors’ due date as possible, taking advantage of prompt-pay discounts in all circumstances. Then pay off your credit card every month, within 21 days of each charge to make sure the interest is avoided.
How does this help your business? Let’s look at a single transaction I did recently, with round numbers to keep it simple.
I used my credit card to pay a $35,000 bill to my vendor on the day it was due (there was no prompt-pay offer in this case), which was 30 days from the date of the invoice. I then made a $35,000 credit-card payment 21 days later.
In this case, I had 51 days of interest-free financing, which was good for cash flow.
On top of that, I earned a $750 flight credit which covered my transportation to a trade show. I managed the transactions well and I effectively got paid to borrow money.
If I could do that same transaction with a vendor that offered a 2-per-cent prompt-pay discount for paying within 20 days, the number of days of interest-free financing would drop to 41 days -- but I would have saved $700 from the vendor, and also received a $750 travel voucher. That’s a $1,450 benefit.
Some small businesses might take a year to rack up $35,000 worth of transactions, but here’s the bottom line: You have to pay your bills and your credit card off anyway, so turn to online banking to make these tactics a daily or weekly routine and your new habits will have meaningful benefits to your business’s profitability.
Special to The Globe and Mail
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.
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