Financial Clarity for Entrepreneurs

Use A Credit Card For Cash Flow Improvement

Proper use of a credit card can gain you an extra 30 or 40 days of float on your accounts payable – WITH NO INTEREST EXPENSE.

Most small business owners are no strangers to credit cards.  They are often the borrowing of choice for things that a line of credit would usually be used for – purchasing inventory, paying for expenses while waiting for a big check from a customer, paying travel expenses, and the like.  However, most of the time the credit cards aren’t used properly and substantial interest costs are incurred.

There is a better way.

Necessary Conditions

The single most important thing to have to avoid interest expense is a credit card with a grace period.  This is an account that doesn’t charge interest if you pay off your entire balance by the due date.

Next, make sure the balance on the account starts at zero.  You can accomplish this in a number of ways: open a new account, use your line of credit (if you have one or can get one) to pay down the balance, transfer the balance from a higher interest card to a lower interest card, put off some other expenses to free up cash to pay down the balance (you’ll make up the cash flow in short order), etc.

Then, identify vendors who are willing to extend normal credit terms AND THEN will accept payment by credit card on the outstanding invoice.  You don’t need to tell them why you’re doing this, just ask them if they’ll take a payment by credit card.

Finally, have the discipline to manage your credit card account(s) and pay off the entire balance each month.

How to Get Extra Float

The trick to maximizing interest-free float is to time your credit card charges with your billing cycle.  Most accounts have a 30-day or 1 month cycle for accumulating charges and then you have 2 or 3 weeks in which to pay the bill.

Be careful about monthly closing dates.  Some accounts will have the same closing date every month, but some will do a 30-day or 28-day cycle.  A quick look at your account online will tell you when the next closing date is.

Just AFTER the beginning of a new billing cycle is the time to pay vendors or charge other expenses like airline tickets, office supplies, etc.  You then have 40 or 45 days to pay the bill without incurring interest charges.

An Example

John, the owner of Acme Widgets needs to order a stock of widget parts for inventory.  Acme Widgets has 30 day terms with its supplier and a credit card account with an interest-free grace period.

It’s now the 13th of the January and a new credit card billing cycle begins on the 15th.  John waits for two days to place his order.  (For our purposes we’ll assume immediate delivery and invoicing by the supplier.)

On the 15th of the February, John pays the supplier’s invoice by credit card.

On the 14th of the March (two months after having received the inventory) the credit card billing cycle closes and Acme Widgets has 15 days to pay the bill without incurring interest charges.

On the 29th, John pays the credit card bill online.  The result is that Acme Widgets didn’t use it’s cash to pay for the inventory until 2-1/2 months after receiving it.  With good inventory and accounts receivable management, Acme has already sold, and been paid for, the inventory it sold before "paying" for the inventory.

Free Money

Not exactly "free", but at least interest-free money.  Credit card companies allow for interest-free grace periods because they know the vast majority of their customers will not take advantage of it.  You can use this to your advantage.

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