Will accepting credit cards help my business's cash flow?
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
Ask Elaine a question
or read her prior answers in the 'Your Business Credit' archive
Dear Your Business Credit,
run a small tech services firm. I'd like to apply for a bank loan in the next
six months to a year to grow the business. A friend who got a loan said I
should work on my cash flow. Some of my clients tend to pay me late, and I'm
thinking about accepting credit cards to speed things up. Would that help much? -- Josh
Congratulations on getting your business established to the
point that you're ready to grow it. The lending climate is finally easing a bit
for small business, so you're likely to find lenders more receptive than if you
tried to get a loan a few years back. The April 2013 Federal Reserve
Board survey of senior loan officers found 23 percent said their banks had
"somewhat" eased lending standards for firms with annual sales under $50
million over the previous three months.
Your friend is right about the importance of working on your
cash flow. Bankers want to know that you'll have enough money on hand to make
your small business loan payments on time, even if you hit a few bumps. In a 2013 report by credit bureau Experian, Jay DesMarteau, the
head of small business and government banking at TD Bank, says that in
evaluating loan applications, "the most important thing to us is the strength
of a business's cash flow." Banks look at a business's gross income (revenue
minus cost of goods sold) and how much money it has on hand to pay off its debts,
including the loan it is seeking, the report explains.
Accepting credit cards can help with the revenue part of the
equation. A May 2012 survey by Intuit GoPayment, a credit card processor, found
that while only 45 percent of small businesses in the U.S. accept credit cards,
83 percent of respondents who do so ring up more sales. Among those who let
customers pay by credit cards, 52 percent said they earned at least $1,000 in
additional revenue per month by accepting credit cards and 74 percent said they got paid quicker and had fewer bad debts.
However, before setting yourself up to accept credit cards, consider
demand among your customers. If most of your clients are big companies, they may only be willing to pay
by check or direct deposit. Sending them invoices immediately and signing up
for their direct deposit system will usually get you your payments a bit faster.
Smaller firms run by individuals and consumers will often be
more receptive to paying by credit card. A June 2013 survey by credit card
processor WePay found that while 72 percent of small-business owners prefer to
get cash or checks, many consumers want to be able to choose from other forms
of payment. This is especially true among younger people. Among 18- to 34-year-olds,
52 percent said they never write checks.
Of course, accepting credit cards isn't the only thing you
should be doing to improve cash flow. Looking for other ways to boost revenue
will help, too. To improve sales, focus on doing more business with your more
profitable clients -- and attracting new ones like them. To free time to do
this, you may want to de-emphasize clients who are not very profitable by
marketing to them less. You may also want to phase out clients you have to
consistently chase down for payments.
Limiting the stream of money out of the business is also important to cash flow. Look for ways
to lower expenses for things such as office space and telecom services. Proceed
carefully with hiring, and if you don't think you'll be able to keep new hires
fully occupied, consider relying on part-timers or contractors until you have
enough business to justify hiring them full-time.
If money has been tight, also look for ways to extend
payment terms with the suppliers and vendors you use. The more you can reduce
your spending, the less money you'll need to borrow.
See related: Which credit cards should your small business accept?, How to improve your chances of getting an SBA loan, When does it pay for consultants to accept credit cards?
Meet CreditCards.com's reader Q&A experts
Vexed by a personal finance problem?
CreditCards.com's Q&A experts answer questions from readers every weekday. Ask a question, or click on any expert to see their previous answers.
Published: July 15, 2013