Will accepting credit cards help my business's cash flow?
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Dear Your Business Credit,
I 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.
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