Should I pay my business's bills by credit card?
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Dear Your Business Credit,
I am looking for a way to rack up more credit card points. Does it make sense to pay the contractors at my small professional services firm by credit card? Some accept credit cards. I run a one-person business and work with four contractors. -- Chris
It's always smart to maximize the rewards points you earn on business purchases. Even if you spend just $500 a month on a contractor such as a search engine optimization consultant or Web developer, that's $6,000 worth of purchases by the end of the year that could be contributing to your total points.
Here's my recommendation: If your company is in good financial shape with healthy cash flow, pay your contractors and other recurring business bills by credit card. Using a credit card can be an effective way for very small businesses to improve their cash flow, according to an April 2014 report by the Corporation for Enterprise Development (CFED), a national nonprofit group that promotes economic opportunity for low- and moderate-income households.
The research, funded by MasterCard's Center for Inclusive Growth, found that 89 percent of small businesses without cash-flow problems paid for purchases with credit cards or checks, while 75 percent of those with cash-flow problems used these payment methods. Paying by credit card (and, to a lesser extent, by check) gives you some extra breathing room between the date you invoice your customers and when you have to pay your own bills.
But I have to sound a cautionary note. Paying for anything by credit card can become a crutch. Some business owners rely so heavily on credit cards they neglect to do much more to improve their cash-flow management, which is very important to the long-term health of your business. CFED's research found that 71 percent of small-business owners who used a credit card to pay for supplies for their business paid it in full every month.
Following their example is a good idea. Among the most experienced and successful entrepreneurs I know, most are elite athletes when it comes to maximizing their cash flow. They have trained their teams to prepare invoices to perfection -- so payments don't get delayed because of some small formatting problem or piece of missing information. They make sure those invoices are sent out on time. And they have set up systems to tell them exactly when their customers have paid them. They don't hesitate to remind customers of past-due bills before they become a problem.
When you stretch your cash flow by using credit cards to pay contractors, you may not feel as great a sense of urgency to get on top of these processes. You know you'll be able to pay them that month even if you don't get paid by your own clients on time.
There can also be a temptation to overspend if you're using credit cards. In my experience, it's a little harder psychologically to write a $1,000 check to a Web developer than it is to enter a credit card number to pay for a business purchase. Rack up too many charges without paying them down and you could end up falling behind if there's a sudden slowdown in the economy.
That said, if you have a good handle on the finances in your business, I say go for it. Many small businesses can greatly expand their capacity by relying on help from outside contractors. Why not take advantage of that situation to earn more points?
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