Commercial credit cards: working capital, NOT rebates
It’s time to radically rethink how commercial credit cards are used, and explore their grossly underutilized working capital benefits
Small and mid-sized businesses grapple with cash flow all the time. A radical rethink of how they use commercial credit cards could transform their access to working capital, and ease the stress of short-term cash flow gaps.
Why is it so hard for businesses to control cash flow? The answer centers on the timing of cash inflows and outflows. Businesses buy materials, employ workers and spend on services, incurring expenses before they can charge customers for their products. Even when accounts receivable and accounts payable match up — on paper, anyway — late customer payments derail efforts to pay suppliers or meet payroll obligations. Half of B2B payments are now made late. And, according to Atradius, American businesses reported a 72% year-over-year increase in payment defaults in 2020.
Businesses struggle to anticipate or plan for these liquidity gaps. And they can stunt growth or, worse, prove fatal.
Most businesses have commercial credit cards, including 67% of small businesses. Yet only about 20% of the available credit is utilized, almost all of it for T&E expenses. An estimated $2-3 trillion in already underwritten commercial card credit is going underutilized. That underutilized credit could provide the working capital businesses need to cover their cash flow gaps. Card usage can extend businesses’ time to pay by 20 to 50 days. Given the average B2B payment is $3,000, a business making 30 payments per month on a commercial credit card could bridge any cash flow gaps to the tune of nearly $100,000, or more than $1 million annually.
Credit card issuers know that there is tremendous opportunity in expanding B2B card spend to replace payments made by check and ACH. Commercial “virtual” card B2B payments alone are projected to grow at 20% or more year-over-year. Even accounting for that double-digit growth, the total projected spend is tiny relative to the potential size of the B2B payables opportunity; a 2018 research note Accenture estimates that “commercial card spend currently represents less than 1% of an approximately $150 trillion in [global] annual B2B payments volume.”
And with the dramatic decline in T&E expenses caused by the COVID-19 pandemic, today most credit card programs are pitched to businesses primarily through the attraction of ever-increasing rebates. Rebate programs provide card-spend incentives to businesses, but the benefits tend to go to the larger business with higher spend, and the costs largely are borne by their suppliers in the form of merchant discount fees. Through supplier enrollment programs — generally effective only with larger businesses — issuers walk suppliers through how and why to accept card payments from businesses.
Rebates and cash back have value, as do process improvements. But they pale in comparison to the value businesses can extract from commercial credit cards in the form of working capital.
What stops businesses from using their commercial cards as the payment method of choice to the suppliers? Principally, supplier acceptance hurdles. Supplier hurdles deserve attention and analysis. For example, not all suppliers are card-accepting merchants. It is estimated that of 26 million businesses in the U.S., about 11 million merchant locations accept cards — or fewer than 45% of all U.S. businesses. In addition, the costs of card acceptance can be difficult to justify — as noted above, the average B2B payment is $3,000, which at 3% in merchant discount rates adds up to $90 in fees on a single transaction. Accepting, processing and reconciling virtual card payments is also far from streamlined.
If cards are to become the payment method of choice for B2B payments, card-based payments must become simpler and less expensive for suppliers. Browbeating suppliers into acceptance is not the answer, though increased awareness of potential benefits to them can have a temporary impact.
Encouraging businesses to see their commercial credit cards as a form of working capital and eliminating the supplier hurdles that limit acceptance requires a reimagined approach. A solution should allow businesses to pay any supplier — even those that don’t accept cards. Costs must evolve to be more equitable, so that the benefits are proportionately distributed between buyer and supplier. Bank fees should be clearly separated from the payment itself to simplify reconciliation. Processing a card must be totally transparent and requires no interaction between buyer and supplier.
Imagine the experience of stepping out of an Uber. Your ride ends with a pleasant “thank you and goodbye,” rather than an awkward fumble for a card, mental math on the tip and the potential for the card to be left behind.
Businesses should be able to pay suppliers just quickly and easily, while simultaneously improving their access to working capital. Suppliers should be able to accept card-based payments without further thought, and improve their access to working capital.
Today, B2B payments are starkly functional and bereft of delight for both buyers and suppliers. That doesn’t have to be the case. A transaction has the potential to be a pleasant close to a purchase — that’s something to work on.