Commercial credit cards are a valuable source of working capital, but they are grossly underutilized by small and mid-sized businesses
A cash flow gap occurs when there is a difference between the timing of cash payables and receivables. This timing lag is often inevitable: businesses need to invest in people, inventory and incur other expenses to create, market and sell goods and services that customers eventually pay for later.
In other words, cash out against payables leads, cash in from receivables trails. Cash flow gaps can limit growth, but in dire situations they can also soon result in business failure.
Gaining quick and cost-effective access to capital to fund cash flow gaps is a challenge for many small and mid-sized businesses.
According to a study by the JP Morgan Chase Institute, the median business has just 27 “cash buffer days” — their cash runway. Many of these businesses are relatively well run. Their owners and finance managers know that customers will pay them; the question is when. Their cash flow gaps tend to be relatively modest, rarely more than a few hundred thousand dollars for 30 to 90 days.
Such short-term working capital needs often could be fulfilled by commercial card credit lines, which match up well against needs of small and mid-sized businesses.
In fact, a massive amount of commercial card credit has already been underwritten by issuing banks, an estimated $2-3 trillion in the United States alone — at least. But, Windward Strategy managing partner and payments strategist Frank Martien notes that the volume of card-based B2B payments (non T&E spend) runs at about $500 billion annually, which means that only about 20% of the available credit is utilized for commercial B2B payments. In a 2018 research note Accenture estimates that “commercial card spend currently represents less than one percent of an approximately $150 trillion B2B payments market. While B2B commercial “virtual” card payments are projected to grow at 20% or more year-over-year, the vast majority of these payments are driven by businesses seeking rebates and cash back, rather than valuable working capital to close cash flow gaps.
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It’s unfortunate that companies don’t make the most of their available commercial card credit, because each payment made using a credit card can provide a business with valuable working capital for 20-50 days based on the card statement cycle. Those additional days can bridge short-term cash needs and fund cash flow gaps. According to studies by the Federal Reserve Bank, the average B2B payment is approximately $3,000. So a small business making just 30 payments per month on a credit card could bridge any cash flow gaps to the tune of nearly $100,000, or over $1M annually.
Businesses have a problem: they need cost effective short-term credit to better control cash flow. Banks have a solution: commercial credit cards are a terrific working capital solution to address cash flow issues. And yet, the problem remains unsolved: businesses struggle to obtain credit and card credit lines remain under-utilized. Why? And what can be done about it? Why can’t businesses use more of their under-utilized commercial card credit lines to pay ALL their suppliers?
Despite the fervor in the industry to drive increasing volumes of AP/B2B payments on credit cards, and despite their obvious working capital benefits, there are core issues that prevent credit cards from taking their rightful place as the payment method of choice for businesses.
Martien cited a variety of reasons, from suppliers’ unwillingness to accept cards to businesses’ lack of knowledge about who accepts cards, the so-called supplier enablement problem. Cost to suppliers is a big factor, and there are issues of acceptance convenience, cash application and reconciliation that all add up to a poor experience for card-accepting suppliers. In an ecosystem of smaller businesses, there’s a hesitation to saddle others with the burden of fees.
What if businesses could pay every supplier by card? And what if the cost of doing so was easily justified? What if the value of paying by card and the value of accepting card payments was clearly, indelibly understood? What if card payments were not an afterthought in the AP/B2B payments process? What if we could drive card payment volumes from a meager 2-5% of total spend today to 30% or more?
The result would be an amazing increase in working capital benefits to businesses and corresponding higher utilization of the under-used card credit lines.
After all, if consumers make most of their payments with credit cards and experience their working capital benefits, why shouldn’t businesses?