1. APRIL 2006VOL. 19, ISSUE III
Reprinted by permission of the St. Louis Small Business Monthly
Page 2
Credit Card...It's The New Cash
by Steve Hazan
“I want to say one word to you. Just one
word...plastics.”
—Mr. McGuire, “The Graduate”
What if there was a revolutionary financial
system that could reduce your interest costs,
improveyourcashflow(i.e.utilizeotherpeople’s
moneyforfree),reduceyourmonthlychecking
account charges, take advantage of trade dis-
counts, improve internal controls, save on
purchase order and reimbursement costs, ac-
celerateprocurementcycletime,automateyour
accounting system and also reward you with
free airline tickets? Cha-ching! What if all of
these benefits came from something as mun-
daneasacreditcard? “Noway,”youmightsay.
A 2004 Federal Reserve study shows that
whilepaperchecksarestilltheNo.1methodof
non-cash payments in the United States, for
the first time this vehicle represents less than
half of all such transactions. At 41.9 billion
transactions, the use of checks has declined
4.3%annuallyduringtheperiod2000to2003.
As a reference point, checks accounted for
57%ofnon-cashpaymentsin2000. Thistrend
is expected to continue with the void being
filled by electronic payments and the preva-
lence of debit card and credit card purchases.
Although the increased use of credit cards
over the same period has been a modest 6.7%
annualized rate, compared to debit card trans-
action growth at 23.5%, it must also be noted
that this is on a large base. At 19 billion
transactionsin2003,creditcardsarethe“most
oftenusedelectronicpaymentinstrument”rep-
resenting 23% of all non-cash disbursements.
Business purpose cards fall into three major
categories: purchasing cards travel and ex-
pense cards and fleet cards. All provide im-
proved float, robust reporting and reduced
administrative costs. We will examine each in
turn.
Purchasing cards, also known as P-cards,
commercial cards or business cards, enable a
company to obtain goods and services today
and take advantage of built-in float before
payment is due. Typical expenses suitable for
P-cards include postage, advertising, raw ma-
terials, office supplies and Internet purchases.
Thisinterest-freeloan,ifpaidinfulleachmonth,
isacost-effectivealternativetotraditionallines
ofcredit. Usersalsobenefitfromthereduction
in procurement cycle times as a result of using
P-cards.
Bank of America, General Electric and the
federal government each estimate the cost of
processing a purchase order/invoice at over
$60. These card programs allow companies to
streamlinethisprocessbyreducingthevolume
ofpaperchecksandtheimportationoftransac-
tion data directly to accounting systems while
cuttingcoststoapproximately$15pertransac-
tion. Simply multiply the number of purchase
orders by $45 to arrive at your annual savings.
Users may also be able to take advantage of
trade discounts not available under current
payment methods. Many businesses find that
the time needed to process an invoice, cut a
check and mail it to their vendor exceeds the
discount period. As such, many business
owners are effectively shut out of this oppor-
tunity. Cardtotherescue…ratherthanhaving
to cut and mail a check, you would simply
provide the vendor with a card number during
the discount period, thus meeting the terms
offered. To illustrate, let’s assume terms of 2/
10, where a 2% discount is available if the
invoiceispaidwithin10days. While2%may
not sound like a lot, if we assume purchases of
$50,000, a month this equates to $12,000 a
year—straighttothebottomline. Saidanother
way,thisrepresentsarisk-freerateofreturnof
37.24%. Nottoomanyinvestmentopportuni-
ties like that are out there.
Travelandentertainment(T&E)cardsper-
mit employees to charge air travel, meals and
other expenses associated with doing busi-
Card Benefits Checklist
Improve payables cash flow an
average of 30 days.
Rewards programs and/or rebates.
Robust reporting enables you to
negotiate better terms with
vendors.
Spend controls protect your
business.
Streamlined reporting reduces
administrative tasks.
Shifting transactions to card
reduces checking account fees.
Lower cost of reimbursement and
processing of invoices.
May facilitate the use of trade
discounts.
Realize interest savings vs.
traditional lines of credit.
Reduce checking account fees.

2. Reprinted by permission of the St. Louis Small Business Monthly
ness. Company administrators can institute
spend controls to limit purchases to certain
establishments. Forexample,atravelingsales-
person could be limited to purchases from a
particularhotelchainorairlinevendororeven
acategoryofmerchants. Somecompaniesuse
this approach to restrict retail purchases in
order to tighten up spending controls. Be-
cause large card issuers receive favorable for-
eign exchange rates, which are often passed
along to the user, T&E cards may be particu-
larlybeneficialforemployeestravelingabroad.
Fleet cards are generally assigned to ve-
hicles rather than individuals, and are usually
restrictedtofuelandvehiclemaintenancecosts.
Theuserinputsmileageinformationatthegas
pump providing management with data to
schedule routine maintenance at proper inter-
vals. Many oil companies issue these cards;
however, the user is locked into using the
service stations affiliated with the particular
cardissuer. Aviablealternativeisabankissued
card—either Visa or MasterCard—branded
with broad acceptance at a variety of provid-
ers. With such programs, drivers no longer
need to search for a particular gas station in
remote or unfamiliar neighborhoods.
Manyfinancialinstitutionsoffera“onecard”
solutionthatcombinesthebenefitsofP-cards,
T&Eandfleetprogramswithouthavingtorely
on multiple providers. Depending on the vol-
ume, some providers offer rewards similar to
frequent flyer or in some cases a cash rebate
resulting in a new revenue stream. Look for a
card that offers a robust suite of web-based
reportingoptions. Suchtoolsallowacompany
to allocate costs, reducing manual data entry,
update accounts payable systems, monitor
spending patterns or compliance with pre-
ferredvendorpoliciesandgleandataforusein
negotiating better terms with suppliers.
By now you are probably thinking, “This is
all great, so what’s the catch?” or “How much
is this going to cost?” Cards are treated as
unsecured credit by the issuer so these ben-
efits may not be available to all businesses. If
you have borrowed on such a basis before or
have a strong history, your lender will likely
welcome the opportunity to deepen the rela-
tionship. As far as cost, one large institution
intownoffersa“onecard”solutionwithairline
milesfora$75annualfeeplus$15percard. As
an illustration, a business with 10 users would
pay only $225 per year.
“Ok, I’m in! How do I proceed?” The first
stop should be your local banker, who is able
to give you details on the particular features
and benefits of his or her institution’s card. If
yourbankerisunfamiliarwiththistool,findone
whois. Itoftenpaystoshoparound,butifyou
have an established relationship, that is usu-
ally the best place to go.
Steve Hazan, CTP, (steve.hazan@bank
ofamerica.com) is senior vice president at
Bank of America.