There are many great benefits to using credit cards for your business including that they are easy to use, nearly universally accepted, accrue points/miles/cash back, and the float they offer.
The float is the time you get to use their money free of charge. The only way to utilize this float is to pay your balance in full on your card. If you leave even one penny on the card this perk and most of the value of a credit card is washed away.
The best way to utilize this float is to learn how the system works. Lets go with a one credit card scenario first. Let’s say you have a due date of the 23rd of the month and a statement date of the 1st. You will want to pay all of your biggest bills/largest charges immediately after the 1st of the month. E.g. the 2nd. If your bills/purchases do not match up with these dates, then simply call the credit card company and request a better set of dates for you. So if you charge $2k on the 2nd of the March and not a penny more the rest of the month then you will not have to pay back the credit card until the 23rd of April. You see that when you charge on March 2nd your statement will close on April 1st with a due date of April 23rd on it. If you have paid your balance in full the previous months you have show zero interest on these purchases and thus this gives you a loan of $2k for 54 days. Not bad if especially if you really scale this up.
Here is where it gets good. I have about 8 accounts which I use regularly. This might be a little cumbersome, but you will see the benefits below. I float about $70k on these cards and never pay interest on them. I use each card for about 7 days only. That is the first 7 days of a statement cycle. If we take the example above I would utilize that card from the 2nd to the 8th of each month then put it away. I will pull out the next card for the next 7 days. I try to never go over half the spending limit so that each month I have half or better available.
I do keep a single card for specific small purchases and never switch it. It would be too tiring to keep changing the card in my wallet. For example, my gas card yields 4% cash back and I never spend more than $2k on it, so I do not worry about maximizing the float on such a small amount. I still pay the balance in full, but this approaches gets me closer to 50 days of float on average.
Most of our charges are paying venders which we do over the phone. I have created a spreadsheet using google docs (more on this in a future post) to show exactly which card to pay with based on the dates. This has relieved me from constantly checking statement dates and fairly well automates the entire process.
We use this float to finance our A/R and pay off any long term debt. If we had to keep this on long term debt it would cost us a lot more money than the zero in interest we pay now on the float. If we were to leave a penny on each card every month I would estimate this to cost us approximately $1,05o in interest per month.
As a side benefit we net over $1,200 per month in rewards points/cash back (more on this later) on these credit card charges. If you add this up it is about $2,250 per month ($27,000 per year) in net benefit as opposed to using a long term working capital loan and then using cash from there.
Since this is almost 100% automated, I would say this is well worth it.
How do you finance working capital and A/R?