The past few years have been unlike any other for the U.S. business community. Many firms’ operations were impacted by remote work and supply chain constraints at the same time they had to navigate a historic labor shortage.
As firms adjusted to these unprecedented challenges, all of a sudden they had a list of lessons learned – including the importance of having money on hand to manage daily expenses and keep operations going.
During economic uncertainty, loans can be hard to come by and business leaders scramble to find options for the working capital needed to pay employees, vendors and short-term expenses like an advertising spend. That’s why businesses are turning to a different solution – purchasing cards for their expenditures.
Unlike a loan that carries an interest rate with it over its term, a purchasing card can be a no-cost solution for a business that pays off its balance each month. And, as I’ll explain in this article, these cards can also be a moneymaker. These corporate charge cards are an electronic payment alternative to writing checks, the latter of which is a more costly, wasteful, risky and time-consuming option that takes longer to reach a vendor.
At First Horizon Bank, we help our clients examine the main benefits of a purchasing card – a flexible treasury management tool that can unlock working capital. Some of those benefits include:
- Working capital: Optimize working capital by extending the payment cycle up to 55 days.
- Costs: Reduce administrative costs through simplifying and streamlining the payment process.
- Fraud mitigation: Significantly reduce fraud exposure through electronic payments; liability waiver programs protect companies from card misuse by terminated employees, up to $100,000 per cardholder; prevent fraudulent use by temporarily freezing card activity if lost or stolen.
- Reporting: Robust reporting to increase visibility of cash flow and cardholder purchases; enhanced reporting to track spending by suppliers, increasing negotiation leverage on prices and discounts; expense reporting, receipt imaging and routing/approval workflow available; comprehensive online reporting to track spending by suppliers, employees, within departments, etc.
- Controls: Automated spending controls can ensure cardholders' adherence to corporate spending policies; spending controls to include restricting spending by business category, single purchase limits, ability to restrict purchases to US merchants only; spending controls based on each employee's purchasing authority.
- Visibility: Increased spend visibility over multiple cardholders and/or locations.
- Tracking: Robust tools to help accounts payable staff manage tracking such as automatic or manual allocations to general ledger codes, and the ability to export transaction/coding data to eliminate manual data entry into accounting software.
- Automation: An electronic payment service can be added to the card program to make paying suppliers more efficient. It allows a business to send accounts payable files directly to the credit card issuer from an Enterprise Resource Planning or accounts payable system, eliminating process steps for the business. The issuer assigns a purchasing card account to each vendor to receive payments, allowing the firm’s corporate leadership team to spend its valuable time focused on other more impactful, revenue-generating responsibilities.
As the business world becomes more digital in nature, the automation component increasingly has been embraced as a way to improve vendor relationships. Because vendors also want to get paid on time, bringing efficiency to the process allows them to get paid quickly and securely and increases the odds the relationship will continue in good standing well into the future.
Revenue share programs
One final key advantage of a purchasing card is revenue share programs like the cash-back deals consumers receive for frequent use of their credit cards. Let’s say a lower-middle-market company spends $1 million a month, or $12 million a year on its purchasing card. If its revenue share is being factored at 80 basis points, it will receive $96,000 back as its revenue share in year one. If escalated at a rate of inflation of 5.5% over 10 years, this revenue generation will equal $1.236 million over that period.
Deferred borrowings and interest savings over that period is $400,000, putting the total savings at $1.6 million for that 10-year span. Considering all the things a company can do with $1.6 million, it’s easy to see the power of this kind of financing tool. Some of that money, in fact, can be used to pay suppliers using other payment methods to receive early payment discounts, which also frees up working capital.
All of these benefits add up and are the reason purchasing cards are one of the most popular treasury management solutions available to middle-market businesses. As Accenture reports, these business-to-business payments are growing fast and becoming more consumer-like, and the increased importance of intuitive digital tools bodes well for card-based products.
So, who is the purchasing card an ideal fit for? Any company wanting to convert its accounts payable department from a cost center to a revenue center. Many of our clients, in fact, have used the money they’ve saved to further invest in improvements to their back-office processes, including technology to make their operations more efficient and profitable.
