Card Wars — More than Just Rewards
Welcome back to your Thursday AM INTRO to Finance. I’m Jason, your guide to mashing up all things finance with Star Wars movie titles. Today we’re focusing on a question that breaks away from financial concepts and instead analyzes a financial product. The question we’re answering is:
“What’s up with all these new credit cards for startups?”
Wait, did you say credit cards? That’s part of the problem right there! There are big differences between a charge card and what most of us think of as a credit card.
Unlike most consumer credit cards that allow you to make a smaller minimum payment, charge cards require you to pay off the full balance by the due date. Because you’re paying everything off so frequently, charge cards don’t have interest rates. Without interest rates, these card companies make money every time you spend on the card. Invisible to you, the card company is paid small fees assessed in the payment processing (interchange fees). If you pay on time, you can avoid fees altogether.
There continues to be confusion around whether it’s helpful or not for your business to pay off the card every month. We’re here to say definitively — it is. Despite the not-so-subtle marketing war among card companies over who gives more rewards, there’s greater value in using a charge card for your business, and it goes beyond rewards points.
Cash Management
Every company needs resources to meet its short-term obligations, like weekly and monthly payments to creditors and vendors. This is commonly referred to as Working Capital. While it’s always nice to have the cash to make those payments, there are advantages to putting them on a charge card.
As a simple financial product, charge cards allow you to purchase something before you actually spend any cash. By delaying payment by days and weeks, you’re allowing your business to grow a little more before spending your money.
If you’re cash-rich, it may not appear helpful to extend payments by 15 - 20 days. However, your peers who used to struggle to make payroll can tell you that stretching every dollar by a few days can have a meaningful impact on your finances. Review your business, and analyze how much revenue your business receives in a 15 - 20 day period to see how much better of a situation your business could be in to make that purchase. Remember, there’s no cost to extending your cash if you pay off the balance at the due date. This is free Working Capital for your business – with added financial efficiencies.
Fraud Prevention
Charge cards can also protect your cash from fraud or other surprises that come up. By using a financial product that doesn’t directly draw on cash in your bank account, you can prevent unfortunate and unfair loss of cash. Fraud on your bank account can deplete your cash and require a full-time effort to reverse. In the event of fraud on your charge card, you can freeze or even close the account while you’re working with your card company to reverse the charges – without any disruption to the cash.
The best way to implement fraud prevention is to create specific credit cards for specific vendors. For example, if you’re doing a lot of digital ad spend on Google and LinkedIn, you could create one card dedicated to Google and another card for LinkedIn. This protects disruption to your entire financial processes in the event of fraud. If you have fraud on the card paying for Google, the LinkedIn card wouldn’t be impacted or need to be changed. Having dedicated cards can save you time and frustration.
Creating specific and/or new cards is much easier thanks to virtual cards. Still part of your charge card program, a virtual card is simply a card number that isn’t associated with any physical card. By not having a physical card, you avoid the hassle of tracking all of your physical cards (and potentially lost cards) but still have a card number to make payments.
Financial Automation
Charge cards save time. They can put some of your financial accounting and reporting on autopilot. By using virtual cards for specific payments, you can tag all transactions on that card to specific line items in your accounting systems. It takes some set up, but once it’s done, it’ll save you time spent reconciling payments each month. Or, even better, save you the cost of hiring a bookkeeper to do it. Automating tedious reporting allows you to focus on more higher-value items.
Cards can help you manage your budgets and team. Going back to our digital ad spend example, having dedicated cards allows you to control how much can be spent on a given vendor. For Google ads, you could limit the card to a certain amount, and reinforce the budget for the person managing the ads for your company. The limit assigned to the card will prevent overspending. No more micromanaging – that’s the card’s job.
Reward Points
Of course, charge cards still offer the real reason we all use credit cards in the first place: rewards. You’re provided points or cash-back for spending money. All card companies have a different rewards system, but the point is to motivate you to spend on their card. Remember — they only make money when you spend money.
While points can be a nice perk, this is the least valuable benefit of using a card. Optimizing the rewards system takes a concerted effort, and your business is better off focusing on optimizing revenue than reward points.
A Few Potential Options
Most card companies offer the benefits above, but many continue innovating to provide additional value. Let’s explore a few examples of new charge card companies and how they’re working to differentiate themselves. These companies work with founders and startups. The sign-up process for each is relatively painless and all digital.
BreX — Innovating on Getting Approved
The loudest of the new kids on the block initially made noise by making it easier for VC-backed companies to access financing. The initial limit for a Brex card is based on a % of cash that the company has received from investors. With rewards like $5k in AWS credits and points on uber rides, they are fighting hard to motivate you to spend with them.
Divvy — Innovating on Expense Management
Divvy focuses on making the automation around financial reporting, budgeting, and virtual card creation easy. If your largest concern is managing your team’s spend and eliminating all of the reconciliation that comes from managing finances, you should take a look at Divvy.
Ramp — Innovating on Finding Savings
The most recent challenger to enter the card wars takes overspending prevention to the next level. Issue unlimited cards with built-in controls, automatically enforce your expense policy, and empower teams to manage their own spend – all while maintaining real time visibility and seamless reconciliation with your accounting tools. Use the link below to earn a $250 statement credit.
Many of us know the dangers of high credit card interest rates. Some of us may have experienced the financial burden they can bring into our personal lives. The best part of using a charge card is that it requires full payment each month and prevents unnecessary debt. Using cards as a cash management tool, and not a primary financing tool, can unlock some stable financial habits for your business and bring automation to your financial processes.
All for the low price of free.
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