A Love/Hate Relationship with Credit Cards

Most small-business owners have a love/hate relationship with credit cards and credit-card companies. While it’s difficult to find someone who doesn’t have a story about how a credit card saved the day, it’s also just as likely to come across a horror story about something bad that happened regarding a business or personal credit-card transaction.

During the last three years, credit cards have come to play a more significant role in how my own company has done business. Credit-card companies have opened up opportunities. But they’ve also made our lives more difficult.

Let’s address the hate part first, because it’s something I need to get off my chest. Feel free to pile on as you read this.

Why I hate credit-card companies
The problem with credit-card companies is that they are banks. One bank, which I won’t mention by name (but rhymes with another word for crappy), has been especially cruel to our small family-owned business during these hard times. In fact, we now refer to them as the other word for crappy bank. These moneychangers, of almost Biblical disrepute, canceled a major credit-card account for which we had never missed a payment. They did this without notice and, cruelest of all, took all the points we had accrued (you’ll read later why the loss of these points was so disastrous to our employees).

Another example of why I hate credit-card companies: In the early months of this recession, our business bank (not the same bank as the one just mentioned) cancelled our line of credit and our overdraft protection. I’ve talked to a number of my colleagues and they suffered the same indignity. I’ve always said that the only time a bank will loan you money is when you don’t need it. That’s been my experience and the recession provided small businesses with an even more squeaky-tight credit market. The good-karma part of this story is that this bank went bankrupt and we didn’t. So while this financial institution was being hypercritical about our money situation, it had demonstrated the height of hypocrisy by having done really stupid things with its depositors’ money for more than a decade.

Finally, I hate credit-card companies because if you accept credit cards for payment, the bank may make almost as much money on a narrow-margin job as you do. One credit-card company had traditionally been the biggest offender in this area and so, eventually, we threatened to quit accepting its card. After some negotiation, the bank reduced our rate by almost a point and also removed the one-point additional charge when we can’t physically swipe the card. Given we sometimes get charges in the tens of thousands of dollars, this negotiated reduction represented huge savings. But I was dismayed that we had to threaten the bank in order to make this happen.
There, that feels better.

Now for the love part
Credit-card companies were our salvation when credit lines dried up, and they’ve become our line of credit for the past three years. If you don’t accrue late payments or carry large balances for long periods of time, it’s not a bad way to go. Plus, you can keep your interest rates reasonably low through various tactics like balance transfer and threatening to close your account. We will probably continue to heavily rely on credit cards as a line of credit even after the banks’ more-traditional credit departments welcome us back with open arms.

The only significant downside to this strategy is that credit agencies take a dim view of multiple credit cards with even occasionally large balances. But what’s the alternative? Factoring? Don’t get me started on factoring (selling my accounts receivable to a third party at a discount in exchange for immediate money) – that’s a road I won’t go down.

Cash flow can be a killer. About three years ago, we began requiring deposits on large orders to ease the cash-flow crunch. Our normal terms are 30 days. Labor makes up 20- to 30-percent of our cost and we have to make payroll every two weeks. For a customer to be paid in full within two to three days of a job completion is really nice, and credit cards can facilitate that.

There’s also been silver lining to switching from banks to credit cards for a credit line. Sue, my wife and business partner, pays almost all our bills with credit cards. She’ll only use cards that have a generous rewards program, and since we buy a lot of materials, we get lots of reward points. Our airfare to the recent Signage and Graphics Summit, for instance, resulted in points. The awesome Canon DSLR and lenses for the company: points. The new iMac for the customer service department: points. You get the idea.

The most worthwhile benefit to the card points, however, has been to our employees. During the boom times, we gave an annual bonus at Christmas; we would also give individuals bonuses throughout the year for exceptional performance or innovation. When the recession hit, though, all bonuses and incentives ended. And employees got the double whammy of seeing their hours cut and paychecks cut, too.

Then credit-card-rewards points came to the rescue. Throughout the year, Sue redeems points for the rewards in the form of gift cards, which employees like almost as much as cash, because serve the same purpose. The most popular are store, movie, restaurant, and iTunes gift cards. Thanks to credit-card companies, we have been able to restore our reward and annual cash-bonuses program to the levels of our most profitable years. The best news is it doesn’t cost us a dime.

PayPal, NFC, and the future
Two other related topics worth noting are PayPal and NFC technology.
Our business accepts payment and buys things with PayPal – in fact, it’s surprising how often we pay with PayPal (and on a related note, how many parts we buy on eBay). Because we don’t get points with PayPal, we’re not motivated to find more vendors that accept it. However, because PayPal payments could help with cash flow and the transaction fees are smaller, we’d like to expand the use of the service in the future.
Another trend in payments has been the development of a mobile payment system called NFC (near-field communication). NFC is the hot new technology that makes the hearts of mobile carriers, Google, and credit-card companies go pitter pat. It’s rumored to be a feature of this spring’s iPhone 5. In the future, your customers’ smart phone will be used as a credit card – basically, just hovering it about four inches above your NFC receiver (which can be another NFC-equipped phone) will initiate the transaction. The customer gets a paperless receipt transmitted by Bluetooth from the driver’s phone. I look forward to having our delivery driver “touch phones” with a customer at a tradeshow and we’re then paid in full before she gets back in the truck.

In the future, then, the credit card may go the way of the personal checkbook. Smartphones may ultimately replace the physical credit card. More and more of our transactions may take the form of PayPal. However we have to pay for stuff, I just hope they never drop the points.