Often the first question posed by my clients when opening an engagement is “Can you help me get a Line of Credit”. With customers paying slower and more pressure from vendors to pay, they believe that a Line of Credit would fix all their problems related to meeting their ongoing obligations. A Line of Credit at their local bank certainly would help. Unfortunately, many small businesses simply don’t qualify for a traditional bank Line of Credit. They are too small, lack the assets to collateralize a Line of Credit or have very poor credit scores; both personal and business.

I find it odd that it is these same clients are vehemently opposed to using credit cards to pay bills. They fear that using credit cards will just increase their debt. But isn’t a credit card account basically a line of credit? Credit card companies expect you to make monthly payments and charge interest on the outstanding balance the same as a bank does on a traditional line of credit. The difference is credit cards require typically little or no security and have fewer or no covenants to observe. So if used judiciously, credit cards can be used to create your own operating line of credit.

Now, I know the availability of credit cards is not what it used to be and if you have poor credit the odds of getting a credit card with a high credit limit is unlikely. So, you need to start small. Even a credit limit of $5,000 is a good start.

Now here’s how it works.

For example sake, we will say that you have $3,500 in bills due on the September 30^th. These bills are for materials you purchased on August 31^st. The closing date on your credit card is September 28^th. On the September 30^th, pay the bills by credit card. Because the billing period for your credit card closed September 28th, these charges won’t appear on your current statement but on next month’s statement closing on October 28^th. Most credit cards allow 25 days to pay. So, the charges you made on the September 30^th will be due on November 22^nd. By using your credit card to pay these bills, you have ostensibly expanded your payment terms from Net 30 to Net 83. That gives you 53 additional days use of your money.

By using multiple credit cards, say three, you can expand your “line of credit’ significantly. You want different closing dates on the each of the credit card dates. That will spread the due dates on which the credit card payments are due.

In selecting your credit card, choose one that offers some type of reward points. You may already be doing this with your current personal credit cards. Just a reminder then, both Visa and MasterCard offer a variety of affinity programs including air lines, hotels and merchants. American Express offers reward points redeemable for a variety of goods and services. Discover offers cash back programs. Over the years I have used reward points from my credit cards for a variety of purposes ranging from airline points to contributions to my alma mater. I can’t remember the last vacation I had to pay for. As owner of your business, you are entitled to some perks. Why not let your credit card company provide them?

Another thing to remember when selecting is to avoid cards that have annual membership fees. You don’t want to owe the credit card company a couple hundred bucks even before you have used the card.

You must be disciplined for this approach to work. Don’t “max” out your card. Leave a balance on your credit limit. You may need this to cover unforeseen bills or for emergencies. Pay off the entire balance each month. You do not want to incur credit card interest.

By properly managing your credit card accounts, you will improve your cash flow, improve your company’s credit score and potential increase the credit available to you.

Now let’s look at the other side of the coin -accepting credit cards. Many of my clients are opposed to accepting credit cards payments from their customers because of the fees charged. But isn’t receiving payment sooner worth a couple percentage points? In my book it is and there are ways to reduce the impact of these fees.

First, if you are using credit cards to pay bills as recommended above, you have held to your money longer. If your bank account is interest bearing (again highly recommended), you have earned additional interest by increasing the average daily balance in your account. Getting paid sooner by your customers has the same effect. If your customer typically pays in 60 days, but will pay you in 30 days if you accept a credit card, you have improved your cash flow on this account by 30 days. That means you have gained 30 days more use of that money than you would have had if you waited for the customer to pay you by check.

Second, increase your pricing to cover the potential credit card fees. Now you probably can’t add to 2% -3.5% to very sale to cover credit card fees, especially in today’s highly competitive market. But in like token, all of your customers will not be paying by credit card. So let’s say you add a .5% to each sale. This should easily cover the credit card fees you are charged, while maintaining a competitive price.

Some of my clients have successfully employed this approach to utilizing credit cards; increasing their cash flow by more than $100,000 annually.

So follow these simple rules and enjoy the benefits of your own line of credit:

1) Select credit cards with no annual fee

2) Establish multiple credit card accounts

3) Select credit card programs that provide “perks”

4) Don’t “max” out your credit card

5) Pay off your credit card

6) Include some factor in your pricing to cover credit card fees