Credit card payments are nothing new to Fortune 500 companies, but as the technology becomes available for mid and small sized companies, it becomes more important to highlight how credit cards are advantageous for suppliers to accept as well as buyers.
Why your business should accept credit card payments
As the saying goes, a dollar today is worth more than a dollar tomorrow – this is especially true now with high and rising inflation rates. Combining this with an increase in interest rates means getting paid faster becomes a top priority for your business. One of the best ways to increase your cash flow is to accept credit cards.
Businesses have negotiated trade terms since the invention of the wheel. One of the primary terms between buyer and supplier is how quickly payments can be made from buyers to suppliers. This can also be referred to as days sales outstanding (DSO). While a buyer may prefer deferred payment terms to capture additional float on their payables, DSO for a supplier is critical to cash flow and can be extremely costly in today’s environment.
Using the current rates as of September 2022, the United States is experienced an annual inflation rate of 8.3%, and the interest rate is 2.5% (rates available from commercial banks range from 5.5% to 8.5%)
The cost of the daily DSO is about 0.04% (4 basis points), and after 60 days, the DSO would be more than 2.5% – a rate higher than the average interchange rate for a commercial purchasing card. Below is a table illustrating the cost of DSO that is incurred by inflation and interest.
So how do credit cards help?
The first thing that most AP managers think about is cash-back rewards, or if you are on the accounts receivable side, interchange fees (more on interchange fees later). There are a myriad of other benefits and efficiencies that are associated with credit cards, such as guaranteed payment, real-time authorization, settlement data, increased security, and reduced errors.
Credit card payments are guaranteed payments, meaning, as long as the authorization is approved when the card is charged, the funds will settle in the merchant account. In fact, a supplier could utilize the real-time authorization response when processing a credit card transaction to kick off downstream processes like shipping or scheduling of services without needing to wait for the funds to settle. In these cases, the supplier could elect to forgo offering payment terms altogether to their buyers.
Additionally, the buyer is likely to receive some sort of cash-back when paying by credit card, and therefore, the buyer should be willing to advance their payment terms (reducing DSO) because the cash-back they receive would be greater than the float they generate.
But what about interchange and merchant processing fees? +
Did you know that the costs of interchange and merchant processing fees are tax deductible by
businesses?
Updated in 2021, IRS publication 535 allows all fees associated with accepting or paying by credit card to be subtracted from a business’s gross earnings, lowering taxable income. Businesses can use the 1099-K sent by their merchant services provider to get the amounts and details needed and entered on line 17 of their schedule C form. This is great news for businesses who have either avoided or been reluctant to accept credit card payments as this also allows them to take advantage of the many benefits associated with credit cards without shouldering the costs.
Interchange rates are established by the credit card networks (i.e Visa, Mastercard, etc.). There are many factors that go into how a credit card transaction will qualify, and how you can ensure you’re paying the lowest rate – credit card network, data level, card type, merchant services provider, transaction amount, etc. Being able to mitigate these costs and write them off at the end of the year is a great way to optimize your receivables.
Looking towards the future
Credit cards are increasing versatility and application across all industries. Looking at the whole picture of credit cards, they are not as expensive to accept as it looks when you see the initial fee. Considering the cost of DSO and efficiencies with credit cards, there are many more advantages to be gained with credit cards versus more traditional payment methods.
For more answers on all your payment needs, check out our website Singe Payables or contact us to have a discussion on how your business could benefit from accepting credit cards today.
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