The intelligent use of credit cards by SMEs
Are you a disciplined person who does not miss on any credit card bill payments, ensures payment of the entire monthly outstanding and within the stipulated time. Are you disciplined enough not to overspend your credit limit buying those attractive toys and services, just because you couldn't resist the urge and it's so easy to use that credit card.
cashbacks associated with the card, no interest on all your credit card outstanding, a ready source of funds in case of emergency and unforeseen expenses.
Credit cards can be a great asset or a huge liability, depending on how you use them. But, start missing deadlines, pay less than full dues, and you will be trapped in a web of late fee, interest and other charges, which tend to go up exponentially. It is not uncommon to have an interest rate of 3 per cent to 4 per cent per month, or 36 per cent to 48 per cent per year. Compare this to a personal loan interest rate of 14 per cent to 15 per cent, or a housing loan rate of 10 per cent, and you start to understand why you need to be so careful not to get into a debt trap here.
Anyway, enough about the downside, we did agree at the beginning of the article that you were capable of handling this financial tool, so let's proceed from there. We will focus on how credit cards can be useful to the owners and employees of small and medium enterprises (SMEs).
Credit cards are useful for SME owners because they give access to ready credit for personal and official expenses. As long as you follow the basic discipline, you have an instrument which will help you track most of your major monthly expenses. It works even better if you can keep separate cards for your personal and official expenses, the official expenses can straightaway be processed as a part of your company expenses.
Your employees too can have credit cards to cover their official expenses. This will minimise the use of cash-based transactions, as well as allow for tracking of monthly expenses with minimum use of inhouse resources. However, do ensure that there is a clear procedure in place on the use of credit cards, including what is allowed/not allowed as a part of credit card expenses. A few of the points worth considering are as follows:
- Credit cards are normally issued in the name of the employee directly. They are personally liable for the consequences of misuse of the credit cards, including late payment of dues.
- Define who will make the regular bill payments- the employee, or the company. In case the employee makes the payments, how will they be reimbursed for official expenses.
- Authorisation of expenses may be required from the employee's superior. Often this is a reason for delay in payment of monthly dues to the credit card issuer. Do look at the option of delinking the authorisation process from the payment process.
- Define how late payment penalties, interest charges on outstanding and other fees be handled, as this can be a potential source of friction between employee and employer.
- Normally, company credit cards cannot be used for personal payments, however do define how reimbursement can be made by the employee in case this happens inadvertently or in case of emergency.
- Will benefits like reward point and cashbacks accrue to the employee or the employer?
There are many banks who would be happy to issue your organisation with credit cards on favourable terms, as long as you have a good credit score and a decent business performance. Do remember that proper credit card usage will also hike the credit scores of the personnel who own the credit cards, just as defaulting or delaying payments will cause a reduction in credit scores, which will make it more difficult to access credit at favourable interest rates in future.
So please introspect, whether you and your employees can handle credit cards, and once you are convinced that you are upto it, then go ahead and enjoy the credit lines banks are willing to offer you. This is just some free additional working capital available for you at no interest cost. Stay disciplined, stay safe!
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