Thursday, June 4, 2009

Dumping Plastic

I wrote in my purchasing manifesto that you should use credit terms with suppliers instead of credit cards. It was one of those things I preached without practicing, mostly because in the past there wasn't much of a downside. However, in the last year and a half, most distributors have dropped credit cards or include a credit card surcharge on each order. It's not hard to understand why. While retailers get 45-50% margin on product, distributors get around 10%. A 2% credit card fee is like giving away 20% of your profit! I can't blame them for not wanting to accept cards or adding fees.

As a retailer, using a credit card for distribution was a double edged sword, and I was getting cut on both edges. First, the credit card companies have been squeezing us of late, interest rates doubling or even quadrupling. Pay even a dollar less than the full balance, which could sometimes hit $15,000-$20,000, and you pay interest on the full balance. Try that once or twice at 18%. When things get tough, the last thing you need are inflexible terms with usurious rates. With consumer credit card protection recently passed by congress, credit card companies are now looking at ways to put the thumbscrews to small business cards, since they lack protection. The writing was on the wall for me: stop using credit cards, especially how I was using them, charging over $150,000 a year with them.

The second part of the problem was distributor surcharges. These were between 1-2%, which was adding up to over a thousand dollars a year. This is money just thrown away for the convenience of using a card. Sure, I got miles and sometimes cash back for that fee, but it's no way to run a business. One of my distributors was splitting the fee with me, so they were happy to have me move to terms instead of charging. The other distributor lost me as a customer when they instituted a credit card surcharge and gave me an inadequate credit line. Now that they've adjusted my terms, they'll not only gain back lost business, but they'll capture a huge chunk of new business from a credit card only vendor who charged extra fees. My financing methods were also skewing my purchasing, as I was less likely to go with a non-credit card accepting distributor, even if the terms were more favorable.

Finally, somewhat related, we've had our first full month of debit card use. Debit card transactions were 50% of our credit card use in May. This accounted for a savings of nearly $200, well beyond my expectations. Our projections were based on debit cards used as credit cards. What I hadn't anticipated was our incentive to encourage debit card use. That just about doubled our debit card usage, which is a big win for us. If I could think of a way to institute a cash discount policy, I would do that too.

This is all nuts & bolts stuff for a small business. Our expenses increase 3-4% a year, but where do we see growth? Right now growth is severely limited, and we're hitting a maturity level in our new location where aggressive growth is less likely. Most businesses are working hard to cut expenses, just to keep their heads above water. Smarter use of credit saves us a lot of money, but it mostly just offsets rising costs.

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