Aug 6 2012
The title of this post may sound counter-intuitive. How can I improve my business’ cash flow by making payments? Shouldn’t it be the reverse? My cash flow improves when I don’t make payments. But if you choose not to make payments when your vendors and employees expect them, you probably won’t be in business very long. By using the payment that is best suited to your situation, you can maximize your businesses cash flow. Below are some of payment tool options you should consider, and the pros and cons for each:
1. Credit Cards
Pros: When used properly, credit cards are similar to an interest free loan. The key is to pay off the balance before interest starts to accrue, usually less than 30 days.
Cons: Few vendors (and virtually no employees) will accept credit card payments for the money that you owe them because they don’t want to pay the discount rates and other fees involved. To those vendors that do accept credit cards, as in our previous post, these fees are usually worth it to get paid faster. But after the recent court decision, many vendors may start charging convenience fees to their customers – a practice that used to be prohibited by the major credit card associations.
2. Wire Transfers
Pros: When you pay with wire transfers, not only do you know when the funds will get there — usually the same or next business day — but you can keep your money as long as possible.
Cons: Most banks charge for sending wires. The fees can vary, depending on whether the wire is domestic or international, or how it was initiated (in a branch, on the phone or electronically). Wire transfers vary in cost from $10 to $50.
3. Automated Clearing House (ACH)
Pros: When you pay with ACH, you also know when the funds will get there, usually two to three business days, and you can keep your money almost as long as when using a wire. Most banks charge for ACH transactions, but not nearly as much as sending a wire.
Cons: While it is possible to send ACH transfers internationally, many banks do not offer this service. Also, many international vendors do not accept this form of payment.
4. Online Bill Pay
Pros: At some banks (including Webster), online bill pay is a free service and great for recurring payments. In addition, businesses such as electricity providers and other utilities can actually invoice you directly through your bill pay provider. You can also avoid mailbox theft by not mailing paper checks.
Cons: With online bill pay, you may not know exactly when your payment will be received, so it’s hard to know your exact cash position on any given day.
5. Paper Checks
Pros: Sending a check is free in almost all instances, and employees and vendors accept checks for payment.
Cons: Not knowing when your check will be received and cashed are the major cons. This uncertainty makes it hard to plan your cash flow. If you’re not careful you might accidentally overdraw your account.
When planning out which payment method is best for a given payment, be sure to check with your bank on the exact costs. Also, consider setting up alerts and limits for your various payment methods. Businesses don’t have the same protections as consumers and fraudsters can cause much more financial damage in a very short period of time. If you have any questions about what is right for you, don’t hesitate to ask us.