One of the goals for maximizing your working capital cash flow is to hold onto your business’ cash as long as possible. At the same time, you do not want to put in jeopardy your partnership with your vendors.
One of the methods used is to deploy the corporate credit cards to help stretch out the payment process of a vendor’s bill. The Numbers Coach recommends this strategy if the net benefit to using it is a positive result, and the business pays off the credit card statement amount each month.
If the business carries a balance and subsequently it is charged interest expense by the credit card issuer, then the Numbers Coach does not recommend this strategy. The reason is the interest cost will likely by too high to produce a net benefit and it directs resources away from productive reinvestment back into your business versus paying interest to a financial institution.
To analyze whether it’s beneficial to pay a vendor using a credit card with the vendor charging a surcharge to use this method of payment, you should consider the following steps.
Compare Surcharge to Benefits
Below is an illustration of how to determine the benefit or not for using this working capital strategy.
- Surcharge Cost charged by the vendor for using a credit card: 3% of the payment amount.
- Credit Card Benefits: Estimate the cashback, rewards, or payment float (time value of money) from using the card.
Example:
- 1.5% cashback → net cost = 3% – 1.5% = 1.5%
- No rewards → full 3% cost
Evaluate Cash Flow Impact
- Assume using the credit card delays cash outflow by up to ~30 days.
- Calculate opportunity cost or savings from holding that cash longer (e.g., investing the money back into the business or covering other payables).
Assess Working Capital Value
- Improved working capital flexibility might justify some cost.
- Ask: Can this help avoid overdrafts or missed payments elsewhere?
Tax Deductability
- The vendor surcharge is typically a deductible business expense.
- Check with your accountant if tax savings reduce the net cost.
Decision Rule:
Only use the credit card if the value of rewards + cash flow benefit > surcharge cost.
Net Benefit Formula:
Net Benefit (%) =Rewards Rate (%) + (Float Days÷30) × Monthly Return (%) − Surcharge (%)
Decision Rule:
- If Net Benefit (%) > 0, using the credit card is beneficial.
- If Net Benefit (%) < 0, it’s more costly to use the card.
Example:
- · Rewards Rate: 1.5%
- · Monthly Return: 0.5% (annual return 6%)
- · Float Days: 30
- · Surcharge: 3%
Net Benefit=1.5% + (30/30) ×0.5% − 3% = -1.0%
→ Not beneficial in this case.
The above illustration indicates that using the credit card for vendor payment in this case would not be beneficial and benefit the company’s working capital strategy.
Understanding how to analyze this working capital strategy can help you make better financial decisions to grow your business.
Want more info? Check out our Working Capital Tool Kit for helpful resources.