Small businesses in need of credit at this juncture of the country’s economic challenges, could find that having a credit card for their business may in fact be advantageous, according to business banker, Ryan Parkes.
The chief of business banking at JN Bank said if used correctly, credit cards could simply be a source of free credit for businesses that will allow them to help to preserve their cash.
“Several times small businesses find themselves in a position where there is a constant need for working capital support especially for short cycles. Several business credit cards in the market currently offer an interest-free period of up to 55 days. For those businesses that have a cash cycle of less than 55 days, a business credit card can provide working capital at an interest rate of zero per cent,” the business banker explained.
“Just imagine the upside to that advantage especially for small businesses that are more vulnerable to a fallout during COVID-19, so it could provide relief from an interest cost perspective to several businesses,” Mr Parkes argued, although acknowledging that if a business has a longer cash cycle, it may be more prudent for it to access a line of credit, than a credit card.
He underscored, however, that it is important to ensure that the card is being used responsibly, noting that financial institutions have a responsibility to educate businesses about how to use their cards effectively.
“Two things are important: knowing the statement cut-off date or due date of the card- you want to ensure that the balance is fully paid off prior to that date. Second, once it is paid off before the statement date, the balance is replenished, which is available to the business almost instantly,” he emphasised.
“With that kind of revolving approach, you get the benefit of credit and you also get the benefit of no interest.”
His comments come as businesses face the plight of a contracting economy due to the COVID-19 pandemic. Both the Bank of Jamaica (BOJ) and the Planning Institute of Jamaica (PIOJ) predict a contraction of between seven to 10 per cent in the economy for the financial year, with the PIOJ also acknowledging that output declined 18 per cent for the quarter ending June.
Businesses in tourism and entertainment have suffered the most, with a downturn of 87.5 per cent when compared to the same time in 2019 the PIOJ said. The industry raked in some $16.2 million from January to June, more than 98 per cent below last year’s total for that period.
The goods-producing industry declined by 4.4 per cent, and services 11.5 per cent.
Use your card for temporary relief
“It is important to note that a credit card should not be used for all expenses,” Mr Parkes cautioned.
“Your credit card must be seen as interim relief, so you need to identify the source of the cash flow before you use the card. It’s relief until that cash flow becomes available,” he said, underscoring that a credit card is not a term loan and if incorrectly used, could worsen the business’ financial position rather than improving it.
He recommended that businesses commonly use their cards to defray certain expenses, such as utilities and customs charges.
“You know you need to clear the goods, but you know that when you sell the goods you’re going to get cash,” he pointed out.
Credit cards can also be used to make online purchases for the business, where necessary; and pay taxes upfront, to avoid interest and late fees.
In addition to interest-free financing, Mr Parkes, whose bank recently launched the JN Bank Visa Infinite Business Credit Card, made the point that some cards also carry a cashback feature, which could provide an additional source of cash for several businesses especially at a time such as now, when businesses need to maximise cash intake.
“Imagine using your card and you get back some cash? That cash could be used to offset other business expenses,” Mr Parkes pointed out, noting that although the cashback rewards are accumulated over time, businesses can budget for it.
“You can allocate the cashback to offset some bills when they are due, for example, insurance,” he explained, highlighting that his company’s Visa Infinite Business Credit Card offers a cashback of up to $100,000.
Get a card that meets your needs
Not all credit cards may be right for a business, Mr Parkes acknowledged. He said it’s important for entities to understand what their needs are and determine what kinds of features best address those needs, including the limits available and the interest on the card.
For example, he noted that a business may have executives who need to travel for work, and so a credit card that offers travel benefits may be important.
They may also need support with operational efficiencies, which is a benefit that some institutions offer along with their business credit cards.
“A card with a payroll feature may be more beneficial than another credit card that doesn’t offer this feature,” he said, noting that for many small businesses, which have understaffed accounts departments, payroll can be a very tedious and inefficient exercise.
“Some persons in accounts departments cringe when payroll time comes around,” he said, noting that especially smaller businesses lack capacity.
He said JN Bank’s Visa Infinite Business Credit Card offers free access to a cloud-based payroll technology to businesses through its JN Group sister company, MC Systems, which allows entities to not only be more efficient, but to cut costs.
