FIGHTING BACK AGAINST CREDIT CARD FEES

I recently attended an SBDC Small Business seminar and was surprised to discover how many small businesses were financing their businesses via credit cards. I understand the difficulty of securing money for start-ups and the passion of pursuing one’s dream to have their own business move them to the desperate act of securing high multiple credit cards to get started. I don’t understand this tactic unless you have cash flow to pay off the card balances. If you don’t, you will severely damage your credit ratings. Be that as it may, if you are going this route, be aware of the high charges awaiting you if you are late in paying your bills.

Here is an example I recently experienced with a major credit card company with actual numbers.

I was looking over an $881 monthly charge of my wife’s card before paying it and noticed an interest charge of $59.39 and a late fee of $39.00. (The card companies will argue that the late fee is not related to the interest charge, and I will advocate they are kissing cousins as both are triggered by the one act of receiving the payment late. It seems obvious that the card company uses this tactic to show a lower interest rate.)

Moving on to the math using their interest charge of $59.39, this is an interest of 6.73%. This doesn’t sound too bad until you realize (which they hope you don’t) this is for one day only. Amortized it comes out to 2,456%, an astounding number. I thought this was against the usury laws, but I was to learn it is not. In fact, new credit card laws that go into effect this August change some credit card practices, but they do not limit how high interest rates can go. I asked my wife to call the card company and ask how late the payment was. She was told one day, which in effect, was the full 2,456% rate. If we add the $39.00 late fee, the annualized charge is 4,072%. After I did this math, I asked her to call again and tell them this charge for one day late was unfair, and they did not hesitate to immediately tell her they would void both charges. I have always found if you phone and politely voice your unhappiness over their outrageous charges, they will yield and adjust or eliminate them. Of course, if you are very late on a consistent basis, the outcome may be different.

Knowing that card companies generated $20.5 billion in fees in 2009 and that few people challenge them, they would rather void some charges so as not to shine the spotlight on this lucrative source of income.

There are some other variables in this transaction in that you are at the mercy of the card company in knowing about how long did it take for the mail to get to them. One day, seven days? Also, how long did it take for them to process and enter the payment on their books?

A small piece of good news is that the new law states credit card companies must give consumers at least 21 days instead of the current 14 to pay their monthly credit card bills.

So, make the call, endure the phone wait, and challenge the charge. Every bit helps when you are fighting for survival and profits.

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FACTORS: How They Can Help Your Cash Flow and More

Factors finance $120 billion in receivables, yet most small and start-up businesses are not aware of them. Business schools rarely acknowledge them. However, they can alleviate your cash flow problems. They can loan you or advance you money against your receivables and in some cases against your inventory. In other words, your receivables are an asset that the lender (Factor) purchases.

The Advantages of Using Factors:

  • You get payment for your invoices within days. This allows you to pay your suppliers on time, to build trust  with them, and to take advantage of their cash discounts. It is a financial tool that speeds your business’ cash flow. Factors do not lend money on purchase orders.
  • All your costs are variable.
  • Factors check the credit of all your customers and would-be ones. Thus, you get more accurate and current information than if you performed this function on your own. More money is saved by eliminating the need to hire a credit checker.
  • Factors collect all your receivables. In today’s world, the majority of customers like to stall the payment of their bills. Some will not pay until someone calls them for payment. The Factors have more leverage than you as an individual have. They may represent 50 suppliers of one customer.
  • Factors act as insurers of the receivable. If after you ship a customer and the customer goes bankrupt, the Factor may be stuck, depending on your contract, not  you. This feature can help you sleep better as well as eliminate your bad debts.
  • The Factor can take over some of your administrative functions and save you the resultant labor costs. On one of our game companies that was created around a licensed product, the Factor supplied us with data on monthly shipments which acted as our Royalty statement. They also provided us with total shipments by territory or account which we used as our Sales Rep commission statements.
  • You can get money even though you don’t have a good credit rating. The Factor is only interested in your customers’ credit ratings.

The disadvantages of using Factors are the costs, which can be high in some cases, and they may alienate some of your customers with their collection techniques. You need to read and understand their contract carefully.

You can locate an appropriate factor by going to the website of the International Factoring Association or ask your local banker, SCORE, or SBDC office.

(This post is excerpted from Chapter 11 of Bootstrapping 101.)

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