It’s critical to keep a retail store well stocked with inventory. But as a retailer, what do you do when your cash in hand is not sufficient to purchase the inventory you need to stock your shelves? Often you will rely on a credit card to buy the goods. Over two-thirds of all small retail businesses rely upon credit cards to pay their expenses – including inventory purchases.
The mechanics of purchasing inventory with a credit card are simple enough.
First you contact your supplier or your supplier’s sales representative to make sure he or she accepts credit cards – not all do. Your supplier will need your credit card number, your expiration date and the three digit security code on the back of the card.
After your order is taken, confirm the amount of the order with the supplier. Often the total amount that will be charged to your card will not be known until the order is shipped when freight is calculated. Make sure that the total amount of your order does not exceed the available credit you have on your card.
If your supplier is in a different state or a different country and the inventory purchase is for a larger amount than you usually charge, consider calling your credit card company and informing them of the transaction so they don’t decline it as a security precaution.
The Credit Card Dilemma
Retail businesses are middlemen who buy inventory from suppliers at one price and sell it to customers for a higher price. A retailer’s profit is that price differential, less the amount that goes towards operational expenses.
The dilemma you face when paying for inventory with a credit card, however, is that the money you remit your wholesaler or producer no longer represents the true cost of the inventory you’ve just bought.
When you buy something with a credit card, the credit card company is essentially loaning you money and charging you interest on that loan. That interest, then, is also part of what you’re paying for your inventory. For retail merchants who operate on the margin with only a small difference between the cost of inventory and the price they sell it for, the interest they pay on credit cards can significantly undermine their profits.
Your suppliers who will have to pay processing fees in order to accept your credit card may also look upon credit cards with disfavor. Processing fees can run as high as 2% of the total amount charged.
So how can you incorporate the convenience of credit cards into your inventory purchases without sabotaging your profit margins? Read on for some suggestions.
Apply For a Small Business Credit Card
A business credit card is a revolving line of credit established in your business’s name. If your business is new or hasn’t established credit in the past, either through a bank or through paying suppliers, you will be required personally to guarantee the amounts charged to the business card. In general, the interest rates you pay on business credit cards are higher than what you might pay for other types of business loans. So why get a business credit card at all? Because if you use the business credit card prudently as a tool to help manage cash flow, it has advantages:
Pay Off Your Balance and Avoid Interest: Most business credit cards offer a 21-day grace period before your payment comes through. Pay off your balance within the first ten days after using card for your inventory purchase and the interest you pay will be minimal.
Build Your Business Credit: A small business credit card is your first step towards building business credit which will allow you to become eligible for business loans or credit lines at much lower rates of interest, essential when it comes time to expand your business.
Keep Personal and Business Expenses Separate: Keeping business expenses and personal expenses separate is a Herculean task when they’re both being charged to the same credit card – although when Tax Day rolls around on April 15, you and your accountant will wish you had. When you use a business credit card, your business expenses are automatically tracked separately. An added convenience is the year-end summary that most business credit card issuers provide with all your transactions neatly itemized by tax category.
Rewards Programs: Many small business credit cards are affiliated with rewards programs that offer discounts on a wide variety of business-related expenses including office supplies, software, and even phone expenses. A small business credit card affiliated with an airline will allow you to compile frequent flyer miles, becoming eligible for free air flights.
Buy Smaller Quantities
If your cash flow is variable – if, for example, you run a gift store in a seasonal tourist destination – and you know several cycles may elapse during which you will incur interest before you are able to pay off your inventory purchase, consider buying in smaller quantities.
Of course, the best inventory bargains happen when you buy in bulk. Often the supplier from whom you are buying the product will cut you a deal when you buy large amounts of a product. But even when he or she does not, the cost of freight is generally the retailer’s responsibility and there are savings to be realized when goods are shipped in bulk.
However, the discount you give up when buying or shipping a smaller quantity of product will almost certainly be less than the interest you will be charged over several cycles until you are able to pay your balance.
Adjusting Your Retail Prices
If you determine that you will be using credit cards regularly for inventory purchases then you will have to estimate the interest you are going to end up paying, and factor that into the cost of goods.
If you are using a competitive pricing strategy, this may affect your ability to price your products lower than your competitors.
However, it’s absolutely necessary because you cannot sell products below cost for any prolonged period of time. Whatever pricing scheme you use, it has to be in excess of your cost of goods and your operational expenses or else you will not be able to stay in business.