As a typical construction contractor, you probably find yourself pouring substantial funds into acquiring equipment, materials, or supplies, even before a project contract is inked. And this initial investment is just the beginning. As you successfully win bids, the financial demands escalate with the need to purchase additional materials and supplies for each new project.
These expenses, crucial as they are to your operations, create a scenario where your money is constantly in motion - from your account to your suppliers, long before the fruits of your labor materialize in the form of client payments. The gap between these outflows and inflows, often stretching into weeks or even months, exerts immense pressure on your business’s cash conversion cycle.
This cash conversion cycle is the heartbeat of your business’s financial health, and it represents the time it takes to turn your initial investment in inventory and supplies into cash flows from sales.
In the construction world, where project timelines and client payments can be as unpredictable as the weather, managing this cycle effectively becomes critical to your business's survival and growth.
Enter the business charge card, an unsung hero in the financial toolkit of construction businesses. Unlike its more commonly used cousin, the debit card, which immediately deducts expenses from your account, a business charge card offers a cushion of time. It allows you to defer payments until the next billing cycle, essentially offering you a short-term interest-free loan. This delay in outflows can be a lifeline, providing much-needed breathing space for your cash reserves.
More than just a tool for deferring payments, the business charge card comes with an added layer of financial management. It helps streamline your expenses, giving you a clear and consolidated view of your outflows. This clarity is invaluable for a construction business, where keeping track of numerous transactions can be as daunting as navigating a complex building blueprint. With a business charge card, all your project-related expenses are neatly itemized, simplifying bookkeeping and budget tracking. This organization is not just a matter of convenience; it’s a strategic asset, enabling you to analyze your spending patterns, identify cost-saving opportunities, and make informed decisions about future investments.
Moreover, the flexibility offered by a business charge card isn’t just about delaying payments. It's about aligning your cash outflows with your revenue inflows, thereby optimizing your cash conversion cycle. In an industry where cash flow is the king, this optimization can mean the difference between a business that thrives and one that merely survives.
What is a Business Charge Card?
A business charge card is a payment method that allows you to delay cash outflows by giving you a specified amount of time between the day you make a business expense and the day you need to repay the card. All without any interest payments.
Cash outflows: Any money leaving the business. Most important are the expenses, inventory and other items you spend cash for, and do not expecting cash in immediately.
Charge cards often come with higher spending limits and generous rewards for members. For instance, members can earn travel rewards or cashback for their purchases. And you’ll receive fraud protection on all your expenses.
You can only apply for a charge card with a limited number of issuers. And some lenders do require that you have a good business (not personal) credit score to qualify, though the exact requirements will vary.
One thing to keep in mind is that missed payments are reported to the credit bureaus and can impact your business credit score.
Overall, a business charge card is a great way to manage short-term cash flow.
Charge Card vs. Credit Card
People sometimes use the terms “charge card” and “credit card” interchangeably, but they aren’t the same thing. A charge card requires you to pay your balance in full at the end of the month.
In comparison, credit cards only come with minimum payment requirements at the end of the month. Some people like credit cards because it allows them to carry a balance from month to month.
However, a credit card comes with hefty interest charges for this convenience — according to data from the Forbes Report, the average credit card rate was 27.80% in 2023.
Charge Card vs. Debit Card
Unlike a charge card, a debit card links to a bank account with money already in it. For instance, you probably have your debit card linked to your business bank account. That means the money you spend will come out of your account immediately, and you can’t spend beyond what’s in your account.
Since a debit card doesn’t allow you to delay your payments, this can end up causing cash flow problems for your contracting business.
4 Benefits of a Charge Card for Contractors
For contractors looking for a way to fund projects and improve their cash conversion cycle, charge cards offer unique benefits over credit and debit cards. Let’s look at four benefits of a charge card for contractors.
Free up cash flow
Most contractors experience a gap between when a project begins and when they actually receive their first payment from the customer. If you don’t have a way to navigate this gap, your business could experience cash flow problems.
With a charge card, you can fund your project and delay payment on these expenses for 30 days. And charge cards typically come with higher pre-set spending limits, so you might be able to use them for a larger equipment purchase.
Avoid paying interest
Unlike credit cards, charge cards don’t come with hefty interest payments. A charge card lets you borrow money interest-free as long as you pay off your balance each month.
In comparison, the average credit card comes with an APR above 25%. Given that construction margins are often 10% or less, carrying a balance on a credit card could make your business unprofitable.
Accelerate business growth
If you solely rely on debit cards to make purchases for your business, then you’re limited by what’s currently available in your account. That means you could have to turn down bigger projects because you don’t have the cash flow available to fund them.
That’s why charge cards are a great way to manage your finances and accelerate business growth. You can take on those larger projects with a charge card because you can delay payment for 30 days.
And one of the most overlooked advantages of charge cards is that you can earn rewards on your purchases. You could earn generous travel, cashback, and rewards points for your purchases. These rewards can add up quickly if you regularly purchase expensive equipment and other project materials.
Improve your business credit score
When you use a charge card, you’re building payment and trade credit, which will improve your business credit score. And unlike credit cards, large purchases won’t hurt your credit since they don't affect your credit utilization rate.
Your business credit score measures the creditworthiness of your business. A good credit score makes it easier to qualify for a business loan and secure the lowest interest rates. You can read more about business credit scores here.
Plus, other companies may look at your business credit score when deciding whether or not to do business with you. A good credit score could help you get bigger commercial projects in the future.
The Bottom Line
For too many construction companies, profitable business growth doesn’t feel very feasible. Either you have to sacrifice cash flow to fund customer projects or rely on expensive, high-interest credit cards or small-business loans.
In essence, a business charge card is more than a payment method; it's a financial strategy. It’s a tool that, when used judiciously, can help you navigate the financial complexities of the construction industry, ensuring that your business isn't just building structures, but also building a strong, sustainable financial foundation.
And when you apply for a charge card with Toolbox, you won’t have to give a personal guarantee or go through a lengthy sign-up process. Toolbox charge cards are built specifically for contractors and have rewards targeted at construction, maintenance and repair businesses.
