How CFOs use corporate cards to increase working capital

CFOs have a variety of options in their toolbox – traditional loans, lines of credit, invoice financing, corporate cards, crowdfunding and even family & friends. It seems like each financing option has its place. Finance teams might use a line of credit to pay for operating expenses, for example. Invoice financing might be a last resort to recoup payables for delinquent customers. 

Corporate cards have their traditional functions too, for things like employee travel expenses and emergency backups when cash is short. But the economic climate is changing, and that affects how CFOs view sources of financing. Businesses that can’t secure a traditional loan, for example, may still be able to acquire a corporate card – allowing the business access to working capital they wouldn’t otherwise have.

According to VISA’s Growth Corporates Working Capital Index, roughly 1,300 participating CFOs reported a 16% increase in the use of working capital as a strategy – rather than an emergency stopgap. CFOs are starting to see new use cases for corporate cards and they’re getting creative with strategies that support business growth. 

Why is the use of working capital changing?

There are a variety of reasons why CFOs are looking to corporate cards as a strategic source of working capital. One of the biggest reasons is inflation that’s taken place as a result of the pandemic. 

According to Key Bank’s Middle Market Business Sentiment Report – Q1 2024, inflation is the highest factor that negatively impacts middle market companies. As inflation increases, companies seek to raise prices, which may have downstream effects on customer relationships. At the same time, rising supplier costs (possibly due to inflation) can also divert additional cash that could be used as working capital.

Higher interest rates are another factor, in that any source of funding that businesses acquire will require a larger payback on the back end. Over a quarter of respondents in the above-mentioned report said that higher interest rates are negatively impacting their business, and 11% expected that credit access (or lack thereof) will negatively impact operations in the next year.

In addition to these negative impacts, there are a few positive elements that are driving change in the use of working capital. One is the more equitable sharing of transaction costs between midmarket companies and their suppliers. 

In the past, sellers were overwhelmingly responsible for costs associated with customer transactions. But with the increased usage of virtual and corporate cards for B2B transactions, the benefits on both sides are changing the way B2B buyers and sellers allocate transaction costs.

Using corporate or virtual cards for B2B transactions also streamlines the payment process. Buyers have less headaches, paperwork, and potential for fraud related to card transactions. They can negotiate more favorable payment terms with commercial card issuers to extend cash flow while still meeting seller payment deadlines and even qualify for early payment discounts.

Sellers get paid faster and with drastically lower effort. 

Use cases for leveraging corporate cards as working capital

Respondents in the VISA’s Growth Corporates Working Capital Index said that corporate and virtual cards are number 3 on the list of most popular working capital options, mainly because of their automatic days payable outstanding (DPO) benefit. Businesses can pay with a virtual or corporate card so their supplier gets cash immediately while they can wait 30 days to pay off the card. Virtual and corporate cards also give CFOs and their teams access to funds without the cumbersome loan approval process.

• Construction businesses, for example, may be managing 50-100 different construction projects all at the same time. Working capital needs to be available to pay workers and purchase supplies at just the right time. Without it, projects can stall or customers can take their business elsewhere.
  
  With a corporate or virtual card, construction managers can pay contractors and buy supplies when they need them. Projects can continue on time and on budget and workers can move to the next one when they’re done, without worrying about getting paid. The business gets extra lead time without decreased cash flow, which may open up opportunities for new projects and increased revenue. And they may even negotiate early payment discounts with suppliers, reducing costs without letting cash out the door early.

• Non-profit organizations may have limited budgets and fundraising windows at certain times of the year. But when disaster strikes and victims of a hurricane need support, for example, staff need access to credit options that enable them to support victims financially and pay their own expenses. Using a virtual or corporate card allows team members to purchase much-needed supplies and do their jobs, while not impacting precious cash reserves.

Use cases for protecting working capital with corporate cards

In addition to expanding the use of working capital, corporate and virtual cards offer the ability to protect cash flow from overspend or unapproved spend – an all-to-common phenomenon with bank cards.

• Businesses with advertising spend might have increased fees based on higher search engine marketing (SEM) keyword use. With a traditional bank card, the supplier would bill for all fees on the card with no limit. If the amount was over what’s in the bank account, it would go into overdraft – incurring both the overspend on advertising and any overdraft and associated bank charges.
  
  With a virtual or corporate card, buyers can set custom spending limits on each card. So if the advertising spend agreed by buyer and seller is $5K per month, that’s the most the seller will be able to bill on the card. Custom spending limits protect the buyer’s working capital from additional unknown charges.

• Recurring charges for SaaS tools, for example, might have a standard monthly fee they bill. Without warning, the seller might send an additional bill for $10K. With a bank card, this fee would be automatically withdrawn from the buyer’s account and could have a big impact on cash flow. Virtual and corporate cards can again use custom spending limits to block unexpected fees, so buyer and seller can discuss what the charge is for before payment. 

Leveraging PEX to expand and protect working capital

PEX offers CFOs and their teams all of the benefits of using a corporate or virtual card, but with more built-in controls and insights. 

• Advanced access to working capital empowers finance teams to make early payments, creating the opportunity for early payment discounts from suppliers. It also allows companies to hold onto precious cash reserves while continuing to fulfill payment obligations on time.
• Custom spend rules allow CFOs to create a framework for spending based on any number of factors – merchant type, physical location, day of the week, or even cardholder group. Any purchase attempts outside the approved rules will be declined, blocking unapproved spending and potential fraud from draining cash flow.
• Real-time expense tracking enables finance teams to understand spending as it happens, rather than after the fact. Knowing the types of spending taking place in the moment helps CFOs manage liquidity proactively, like using working capital to grow the business rather than for crisis management.

Want to learn more about how PEX helps companies expand working capital and protect cash reserves? Schedule a demo with us.