Credit cards are so ubiquitous that it feels like they've been around forever, but they're a relatively modern payment and financing tool.
Credit cards are undeniably valuable, which is why the average American has four card accounts open at any given point in time.
While many focus on the usefulness of personal credit cards, particularly when looking at the history of credit, they're also essential tools for businesses today.
In this post, we're going to discuss the history of credit cards and why it's so relevant for B2B businesses today, along with sharing some tips for how B2B businesses can leverage credit to their benefit.
The History of Credit Cards
We know that the biggest advantage of credit cards is that they were created to allow consumers and businesses alike to collect and manage tabs, or accounts receivable. You can swipe the card without having cash on hand, and pay it back in installments if necessary.
The Use of Credit in the United States
The concept of credit is something that goes far back beyond credit cards themselves. There are documented cases of credit being used as loans from local shopkeepers in the 1800s here in America. Consumers would have "tabs" that they'd use to buy everything from groceries to essential farming equipment when they didn't have the cash to pay upfront.
The Emergence of The First Modern Credit Card
It wasn't until the mid 1900s, however, that credit cards began to evolve into something closer to what we know today.
In the 1920s, department stores and oil companies began offering "courtesy cards" and metal charge plates that customers could use to put purchases on credit. The idea was similar to what we're used to today as "Store" cards, like a Lowes Card or a Haverty's Card; you can open a line of credit, but it can only be used at that particular shop.
It was Frank McNamara in New York in the 1950s, however, who gave rise to the modern-day credit card. He started a "Diners Club," which was a card that he hoped restaurants all over the city would eventually accept.
It became the first major charge card accepted by multiple vendors. It started to be more accepted by travel and entertainment businesses, even though restaurants had never even had charge cards previously.
Though he charged 7% fees to restaurants, he also assured them that customers with cards would spend more than those without. He was clearly onto something.
The Increasing Popularity of Cross-Vendor Charge Cards
The concept quickly caught on and became more widely accepted, and thus the modern credit card was born. By 1958, Bank of America released a credit card that allowed for revolving credit. It started in California, but by the mid-1960s it was rolling out to other areas, too.
The Standardization & Popularization of Credit Cards
Over the next decade, protections for customers rolled out, protecting them against fraudulent charges and standardizing interest rates. The credit card industry became regulated, interest rates were aligned with the federal reserve, and terms and conditions of credit card usage were made clear.
We saw the emergence of credit cards as we know them today, including Discover cards, American Express cards, and Visa cards.
The Adoption of Lines of Credit by B2B Businesses
Over time, business credit cards and lines of credit became available, too. B2C adopted credit early, as they were incredibly familiar with the benefits from their own customers. Many often used it to increase their ability to purchase inventory while waiting for client payments to process.
Why The History of Credit Cards is So Relevant for B2B Businesses Now
The history of credit cards is relevant to B2B businesses now because it offers the potential for expansion through affordable, flexible financing.
B2C businesses, after all, happily adopted business credit. They were able to gain flexibility by freeing up their working capital while waiting for payments and sales.
These exact same principles apply to B2B businesses, too, especially since so many B2B brands are often relegated to net 30, 60, or 90-day payments (if not long-term payment plans) for large contracts. There's often a sizable delay in sending an invoice and receiving payment for a large number of B2B businesses, which can cause major growing pains when you're trying to scale.
This is particularly true now, as businesses have been hit particularly hard during the strenuous economic difficulties caused by the COVID-19 pandemic. Many B2B businesses are struggling with ever-shrinking budgets while they try to make ends meet until the economy is able to recover, which limits their overall working capital.
This is putting many B2B businesses in precarious positions. If you're on a tight budget and struggling to attract new clients, the last thing that you want to do is cut marketing costs when they're keeping customers coming in through the door. Yet if you only have $4000 and it's all used up for mission-critical costs like invoicing software, site hosting, credit card fees, and your office's rent, there's literally no funding left over for marketing campaigns.
This is where business credit cards come into play. By putting some of your expenses on a company card, you're able to free up working capital. You can keep your operations running as you see fit, maintaining your current operations at a reasonable level, until cash flow opens up and improves enough that you're able to pay it off and start scaling again.
Right now, flexible and revolving lines of credit can be exactly what B2B businesses need to stay open long enough to survive a hardship or the economic downturn, and business credit cards can offer that.
"Revolving" lines of credit is the key phrase here. Not only is it typically easier and faster for B2B businesses to open a new credit card instead of accepting a major loan, but it also allows you to make charges, pay it off, and charge something else again.
You're able to use your available balance as you see fit on an ongoing basis, as compared to a loan, which offers you a one-time lump sum. And unlike loans, charge cards don't have any restrictions around early pay-offs, and the interest rates are applied only to what you're using right now, not what's available to you.
How B2B Businesses Are Using Credit Now
While loans and grants are often the first line of defense for a large number of B2B brands, an increasing number of these businesses are turning towards credit cards.
They're undergoing a similar digital transformation as their B2C counterparts. They're using more tools for automation when it comes to invoicing or full credit card systems, which opens up the door for more regular credit card usage and improved accounts receivable (AR) management.
Apruve's B2B business lines of credit act exactly as your standard VISA card will. We tie together banks, suppliers, and buyers. Credit issuers are the ones who hold onto the debt, ensuring that the seller is paid promptly without needing the buyer to pay it off over time. Businesses are able to get paid within a single day of the invoice being sent, and with automated invoicing, the process is significantly streamlined.
While it's smart to minimize credit card debt and your debt-to-profit ratio overall, knowing how to leverage short-term debt to your benefit can be a powerful asset. Keep in mind, too, that you don't necessarily need to have a plastic card with a magnetic stripe for the line of credit to be effective, as our credit management solution is entirely online.
You need to have strong and consistent cash flow management in order to keep things moving, and whether your customer have net-30 accounts (or longer!) or things are just a little slow, business lines of credit can be a game-changer.
The history of credit cards is relatively short, but the history of businesses using and extending accessible lines of credit to their customers is almost as old as our country itself.
Now, however, credit cards and business credit has come a long way. Thanks to accounts receivable and credit management options that are specifically designed for B2B businesses, you can get paid 24 hours after an invoice is sent, even if your customers will sit on the invoices for weeks or month themselves. The flexibility that this allows for your cash flow is huge, ensuring that you're not stuck at a financial standstill that keeps your business stagnant in the meantime.
Improved cash flow means more room for business growth, both in economic upturns and downturns, so consider finding a revolving line of credit for businesses that works for you.
Looking for new financing options to expand your B2B business by boosting your working capital and cash flow? Learn more about how Apruve's B2B credit management solution works here.