This is finance of a kind wherea company will make arrangements for the use of the services of a credit card organisations (through the purchase of credit cards) in return for prompt settlement of bills on the card and a commission payable on all credit transactions. This is used to finance goods and services of working capital in nature such as the payment of fuel, spare parts, medical and other general provisions and it is rare for it to finance raw materials or capital items.
Reasons behind the Fast Development of This Finance (Plastic Money) In Kenya
- High incidences of fraud dishonest employees has been responsible for development of this finance as it minimises chances of this fraud because it eliminates the use of hard cash in the execution of transactions.
- Risk associated with carrying of huge amounts of cash for purchases which cash is open to theft and misuse has also been responsible for development of this finance.
- Credit cards have boosted the credibility of holder companies which enables them to obtain trade credits under conditions which would have otherwise been difficult.
- Of late, Kenya has experienced emergence of elite, middle and high-income groups’ in particular professionals who tend to use these cards as a symbol of status in execution of day to day transactions.
- These cards have been used financial institutions and banks to boost their deposit and attract long term clienteles e.g. Royal Card Finance, Standard Chartered.
- A number of companies and establishments have acquired such cards as a means of settling their bills under certain times when their liquidity is low or when in financial crisis.
Limitations of Credit Cards as a Source of Finance
- These cards leads to overspending on the part of the holder and as such may disorganise the organisation’s cash budget and cash planning.
- Limited as to the activities they can finance as they are ideal for financing working capital items and not fixed assets in which case they are not a profitable source of finance.
- They are expensive to obtain and maintain because of associated cost such as ledger fees, registration, insurance, commission expenses, renewal fees etc.
- It is a short-term source and is open only to a few establishments in which case a company can obtain goods and services from those establishments that can accept them.
- Entail a lot of formalities to obtain e.g. guarantees, presentation of bank statements and even charging assets that are partially pledged to secure expenses that may be incurred using these cards.
- They may be misused dishonest employees who may use them to defraud the organisation off goods and services which may not benefit such organisations.
- Credit card organisation may suspend the use of such cards without notice and this will inconvenience the holder who may not meet his/her ordinary needs obtained through these cards.