About 5% of National Home Centers' 6,000 active accounts pay their invoices by credit card. That might not seem like much, but it's a "dramatic increase" over only a few years ago for the Springdale, Ark.?based dealer, says Brent Hanby, National's COO. He also notes that some customers put huge sums on their cards each month.

"We have several who buy in excess of $100,000 per order," he says.

More small businesses are using cards with greater frequency to buy product and pay bills. In December, the Small Business Administration's (SBA) Office of Advocacy attributed a 25% increase in small business loans under $100,000 between June 2004 and June 2005 "mostly" to credit card use. A Webcast that the First Annapolis consultancy and American Express broadcast in January estimated that between 2001 and 2005, credit card spending among small business owners jumped 107% to $219 billion. And a survey of 850 businesses generating between $100,000 and $5 million in annual sales, which Barlow Research Associates conducted last summer for the Consumer Bankers Association (CBA), found that while only 10% currently use purchasing cards, another 19% were "very" or "somewhat" likely to use a card in the following 12 months. Consequently, banks that issue plastic "see small businesses as having lots of potential for growth," says Fritz Elmendorf, a spokesman for the Arlington, Va.?based CBA.

This increase in card traffic has caught the attention of pro dealers because it means transaction fees are taking a bigger bite out of their profits. In response, some dealers have reduced or eliminated the discount they return to account customers who pay early if those accounts insist on using plastic. A few dealers have made the competitively risky decision to refuse card payments altogether.

Right now, National Home Centers accepts major credit cards from its account and its over-the-counter customers; it also doesn't levy an upcharge on account customers to help defray merchant fees that, for all transactions, run between $10,000 and $20,000 per month. Its policy on card payments is evolving, though, as National recently engaged the services of P.E. Systems, a Spokane, Wash.?based consultant that specializes in helping businesses lower merchant fees. Hanby thinks credit card companies might be receptive to reducing their fees in exchange for receiving information about National's customers and transactions.

What dealers struggle with, they say, is how best to accommodate customers' preferences and credit needs without cutting into profit margins at a time when card use is rising. "We'll have monthly budget meetings and see admin expenses that are $20,000 higher because of a surge in credit card use," says Richard Cortese, president of TW Perry of Gaithersburg, Md. Allen & Allen Co., with two yards in San Antonio, saw average monthly fees jump 7.5% last year to $10,183. "I guess it's a sign of the times," says president Buzz Miller, even among account customers, although currently only about 3% of Allen & Allen's 1,200-plus active accounts pay with credit cards.

Niche Products

Contractors, remodelers, and builders–which the SBA estimates comprise about 10% of all small businesses–historically have preferred to pay by cash or check. Credit card providers are looking to change those habits with niche products tailored to pros' specific needs.

In January, the Chase Card Services division of JPMorgan Chase & Co. launched its Chase Contractor Cash Rewards Visa Signature Business Card, which offers 2% cash back on construction purchases up to $20,000 per month, 1% back on all other purchases, 60-day "same as cash" payment dating, and no preset limits. (ProSales' parent company is owned by affiliates of JPMorgan Partners.) "Our goal is to create flexibility," says John Delaney, director of business cards for Wilmington, Del.?based Chase Card Services.

Construction is also one of the sectors that American Express' Open business unit focuses on. Its spokesperson, Rosa Alfonso, notes that Open–which offers many of the same benefits as Chase's card–participates in industry trade shows and runs clinics to educate contractors on business issues like cash-flow management; has conducted special promotions with dealers such as Stock Building Supply; and offers users complimentary enrollment in ServiceMagic, an online lead-referral provider.

And the discount rate? "Our merchant pricing is based on the value we deliver to merchants through the type of high-spending, loyal customers who are our cardmembers as well as marketing expertise that helps drive business to our merchant customers," Alfonso says. "Study after study has shown that American Express cardmembers spend considerably more than consumers who use other cards do ? in all types of establishments. American Express cardmembers want the choice to use their cards for a wide range of reasons."

Dealers are ambivalent about this trend. On one hand, they accept plastic for over-the-counter purchases as a necessary cost of doing business. Dealers understand, too, that pro customers often use credit cards for record-keeping purposes. "You can't start telling customers, who have choices where to buy, how they need to pay you," says TW Perry's Cortese, who observes that credit card use among contractors usually rises when business conditions soften, as is the case now in the housing market.

But dealers suspect that most customers use cards to earn points for trips and merchandise, "which is fine, but we don't think we should have to pay for that," says Buck Byers, vice president with San Bernardino, Calif.?based Barr Lumber. Barr refuses to accept credit cards from account customers unless they pay an upcharge, which some still choose to do: Between 5% and 10% of Barr's 300-plus accounts pay with plastic.

By law, dealers can't charge extra for over-the-counter credit card transactions, and no one interviewed for this story plans to stop accepting some form of plastic at their cash registers. (Most of the dealers we spoke with that don't take American Express generally aren't buying the provider's justification for higher fees that its card delivers bigger spenders.) But Hanby and other dealers note that all providers charge higher fees when a card number is keyed in–as is often the case with account customers–rather than swiped.

Necessary Measures

The higher fees for keyed-in transactions are what led Thomas Building Center, a $12 million dealer in Sequim, Wash., to stop accepting plastic altogether from account customers last summer. Andrew Thomas, its controller, recalls that four years ago his company started letting account customers pay by credit card if they waived the 1% discount they got for early payments and if the dealer billed them weekly. But then providers began classifying all card transactions as "nonqualified," meaning they were considered manually keyed whether they were keyed or swiped. The key-in merchant's fee was 2.25%, "which didn't work for us," says Thomas. "On $20,000, we were paying $450 just to get them to pay us."

When it finally stopped accepting plastic from its 800 accounts, Thomas Building Center lost some customers, even after restoring the 1% discount. But Thomas says his company can't absorb more transactional fees–which already hover around $80,000 per year–even if more account customers started demanding that their cards be accepted.

Other dealers have taken less draconian measures to rein in card-related costs. Stenerson Lumber's three yards in Montana once returned 2% to 3% of an invoice to early payers. Now its policy is to reduce or eliminate that discount when account customers pay with a card. Still, Stenerson Lumber enforces this policy on a case-by-case basis, says its president, Les Stenerson. And most independent dealers don't want their credit card policies to become so restrictive that they drive customers away.

"We don't consider the big boxes competition, but we hear all the time they accept credit and that customers have 90 days to pay," says Stenerson. "It's becoming harder to combat that."

–John Caulfield is a contributing editor for ProSales.