Building Better Construction Procurement With Virtual Cards

Construction companies must make a variety of purchases to get the building materials they need to complete jobs, but using paper-based methods, such as checks, to handle this procurement can quickly create friction. A company such as commercial wall system contractor Nevell Group spends about $10,000 on an average order, though B2B transaction amounts can range from $100 to $500,000. Using paper-based payments to make such purchases is rarely a smooth — or cheap — process, explained Jeff Freese, the company’s certified public accountant and controller.

Nevell Group used to rely entirely on paper checks for vendor payments and payroll before changing tack two years ago. At that time, the firm was sending out 2,000 checks a week.

“I did an analysis a while back, and we were spending $50,000 a year just on checks, envelopes, ink [and] time sorting and stuffing checks into envelopes,” Freese said. “Right now, we’ve cut that down by 80 percent with direct deposit and AP digital payments. … It’s not only helped our costs today, but with all that’s going on with COVID and the mail service, we don’t have to deal with all the delays and lost mail.”

The pandemic has highlighted paper-based payments’ pains for many businesses, and Freese explained to PYMNTS that switching to virtual card transactions can be a desirable upgrade for avoiding these delays and expenses. This payment method offers a fast, secure way to pay while boosting cash flow for construction companies and their suppliers.

Constructing Convenience and Security

Financial strains brought about by the pandemic have made many companies even more concerned with trimming unnecessary administrative expenses, and paper checks can be a major obstacle to efficiency. Freese said Nevell Group found that paying this way led to time-consuming AP processes, with staff having to prepare checks and send them to high-level executives for signatures before putting them in the mail. This was a problem for the team, partly because only two executives were authorized to provide signatures and had to fit the signing sessions into their busy schedules.

“Once we’d have checks printed, they’d have to go to our CEO or [vice president],” Freese explained. “Having them take the time to go through and sign all the checks could be a two- to five-day process, plus we’d have to stuff all the checks and mail them out.”

Transitioning to digital methods removed this speed bump and cut that multi-day process down to several minutes.

“Now that we’re doing electronic payments, there are seven to 10 people within the company who can approve a payment,” Freese said. “We don’t need to wait for a signature. And once we have that approval, we’re able to upload any number of payments in five minutes and receive confirmation 10 minutes later that they have all been successfully sent.”

Companies need to make sure they are not sacrificing safety in exchange for administrative cost savings, however. Construction firms that are changing how they make procurement payments must be attentive to the security measures that will protect their now-digital transactions.

Freese explained that security is an area in which virtual cards particularly shine. Payments made via traditional credit cards involve transmitting card details to vendors, which hackers could potentially steal to take advantage of a company credit card. Virtual cards reduce such risks by generating one-time-use codes to authorize each transaction, meaning that even fraudsters who manage to capture the information cannot use it to make purchases.

A Blueprint for Better Cash Flow

Buyers and suppliers are also exploring virtual credit cards out of a desire to improve cash flow. Businesses across the board have seen their finances take a hit as a result of the pandemic, making safeguarding liquidity an even higher priority than usual.

Construction companies may be tempted to spend with credit because doing so allows them to keep cash on hand longer while still promptly paying vendors. Switching check payments for credit means buyers can retain their money for additional weeks beyond invoice due dates. The credit card companies deliver funds to the vendors first, and the buyers have until the card bills are due before they must move money out of their accounts.

“The virtual card is on a credit line for us, so we have a 30-day billing cycle we can utilize, plus a seven-day payment period [with the card company], so anything we pay has the opportunity to sit in our cash flow for 37 days,” Freese said.

The materials suppliers on which construction companies rely have not always been interested in accepting card payments, however. They typically prefer to avoid the associated interchange fees, but this has changed now that vendors are finding it urgent to get paid fast. Suppliers have become increasingly open to accepting digital payment methods — even at the cost of fees — over the past year, as long as funds settle sooner, Freese said.

“In construction, cash flow is extremely important, so [the vendors are] oftentimes going to go with the way that gets the cash into their banks in the fastest time possible,” he explained. “So, a lot of times, if they take a virtual card, they’re willing to pay a fee for that.”

Buyers and suppliers alike are hurting as they cope with the pandemic’s impacts. Fast, secure B2B payment methods could help them get through these hardships and emerge with more resilient arrangements. Construction firms looking to design stronger procurement practices may find that virtual cards could be the important building block they need.