After trying out a few products, I hit on what I was sure to be hot for the holidays - a portable pop up desk that can turn any flat surface into a stable standing desk with a handy cup holder. I made a great deal with a supplier that had a distribution center in California, and we started advertising in October. It took off. It was great until my supplier couldn’t keep up which caused shipping delays I didn’t anticipate, and then my processor put a hold on my merchant account. Sales kept streaming in, but I wasn't getting funded so had no cash I needed to keep paying my supplier. The account was eventually closed, because we processed more than our approved monthly volume. Everything crashed after that and a bunch of orders didn’t arrive in time for the holidays, which left me with some extremely unhappy customers and a bunch of chargebacks to make matters worse. Without the cash flow, I am having more issues with the supplier as well. What can I do to fix things?
--Strapped without a desk to stand on
Congratulations on finding a good product. It sounds like something we could use here.
You did the right thing in trying out a few products before committing to going big with one. Sometimes merchants are so eager to get going they skip this step and end up spending a lot of money on what turns out to be a dud. There’s a lot to be said about how to test products and figure out if the problem is the product or the marketing plan, but suffice it to say it’s usually in the marketing. That was not your problem. Clearly, based on orders, you had solid marketing that resonated with consumers.
Now, what you need is a MAP - Merchant Account Plan - to show you where you’re going. It’s basically a road map for your company’s growth. You figure out where you want to go and then work backwards to figure out the best route. Along the way, you’re looking for the shortcuts and figuring out how to avoid wrong turns. It's something every company should develop before putting up a product or service for sale, but it’s never too late to start one. It’s also something companies should routinely review, especially before launching a new product or marketing campaign. Mapping is an easy way for you to straighten out your current issues and get back on track.
The core of an effective MAP is your payment processing. This often-overlooked part of your business will make or break your company. Merchants think about the product, the marketing, the suppliers, and fulfillment, but they gloss over how they’re going to collect money and how the solution they choose will enable or limit their potential growth. Clearly, it would be simple if you could just take cash, but that’s not possible with eCommerce, and things get complicated when you’re dealing with credit and debit cards.
What many people don’t realize about payment processing is how much it resembles a loan from the bank’s perspective. Customers pay before they receive the product, which means the bank that collects the money is taking on a risk. If the bank gives the money to the merchant and the merchant doesn’t follow through with providing the products or service, the bank is on the hook when customers demand refunds. It’s the same if customers are unhappy with the product or for some other reason want their money back.
Banks have screening procedures to mitigate their risks. Some won’t work with certain types of businesses, so it’s important to find the right fit for you. A bank may also ask for a reserve, a fund of money set aside by the merchant to cover potential losses. Sometimes, especially with newer accounts, a bank may have processing limits. It's important to know and understand what the means, as those limits can restrict your growth. This is what you were up against. You had a new business with no track record. It’s like trying to borrow money for a new car without having any credit history. You’re in a moderate category be
cause you don’t have your own inventory. Not that you would want to at this stage of your business, but you’re relying on vendors you can’t control. It seems that once you topped a certain amount of sales, the bank held funds to reduce its risk.
It’s frustrating for a legitimate business with great potential, but a solid MAP prepares you to navigate these types of challenges.
Developing a MAP involves looking at the potential big challenges, which are surprisingly predictable, and creating a plan to deal with them if they come up. The questions below will help you get started.
You’ve already experienced one of the biggest challenges, which is having a marketing campaign that is way more successful than anticipated. Suddenly, you have more orders than you expected and that’s putting pressure on your supplier. It’s also creating an unanticipated cash flow problem.
What you don’t want to have to do at this point is to turn off a successful campaign. Pausing a winning ad may send it crashing faster than the stock market back in 1929. If you want to make the most of your ads and avoid this scenario, factor in what your monthly merchant processing capacity is and plan accordingly. The last thing you want to have is sales coming in but no where to take the payments.
What are you going to do if the bank won’t release the funds? What’s your backup source to cover the gap?
While you’re figuring out how to handle things with the bank, you also need to figure out how to handle things with the customers. There are some things that may be out of your control like how fast your supplier can deliver, but you still need to make the customer happy if you don’t want to rack up bad reviews. You can at least stay in touch with customers and let them know what is happening. A little assurance that an order is on its way can go a long way.
How will you stay in touch with customers? What systems will you use and how often will you reach out?
This is also a crucial time in your vendor relationships. As part of your plan, look for vendors that have a good reputation and the capability to ramp up quickly if needed. You may be better off with a distributor that has locations in multiple parts of the country, especially during the holidays when delivery systems are getting overwhelmed.
If you have cash flow issues, try to work things out with your vendors as early as possible. You’ve hit a rough patch, but if you can pull through this and show how things are going to go better, you can many times negotiate better deals moving forward. Vendors want to work with merchants who are reliable and will continue to do business with them. They're also, however, on the lookout for those who are just in it for a quick buck.
What’s your vetting process for vendors? What options will you have if there are cash flow issues?
You can’t know for sure how well your product will do but you still need to run the numbers so you can make contingency plans. It’s super important to make clear estimates and projections that take into account things like holidays or other demand drivers.
This past season, I worked with companies that were running $100K a month and suddenly sales jumped to $1 million. If you don’t have the right CAP space with your merchant account, you’ve got nowhere to go and you’re going to have cash flow woes.
Maybe you won’t get 10X sales, but you know demand is likely to increase by some amount. Some get ready before it’s too late by setting up a second account to funnel sales to if need be. Or, you can work with your processor to increase the capacity of your current account, something few realize they can even do.
You may be in a bit of a scramble now, but making projections for the next twelve months will help you get a better handle on your potential and what your needs will be. Armed with that info, you can work out arrangements with your bank and supplier that will give you the room to grow.
How much revenue do you expect? How much will you need to pay vendors and when? What will you do if sales are higher than your projections?