Staying Alive: My Search for a Credit Card Processor

The struggles of a business trying to survive.

At the conclusion of Tuesday’s post, I had just applied for cheaper credit card processing from Emerald World, and I had received an unsettling phone call about the status of my application. The events I am about to describe took place in June 2012, at a time when my business was experiencing a sales slump. We were about to come out of it, but I didn’t know that at that time. Cash was tight, and the prospect of saving money on my credit card processing was very attractive.

I have been in sales for 25 years. It has been my main job, with all the other tasks involved in being the boss playing second fiddle. So I appreciate it when I am buying instead of selling and find a real pro on the other side of the deal. Kelly Nelson at Emerald World, who had opened my eyes to the high prices I had been paying PNC for processing, had done everything right. He had taken the time to educate me about something I didn’t know. He had proven that his solution was better for me than my current situation. He had outlined a deal that was very low risk for me: my fixed costs were low, and I could back out whenever I wanted. And he was patient while I was distracted with my trips to Germany and Dubai, and he was able to remind me that he was still around without being annoying.

So when I finally pulled the trigger and filled out the application, I wasn’t expecting further delays. The application demanded information much like the one I had filled out years earlier for PNC: anticipated annual sales volume, average transaction, highest single transaction and percentage of sales over the phone (as opposed to transactions with a swiped card). And there was a fair amount of routine company info: tax identification number, years in business, partnership structure. Here and there were dense blocks of text, waiting for my signature to confirm that I had read this and agreed to that. Typical corporate sales contract. I had nothing to hide; I was coming off a very profitable year, I still had a good amount of cash in the bank, and I had been accepting cards for many years without any problems. What could possibly go wrong?

I would soon learn that Mr. Nelson, like many salesmen, particularly those who represent large organizations, had been emphasizing the benefits and glossing over the potential difficulties in the application process. Emerald World, it turned out, does not perform the function of acquiring bank. That is done by another company, National Processing Corporation, and final approval for the deal would have to come from it, specifically from its underwriting department. And the underwriters wanted more information.

They wanted to see my balance sheet and a profit-and-loss statement. They wanted to know whether we would use credit cards to take deposits or only when we delivered goods (we do both). They wanted to know the typical length of time between a deposit payment and final payment (six to 12 weeks). I provided all of that, and then I asked Mr. Nelson what this was all about. And from him I learned how National Processing saw me — not so much as a good client with a solid gold track record but more as a potential fraudster or failure that the company might not want to work with.

In my application, the underwriters would see lots of what they would consider red flags. For example, we do all of our transactions over the phone for large amounts of money, and we enter the card data into our terminal manually — we never swipe. Plus, there is a significant time lag between the receipt of the payment and the delivery of the goods. And my type of business, or MCC category, does not get a lot of respect from credit card companies. Furniture seems to be a difficult product for them. Apparently there tends to be a lot of damage in shipment and a lot of dissatisfaction even with products that arrive in one piece, which can lead to a lot of chargebacks (money returned to a customers when a transaction is disputed).

Of all those red flags — card not present, big ticket, delayed delivery and big chargeback rate — I concede I am guilty of the first three. But I can proudly claim that never once, not one single time in the 18 years that I have accepted credit cards have I had a chargeback. Zero. Zilch. Nada. That’s a reflection of the commitment we make to our customers to keep them happy, no matter what. We also are careful about our shipping practices and how we handle installation. I guess that some of my fellow furniture makers and dealers aren’t so fastidious, and I have been tarred with the same brush.

I provided all of the supplemental information and waited. Mr. Nelson got back to me a week later. National Processing was willing to go forward with the deal but on one condition — it wanted to establish a reserve account to guarantee that it wouldn’t be left holding the bag in case of an unresolved chargeback. It would withhold 10 percent of the first incoming payments until it had set aside $10,000 in the reserve account. And it would review the case after six months.

I had never heard of this before, and frankly, I was a little insulted. I asked Mr. Nelson whether this was common, and he told me that it happens now and then — when underwriters have doubts about a merchant. Now, I was really insulted. But leaving feelings aside, was this such a good deal?

The price of each transaction, interchange plus .98 percent, was still much better than I had been paying. But the format of the reserve — taking 10 percent off of incoming payments — would complicate the accounting of commissions I was paying to my salesmen. And for me, the cash itself was a problem. I had started the year with more than $180,000 in working capital, but our long sales slide had depleted that. By the beginning of the summer, I was operating with $60,000 to $100,000 on hand and spending, on average, $40,000 a week.

The savings in costs represented a reasonable return on a $10,000 investment. But I didn’t want my cash tied up. So I told Mr. Nelson that I would not go forward with the deal.

Thursday: The big banks come knocking.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Staying Alive: What I Took Home in 2012

The struggles of a business trying to survive.

A year ago I wrote a series of posts that dissected my company’s finances and culminated with a detailed accounting of how much money I made in 2011 — $246,626, generated from revenue of $2,155,193. The event that prompted the analysis, writing an application for college financial aid, just happened again this weekend. So I’m going to give you an update on how 2012 went and whether I was able to match what was by far my most rewarding year.

For those who have not read my posts regularly, let me start with a little context. Manufacturing custom furniture is not known as an lucrative profession, and it isn’t. To give you some idea of what I’m talking about, let’s take a look at how my company performed from 2003 to 2012 (I don’t have great records from before then). Sales for that period totaled $16,352,367. The profits? The total for that period is negative.

The vast majority of those losses happened in the years leading up to the crash in 2008 when The Partner and I were doing a very bad job of trying to grow the company. From 2003 to 2008, our losses totaled $1,086,648. The Partner ate much of that when he left the business. The remaining partners — my father, my brother, and me — are owed a large amount of money by the company: $526,754.

Since 2009, I have managed to stop the bleeding, and the company has made profits totaling $401,935. That still leaves an accumulated loss of $684,713. But I have managed, during some very rocky years, to pay my bills. First and foremost, all of the employees who have worked for me got paid, on time and in full. All of the taxes were paid, on time and in full. All of the vendors, and my landlord, were paid in full (not necessarily on time). While the company owes my partners and me a pretty good pile of cheddar, it owes nobody else.

Between 2003 and 2010, my annual salary averaged $78,484, and I loaned, on average, $29,363 of that back to the company (after I had paid taxes on it). That left me an average of $49,121 a year, and I have the lifestyle to match. Aside from a house in a decent neighborhood, my wife and I live modestly.

My 2011 windfall came right on time. My oldest son was supposed to start college in the fall of 2012, and my wife, in preparation for the empty-nest experience, had started a two-year graduate school program. She would need the Master’s in order to get a job teaching. So, 2012 promised some large tuition bills — hence my relief at the outstanding financial results of 2011.

I had no money saved for college. There had been a small amount set aside, but I took that in 2009 and spent it on a new Web site. The big bump in 2011 income allowed me to set aside enough cash to cover both of the tuition bills, which was a good thing, because, as it turned out, that income also disqualified us from receiving any financial aid. I would need more than $80,000 for education.

A boss is supposed to be a competent financial manager, considering the ebbs and flows of money within the company and making financial decisions for the stakeholders with perfect objectivity. My own experience has been that the needs of my family and my own fears for the future have a powerful influence on decisions I make about the company’s money. As a small-business owner, there is little boundary between my company’s financial health and my own. I have, on multiple occasions, signed personal guarantees for company expenditures. In order to get company credit cards, in order to establish a line of credit (since closed), and in order to lease my space, I have been required to pledge my assets. If the situation gets out of control, everything I own is at risk.

Last year started well. I decided that rather than wait to see how much money I would have at the end of 2012, I would pay myself a reasonable salary, which would ensure that I would have enough money for the following year’s tuition. But sales started to slump after two months, and I ended up stopping my salary in April. I did continue to pay interest on the loans I had made to the company, but my pay shrank from $15,000 a month to $3,225 a month. This took me from a position of adding to my savings every month to draining them. In May, the wheel of fortune turned again. Both of my cars (a 1999 Odyssey and a 1993 Camry wagon) died in one weekend: blown head gasket and bad transmission. Meanwhile, sales continued to slump, to the point where I wondered whether I would have to lay off workers.

By the end of June, sales were dropping by 50 percent every month, and our order backlog was shrinking fast. I had run through two thirds of the working capital I had on hand at the beginning of the year, and we were down to a week’s worth of cash. I hadn’t seen a paycheck in two months. As it turned out, the problem was a mistake I made in my AdWords campaign. (I wrote a series about how I figured this out last fall). Part of the solution, aside from rejiggering the campaign, was to hire an expensive sales consultant to maximize the effectiveness of our salespeople.

My personal situation had evolved as well. My son decided to take a gap year instead of starting school. He is a talented programmer, and he was able to find a full-time job in San Francisco and support himself. So now I had another year to worry about his tuition. (He’ll be starting his studies at M.I.T. in September.) My wife suffered an injury to her rotator cuff, which was very slow to heal. So she ended up postponing her second year of graduate school. That freed up enough money to replace the two cars.

Over the summer, the company’s sales came back from the dead, revived by both the training that the salesmen had received and the repaired AdWords campaign. Over the course of the fall and into the last quarter, our working capital crept back to where it had been at the beginning of the year. But I did not restore my salary. I wanted to make sure that we could show at least a small profit and to start 2013 with a decent amount of working capital.

In the end, the company was able to show a profit of $27,530 on revenue of $2,077,770. My share of that, as owner of 40 percent of the company stock, is $11,812. My salary for the year was $66,090. And the company paid interest on the debt it owes to me totaling $35,484. That all adds up to $113,386. Not terrible, I suppose, and certainly nothing to complain about. Many, many people get by with a lot less. But a rather large drop from the previous year. I was just glad that it wasn’t worse.

So, what is the moral of this story? I think it’s that, especially for the owner of a small business, nothing is certain. What do you think?

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.