Well, things were going so well! Then we got this letter from Barclays merchant services, in response to our application for a merchant account (this is a separate account, run by the bank, to receive payments from credit and debit cards).

Now, as you can see, they have accepted our application, with one provision, deferred settlement for 30 days, post each payment. They go on to say that they will (kindly) review this in 12 months for us. This, apparently, is a ’security measure’.

So, each time a customer buys something from our website, their money will be credited to our merchant account with Barclays. They will then sit on this money (paying us no interest, I suspect), for 30 days. We then get the money credited to our bank account, 3 days after that (nice touch, i thought, the extra 3 days).

Now, for any young company (actually any company), cash-flow is king. Retail is all about getting the money in from your customers on a percentage of the stock you have bought, before you pay your suppliers. Most trade accounts with suppliers work on 30 day terms.

As a brand new retailer, Webtogs has no trade references to give to suppliers, so many are asking us to pay ‘pro-forma’ for our first few orders. This essentially means we pay up front for our stock. Now we expected this, and had factored it into our cash-flow forecasts. What we had not expected, was to be squeezed at the other end, by the bank.

I did some quick excel work on how this would affect our cash-flow in the first 12 months. The results are staggering. It creates a net shortfall of roughly £40,000.00 in our first year, as compared with the 3 day settlement model.

Why? you may ask. Well, we’re an aggressive company with big plans. We are aiming to turnover (on a forward basis) £400k by the end of year 1. This requires a fairly steep acceleration of month on month sales from the website to achieve. The additional cost (in cash-flow terms) of this ‘minor item’, means we will have to fund stock purchase from our cash reserves, rather than use direct revenue. As the growth is steep, we never get a catch-up period, as each new month requires a larger stock purchase, than the last. So, the more revenue the site generates from sales, each month, the worse this gets as we have to buy ever increasing amounts of stock to service the continuing growth.

The other item to note, is the requirement for ‘audited’ accounts at the 12 month point. Companies house classify companies as either ‘Small’, ‘Medium’ or ‘Normal’. Small companies get several forms of reporting relief when filing accounts, in terms of the information they have to supply and the need to supply audited accounts. A small company is one that meets several criteria, but the main one being a turnover of £5.6M or less. Now we have big plans, but £5.6M is pushing it a bit for the first year! So, as a small company, Webtogs doesn’t need to get it’s accounts audited. This is a good thing, as a formal audit is roughly 4 times the price of getting standard accounts prepared. The bank requiring and audit, therefore, just cost us another bunch of unnecessary cash.

So, happy days! We’re trying everything we can to change the terms of the deal with Barclays, and I had an encouraging chat with a local business manager recently, who hopes we can come to an alternative arrangement.

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