March 05, 2025
by David Goodale
Why do company financials matter when applying for a merchant account?
(Slightly edited from video transcript for greater readability)
Key Takeaways
Hello, David here at Merchant-Accounts.ca. Today we're going to discuss, why company financials matter when you're applying for a merchant account. If your company's not profitable or if the financials look bad, Is it a problem? What can you do about it? Stay tuned. We'll dig in in one second.
Company Financials
I recently had an excellent merchant apply to get a merchant account, they work in the pharmaceutical industry. They do over a hundred million dollars a year in sales and they initially got declined on their merchant account application. It's because the financials for the company at a very rough glance didn't look good. Now, the merchant was surprised by this, actually, in truth, in this particular case, I was surprised as well. I disagreed with the underwriter, but we went ahead and fixed the problem. I want to start by explaining that when you try to get a merchant account, the processor cares about two things. Firstly, is the customer going to get what they paid for? Secondly, is this merchant going to go out of business? The reason for the concern is, everything that you sell, in the next six months, if you go out of business and the cardholders claim that they didn't get what was promised to them. It's possible their credit card processor can become financially responsible if the cardholder does a chargeback.
Stable company
You deal with this problem by proving that you're not going out of business. For example, nobody worries about Berkshire Hathaway going out of business because it has a zillion dollars in assets and has been in business for over 50 years. It is a stable company with brands like Coca-Cola. When these companies go to get a merchant account, nobody worries because they have cash and stability from here until tomorrow.
The credit card processor is worried that you're going to take payment for something today and the customer won't get it until sometime in the future. For example, if you are selling some custom furniture, that might take months to build. Well, what if you have four months of orders and you go out of business? The credit card processor's going to say: Hey, everybody that ordered this custom handcrafted furniture that didn't get it now has to be refunded, but since the company is out of business now, we the processor have to cover it.
Legitimate reasons for bad financials
When you take payment for something today and you provide it in the future, in your financial statements, you don't always show a profit and there are lots of legitimate reasons for this. There might be upfront costs. Maybe you bought a new factory, maybe you invested in some new software. Maybe the shareholders or directors of your business took huge draws or bonuses. Could be for very legitimate reasons. They might just be buying some exotic super sports car or maybe for creditor protection. I've been in Canada in the last couple of years, and they keep messing with the tax rates here. Maybe it's very legitimate tax planning reasons. For example, Warren Buffet, I don't know why I'm using him as an example twice in this video, but he just realized a whole bunch of gains in Apple that last year. I think it was because he expects the capital gains rate to increase. The point is that I went way down a rabbit hole there.
Cover letter
There are legitimate reasons why for one particular year the financials don't look that great. If that's the case, you need to do a cover letter. You need to explain why. You need to tell the processor the things that are not always obvious on a balance sheet or a profit and loss statement. Because if you're going to stay in business if you're a rock-solid merchant that's not going anywhere, but the financials aren't telling the story. The financials alone could be enough to potentially cause you to be declined, especially if you're working with a not-great credit card processor. Just to tap ourselves on the back here at Merchant-Accounts.ca, when that merchant got declined, we didn't take the decline. We went back, and I spoke to them, to the CFO of the company. He explained what was going on. We did an updated cover letter, and we explained it to the underwriter. You make sure that you communicate effectively to get the approval. That doesn't always happen, especially if you work with larger or more call center-based credit card processors.
As a merchant, ultimately, it's on you to make sure that you get approved. I've tried to explain why the financial statements are so important when you submit a merchant account application, and what you can do if they don't look good. Now, I will say if they look terrible because they're terrible and the companies are in dire financial shape and you take payments away ahead of time for a service rendered well in the future, there is no magic bullet to that situation. In that case, the payment processor might want to have some type of reserve or collateral on your account because they're legitimately worried that you're taking payments for things that might not get delivered. If that's the case, there is no easy solution. I've been working in this industry for so long now, sometimes I think I see a lot of cases where there are legitimate merchants with really great businesses, and sometimes the underwriters get it wrong. This is one way you can prevent that from happening.
Sign a Guarantee
Look at your financials, if they look funny for some reason, make sure you have a meaningful discussion about why. Include an accurate and good cover letter and you can solve that problem. I guess in the last note, I didn't intend to include this in the video, but if you do have a poor financial situation, but you own another profitable company, maybe you have a big established company and you have a new startup that's been in business for a year or two and it's just, getting going. If the big established company signs a guarantee, that if the startup company has a problem, we'll pick up the bill so you don't have to worry about it. You can do that too. There are usually things that you can do to help with approval.
Conclusion
With that, hope this explains why company financials are pretty important when applying for a merchant account. If you have a business and you're looking to get a merchant account and perhaps your financials don't look great or there's complexity, please do reach out to us at Merchant-Accounts.ca. We would love to hear about your business. Thanks for watching, have a nice day. Bye now.
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My name is David Goodale, CEO at Merchant Accounts.ca. I launched our business in 2001 and have over 20 years of expertise in the field of online payments. If you have a payments related question or project, and especially if it relates to multi-currency or international e-commerce don't hesitate to contact me. I'm always happy to help with an honest opinion, and enjoy chatting with folks from interesting businesses.
Toll free: 888-414-7111 ext. 5
Direct: (905) 901-2254
david.goodale@merchant-accounts.ca