Protecting Your Syndicated MCA Investments

David Roitblat is the founder and CEO of Better Accounting Solutions, an accounting firm based in New York City, and a leading authority in specialized accounting for merchant cash advance companies.

To connect with David or schedule a call about working with Better Accounting Solutions, email david@betteraccountingsolutions.com.

An increasingly popular way for merchant cash advances businesses to raise capital is by offering syndicated deals. In theory, this structure is simple to understand and fulfill the terms of: in these scenarios, investors put a percentage of the funded deal and get a percentage of the returns. But, as we all know, our industry is dynamic and has inherent risks, and safeguarding one’s hard-earned investments takes on paramount importance.

We saw the pitfalls in the cases of MJ Capital Funding, LLC and 1 Global Capital, along with more recent cases earlier this year, where investors were fleeced of hundreds of millions of dollars that they invested into what they thought were legitimate MCA funding companies.

What happened there is unfortunately investors did not see or understand the importance of having a third party reporting back to the investors and syndicators about how their investment was going, and were misled until it was too late.

So how can investors protect their investments in syndicated MCA deals?

Know Where Your Money Is Going

Let’s start with the first thing you can do.

The landscape of MCAs is marred by tales of deceitful entities posing as legitimate funding companies, leaving investors and syndicators in dire financial straits when they are left to hold the bag.

From the outset, it is essential to ensure that the funds committed find their way into the intended bank account- one that is owned by the same entity as the MCA actually funding the merchants. The need for this is underscored by the unfortunate prevalence of fraudulent actors diverting funds to different accounts under deceptive entities. This manipulation obscures the money trail, making it harder to track and detect financial malfeasance, and leave investor funds vulnerable to exploitation.

Vigilance through Allocation Monitoring

To protect your investment against malicious machinations, it is crucial to exercise stringent vigilance and monitor your funds.

If one’s investment is tied to a specific percentage of MCA deals, a diligent verification process is necessary to confirm that the funds contributed align precisely with these deals. Ensuring the MCA business has a quality and comprehensive reporting and CRM system will provide a transparent window into the balance and distribution of funds across each deal. This transparency not only empowers investors but also safeguards their interests against any misallocation.

Additionally, investors should ask about and pay attention to when their portion of the syndication was added to a deal, to make sure you haven’t been added to a bad deal only once they have already started bouncing payments.

Finally, suppose the CRM system shows an available balance on your syndication for a certain amount. In that case, you can talk to the MCA funder about ensuring they always have that amount or more available in their bank account. If the available balance in the MCA’s bank account is less than your available liquid balance then essentially the funder is borrowing (and risking) your funds to fund deals without you benefitting.

Navigating Default Deception

Another way scammers try to fleece syndicators is by telling them deals that they have invested in have defaulted. Through shrewd tactics such as rerouting default payments to alternative accounts or manipulating reporting mechanisms, deceptive entities can evade investor scrutiny and keep their money.

To counteract these tactics, a collaborative partnership with a transparent and independent accounting firm is indispensable. This partnership acts as a source of clarity for both parties: unraveling intricate payment webs and ensuring that defaults are tracked while investors receive accurate insights into their investments’ actual performance that cannot be manipulated by the unscrupulous funder.

A Solution…

The scale of risks are glaringly evident. So what can you do about it?

The message is clear: vigilance is paramount. Minor inconsistencies can snowball into severe financial pitfalls, making it imperative to maintain an unwavering, watchful eye.

But it’s difficult for syndicators to do that, both because they have limited insights as syndicators and because they have their own jobs to worry about without the added stress.

That’s why Better Accounting Solutions encourages all our clients in the merchant cash advance industry to employ this protective framework:

When we come onboard to do accounting for business or investors, we encourage both parties to obtain explicit consent from MCA entities to share all information with the syndicator. Without formal authorization, firms like Better Accounting Solutions are legally bound from sharing crucial information. Trust and transparency rests upon this explicit approval, serving as the conduit for open dialogues and proactive measures. With this permission granted, the accountants can regularly produce independent and up-to-date reports ensuring both parties are on the same page and share a mutual trust. That’s the benefit of third party oversight: nothing is happening in the dark, without anyone’s knowledge.

Encouraging and working towards an honest merchant cash advance industry is a virtue that safeguards investments, draws more investors, and bolsters the credibility of our entire industry.

David Roitblat is the founder and CEO of Better Accounting Solutions, an accounting firm based in New York City, and a leading authority in specialized accounting for merchant cash advance companies.

To connect with David, email david@betteraccountingsolutions.com.