Splits Glitz or Fritz? – Transact 16 highlighted strange chapter in merchant cash advance history

It’s Opposite Day in the alternative business funding industry. Lenders are splitting card payments and merchant cash advance companies are doing ACH debits.

Jacqueline Reses was not an odd choice for Transact 16’s Wednesday morning keynote. Square, the company she works for, has continued to be a hot topic in the payments world for years. But what was striking is that Reses heads the lending division, the group that allows merchants to pay back loans through their future card sales. If that sounds very merchant-cash-advance-like, it’s because that’s exactly the product they used to offer before changing the legal structure behind them.

Split-payments, not ACH payments, have literally propelled Square and PayPal to the top of the charts of the alternative business funding industry. One individual on the exhibit hall floor posited that Square’s ability to originate loans through their payments ecosystem was the company’s real value; Payments itself was secondary. It’s a testament to the opportunities that split-payments affords to (as I argued 3 years ago on the ETA’s blog) a company well positioned to benefit from it.

Meanwhile, the companies at Transact that one would have historically described as merchant cash advance companies have mostly transitioned away from split-payments to ACH. Essentially, Square and PayPal embraced splits as an incredible strength while yesterday’s merchant cash advance companies viewed splits as a handcuff that limited scalability. The payment companies became merchant cash advance companies and the merchant cash advance companies became something else entirely, a diverse breed of loan and future receivable originators operating under a label people are now calling “marketplace lenders.” But even Square and PayPal, arguably the two companies at Transact doing the most split-payment transactions, claim to make loans, not advances.

Merchant Cash Advance as anyone knew it previously is dead

Ten years. That’s the average age of the small business funding companies that exhibited at Transact this week. They are but the last remaining players that probably considered the debit card interchange cap imposed by the Durbin Amendment of Dodd-Frank as being among the most significant legislation that affected their businesses.

A senior representative for one credit card processor told me at the conference that their biggest gripe with new merchant cash advance ISOs today is that they know almost absolutely nothing about merchant accounts. It’s not that they know less, they know nothing, he said.

One company was notably absent from the floor this year, OnDeck. They’ve since embraced the marketplace lending community as their home, just as many others have.

Nine years ago, I overheard a very influential person say that the first company to be able to split payments across the Global, First Data and Paymentech platforms would be crowned the “winner” of the merchant cash advance industry and by extension the wider nonbank small business financing space.

If one were to define the winner as the first company from that era to go public, well then those 3 platforms played no role. OnDeck was the first and they relied on ACH payments the entire way. They also refer to themselves these days as a nonbank commercial lender. If that doesn’t sound very payments-like, it’s because it’s not.

What cause is being Advanced?

At least four coalitions are currently advocating on the marketplace lending industry’s behalf, the Coalition for Responsible Business Finance, the Marketplace Lending Association, the Small Business Finance Association, and the Commercial Finance Coalition. The Transact conference is put on by the Electronic Transactions Association whose tagline is “Advancing Payments Technology.” In an age where new merchant cash advance ISOs know nothing about payments, it’s no wonder there’s a growing disconnect.

Could Transact now be one of the best kept secrets?

A few people from companies exhibiting say that they believed they stood a better chance to land referral relationships from payment companies by being there and that there was still a lot of value in landing those deals. Partnerships like these may be why the average exhibitor has been in business for 10 years while today’s new companies relying solely on pay-per-click, cold calling, or handshakes are falling on hard times.

Some payment processors acknowledged that merchant cash advance companies were still a good source to acquire merchant accounts, though the process by which that happens is not the same as it used to be. A lot of it is referral based now, according to one senior respresentative for a card processor. The funding company funds a deal via ACH and then refers them to the payment guy to try and convert that as an add-on. The residual earnings may not be as good as they used to be but that’s because they don’t have to do any work in this circumstance. In a sense, funders are still leading with cash but instead of the boarding process being mandatory, it’s an entirely separate sale that sometimes works and sometimes doesn’t. In that way, small business funding companies can be a good lead source for payments companies.

When I asked the senior representative if they really had success closing merchant accounts just off of a referral from a funding company, he looked at me incredulously, and said, “you used to do this, of course we do. that’s how this whole industry started.”

“What industry?” I asked.

What industry indeed…

Audit Season Is Coming: How to Get Your MCA Books Ready Before the Panic Starts

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.

Audits do not create problems. They reveal them. This distinction matters more than most funders realize, because the panic that accompanies audit season rarely stems from the auditor’s requests. It stems from the gap between the order a company believes it has and the order it actually keeps.

A funder in Chicago learned this one March when his auditor sent a routine request: ten funded deals, their supporting documents, and the corresponding bank activity. He expected the ask. What he did not expect was how long it took his team to assemble everything. Three merchant applications were missing pages. One deal had two payoff letters saved under different names. A renewal had been recorded without a clear link to the original advance. Nothing was catastrophic, but everything took longer than it should have. He looked around the conference table and saw the same realization on everyone’s face. The audit had not made the mess. It had simply exposed it.

This is how most MCA shops encounter audit season. The good news is that readiness does not require special software or a large finance team. It requires discipline in daily habits long before the auditor appears.

Reconciliation of RTR balances is a natural starting point. Many funders assume their balances are accurate because the CRM shows a clean number. In practice, reconciliation depends on tight alignment between the CRM, processor reports, and the accounting ledger. If any of these sources lag by even a few days, mismatches will begin to form. A merchant’s payment might fail on Friday, get resubmitted Monday, and post to the ledger Tuesday. Without consistent reconciliation, the funder sees one story while the auditor sees another. A steady daily or weekly routine of matching processor deposits to merchant balances prevents these gaps from widening into explanations nobody wants to give.

Wire activity demands the same attention. Funding wires, collections wires, reserve transfers, syndicator payouts: each touches different parts of the books. A company that does not document these movements as they occur eventually faces a stack of transactions labeled simply “funding” or “payout,” requiring backward reconstruction that consumes hours. One funder discovered that three wires recorded as syndicator payouts were actually renewals paid in error from the wrong account. Small mistakes, but they created lengthy explanations. A simple internal rule that every wire must carry an attached note and supporting detail at the moment it is sent eliminates that uncertainty before it takes root.

Syndicator splits introduce their own complications. When multiple investors participate in a deal, the funder becomes responsible for tracking each share of principal and returns with precision. Problems arise when the initial split is entered inconsistently, or when renewals process without correctly updating the syndicator’s residual balance. During audits, these discrepancies stand out immediately. One company maintained a separate spreadsheet for syndicator participation because their CRM could not display multi-party splits cleanly. The spreadsheet worked until the team member who managed it went on leave. No one else understood the logic. The audit revealed not a major error, but a process built around one person instead of a system. Auditors look for evidence that the company can reproduce its numbers without depending on any single employee.

Default classification is another area where funders frequently fall behind. A delayed payment can linger in active status for weeks because no one wants to mark it as default prematurely. But when the auditor reviews the file, unclear classification becomes a problem. The funder must show when the merchant became delinquent, what outreach occurred, and how the remaining balance is being treated. A restaurant in Texas once stopped paying for three weeks. The collections notes lived in the account manager’s personal notebook instead of the CRM. The auditor flagged the discrepancy because the books still showed the merchant as active. Proper classification helps the funder understand portfolio behavior and demonstrates to the auditor a clear, consistent process.

Underlying all of this is documentation quality. Merchant applications should align with the funded terms. Bank statements should be complete. Contracts should be saved with names that make sense across the team, not names that make sense only to the person who downloaded them. Renewals should show the payoff, the redeployment of capital, and the new terms in one complete package. Missing pages, duplicated files, and vague naming conventions do not cause financial harm directly, but they slow the audit and weaken the impression of professionalism. A well-organized document library is one of the simplest ways to make an audit move smoothly.

Internal controls play a larger role than many funders expect. An auditor does not expect a small MCA company to maintain the same segregation of duties as a large financial institution, but they do expect clear responsibilities. If the same person initiates payments, reconciles bank accounts, and approves adjustments, the company has created unnecessary risk. Even a small team can separate duties by establishing checkpoints. One person prepares the payout. Another reviews it. A third reconciles the bank activity. These controls do not exist to catch wrongdoing. They exist to make wrongdoing difficult in the first place.

The habits that lead to a smooth audit cannot be assembled the month before it begins. They must be woven into ordinary operations throughout the year. A weekly ten-minute review of aging reports reveals shifts early. A monthly check of syndicator exposure confirms whether splits were entered correctly. A simple rule that every merchant contact must be logged before the end of the day prevents confusion when questions arise later. At Better Accounting Solutions, we encourage clients to think of these routines not as audit preparation but as as the proper way to run a business. The audit simply confirms what healthy habits have already produced.

Audit readiness benefits the team in ways that extend beyond the audit itself. When systems are disorganized, staff spend more time defending their work than improving it. When information scatters across folders and inboxes, no one feels fully in control. A clean, disciplined financial environment reduces stress for everyone. New employees learn what good work looks like because the system teaches them. Managers spend less time searching for answers and more time interpreting what the answers mean.

Audits also shape how capital partners view the company. Syndicators and institutional investors frequently request audit reports before deepening their commitments. A clean audit signals stability and transparency. A messy one does not automatically disqualify a funder, but it raises questions that take time and credibility to resolve. A funder who treats the audit as part of their annual rhythm presents a stronger case to partners than one who treats it as an interruption to be survived.

Many funders approach audits with dread. The dread usually fades once the process begins, because audits do not invent problems. They surface them. And once surfaced, problems can be fixed. Funders who treat findings as guidance rather than criticism tend to grow faster. They catch issues earlier. They build stronger infrastructure. They develop habits that improve performance year-round rather than only during preparation season.

In an industry where capital moves quickly and margins shift without warning, reliability becomes a competitive strength. A company with clean books makes better decisions. It moves faster because it spends less time reconciling its own history. It communicates more clearly with partners because its numbers are organized and honest. Audit readiness has less to do with pleasing an auditor and more to do with strengthening the structure that supports every advance.

The calmest funders during audit season are not the ones with perfect portfolios. They are the ones who built habits long before the auditor arrived. They did the small things consistently. They documented what they did. They noticed discrepancies and addressed them. Audit season becomes a checkpoint instead of a crisis. And the company emerges stronger each year because clarity became part of how it operates.