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.
Articles by David Roitblat
Get Ahead in 2023 with These Best Accounting Practices for MCA Companies
January 6, 2023
As we draw the curtain on 2022 with the festive holiday season and prepare to kick off 2023 with a bang- with ambitious goals and the highly anticipated industry meetup at deBanked Connect in Miami on January 19-, your company accountant is gearing up for a busy quarter. Depending on the level of financial organization in your MCA business, filing your annual taxes can be a breeze or a nightmare.
Better Accounting Solutions has been the premier accounting partner in the MCA space for over a decade, and we’ve compiled some of the best accounting practices you can implement now to make your taxes easier next year:
1. Determine your income recognition method and be consistent with it:
This is important for three reasons:
a) Accurate financial reporting: Consistently applying a single income recognition method ensures that the financial statements accurately reflect the income earned by the business. This is important for internal decision-making and stakeholders such as investors and creditors who rely on these statements to assess the business’s financial health.
b) Tax compliance: Proper income recognition is important for tax compliance purposes. The method used to recognize income can affect the amount of tax that a business owes. By consistently applying a single method, the business can ensure that its tax returns are accurate and avoid potential issues with the tax authorities.
c) Simplicity: Consistently applying a single income recognition method can also make it easier for the business to prepare and file its tax returns, as well as to manage its overall financial record keeping. This can save time and reduce the risk of errors or discrepancies.
2. Understand Writeoffs:
As a business owner, it is important to understand how to maximize write-offs in order to reduce your company’s tax liability, and one way to do this is by taking advantage of deductions and credits that are available to the company. For example, businesses can write off typical expenses such as employee salaries, office rent, and supplies. On top of that, you may be able to write off meals, trips, and events if they are being done for the business, so consult your accountant to see what counts.
It is also important to ensure that these expenses are properly documented in the company’s financial records, and that they are being paid for using company cards accounts rather than personal accounts for business expenses. This is because personal expenses are not tax deductible, whereas (many) business expenses generally are. By using clearly delineated company accounts, businesses can ensure that they are able to properly document and claim these expenses as deductions on their tax returns.
3. Documentation, Documentation, Documentation!
Businesses and governments are run on the back of paperwork, and ensuring you are on top of your documentation and records is the best way to ensure smooth operations and compliance. This includes making sure:
All your business licenses and registrations are in order.
Your W-2’s are filed by the end of January.
Determine who you need to get W-4’s and W-9’s from:
It’s important to know how to categorize your partners to establish clean and complete records. Filing inconsistent records, internally or compared to their paperwork, can cause issues and complications down the road when you file your taxes.
For example, an ISO is typically classified as an independent contractor rather than an employee. As such, an ISO would typically need to fill out a W-9 when working for you, rather than a Form W-4.
Form 1099 is a tax document used to report various types of income other than wages, salaries, and tips that are reported on a Form W-2. Form 1099s are typically issued by businesses or other organizations to contractors or other independent workers for services rendered or income received.
Independent contractors, including ISOs, are responsible for paying their own taxes and are not entitled to the same employment benefits as employees, so you’d need to get a W-9 form from them and then give them a 1099 based on the information they gave you.
Better Accounting Solutions recommends not giving syndicators 1099s from you because we’ve found that many syndicators have different methods of reporting their recognized income to the IRS, and we do not want to report differing numbers to the IRS, which can lead to obvious complications.
It is important for businesses to correctly classify workers as either employees or independent contractors to ensure that the proper tax forms are used and that the correct amount of taxes are withheld or paid.
Speak to an experienced financial expert to determine how to classify your partners, vendors and employees.
Get a W-9 from all of your partners (ISO’s, etc.) before you pay them, otherwise, you’ll have to chase them for paperwork when they’ll have no incentive to get it to you in a timely manner.
4. Ensure You Are Getting The Best Financial and Accounting Advice:
If there is a major theme in this piece, it is the importance of having access to expert financial and accounting advice and guidance, particularly in an industry as complicated as merchant cash advance.
Whether you work with an in-house CPA or work with a large accounting firm, do consistent check-ins and self-audits to make sure your business is getting the premier service it deserves, which will certainly save you a significant amount of stress, time and money.
Your Default Rate Is Too Low, And It’s Hurting You
November 22, 2022
There may be no word as terrifying to stakeholders in the merchant cash advance business than the term ‘defaults’.
In an industry where a significant portion of revenue is generated from daily or weekly automatic withdrawals from a merchant’s bank account, defaults can cause deep and lasting problems. Not only do they eat into profits, but they damage relationships with banks and processors- both of which are essential to the success of any merchant cash advance company. Defaults can also be contagious: if one merchant in a large portfolio decides to stop making payments, it can have a ripple effect that leads to other merchants doing the same thing.
All these are reasons why MCA companies go to great lengths to avoid defaults at all costs: they exhaustively screen merchants before approving them for funding and do all the due diligence needed to ensure they can follow realistic payment plans. They also attach a fee to every deal to cover the percentage of the deal they expect will not come back, and conventional thinking would be to aim to keep that number as low as possible.
That’s a lot of work to keep that default rate low, but what would you think if I were to contend your default rate is too low, and it’s hurting your bottom line?
Fear of defaults is paralyzing MCA funders and inevitably leading them to leave opportunities-and money- on the table.
Better Accounting Solutions has been the leading accounting firm in the MCA space for over a decade, and has seen this across the board:
Many MCA companies have adopted a risk-averse approach to avoid defaults, opting for sure-fire deals in higher positions, rather than taking calculated risks that could enhance their bottom line. In the name of capitalizing on low-risk deals with a lower chance of default, many companies choose to fund deals where they charge smaller fees than what they could be charging if they choose to fund deals others are wary of taking.
Let’s look at two deal examples for an example of my thesis:
Average Andrew is the perfect merchant for an MCA company. He is getting a $100,000 advance with a deal length of 7 months (140 days) and with his rock-solid history, his default rate is a meager 6%. The RTR on the deal is 44%, the UR fee is 7%, broker’s commission is 10%, meaning the profit on this deal will be $35,500- a net unit profit percentage of 35%, profiting $5000 a month. He is a great client, and a pleasure to work with.
Now let’s examine his buddy, Reformed Ricky. He’s made some mistakes in the past and now wants a business advance to grow the business he believes is The One. No one else wants to touch him, so you offer him a deal of $35,000. Because he is a riskier advance proposition, you can raise the RTR to 49%, and the UR fee to 12%. On a deal like this, the commission is around 14% and the default rate will be a whopping 18% on a merchant like this, but the profit to be made on this deal is $10,150- a 29% net unit profit, getting $3,383.33 monthly profit over the length of the deal.
Now, looking at the structures of both deals, why would I advocate that someone advancing Reformed Ricky instead of Average Andy? What’s the advantage of working with the weaker merchant over the perfect one?
It’s simple:
Because of his history, you can set the duration of Reformed Ricky’s deal to 60 days (3 months). That means according to the terms of his deal, your profit is 9.67% a month. You’ll be stunned to learn that when you break down your monthly profit on Average Andy’s deal, it is a considerably smaller percentage of 5.00%!
This means every month you’re making more back on the smaller deal, and are getting it to work for you by placing it into new deals and generating more income for you, because of its shorter term. If you’re only taking deals with longer outstanding balances, it will take you a considerably longer amount of time just to make a smaller profit percentage.
On top of this, we also have to account for the compounding effect you will quickly be seeing when you take these ‘riskier deals: because you’re earning more money per month due to the shortened duration of supposedly weaker deals, you will be able to turn it around more times per year, supercharging your growth quicker than what you’d be seeing you stuck to only ‘traditionally-safe’ deals.
I’m not advocating for funders and brokers to be irresponsible and create a new and much less entertaining version of The Big Short, throwing money around to people that don’t stand a chance of paying it back.
I am saying that they should consider funding merchants and positions they were wary of till now, and responsibly assessing the opportunities and upside for them at those positions.
Of course, this doesn’t mean that you should mindlessly funnel money into every deal that comes your way. You still need to be responsible and vet your investment opportunities carefully, and of course, if it turns out you’re picking the wrong deals and your default rate explodes, you will have to reevaluate your approach.
However, working from a place of fear is not the way to grow and thrive, certainly in this business. Moreover, by avoiding risk altogether, MCA companies are likely to become less competitive over time. After all, it’s only through taking risks and innovating that businesses can thrive in today’s rapidly changing world, especially in the rapidly evolving and growing MCA industry, where more and more people are seeking to find their niche.
A great number of successful investors in MCA companies have complained to me that their partners are too conservative with the deals they are choosing to fund and leaving too much capital in the bank, costing the investors higher facor rates instead of working for them.
This approach is a way to break away, and ahead, of the pack, because only by taking the opportunities others keep passing by will MCA companies be able to grow and compete in the long run.
Why Participating in Industry Events Matters
September 29, 2022Guest Post by David Roitblat, Better Accounting Solutions
In just under a month, on October 24th, hundreds of members of the merchant cash advance community will descend on Times Square in New York City, at the New York Marriott Marquis, for deBanked’s Broker Fair event. Every aspect of the industry will be represented, from brokers and ISO shop reps to specialized lawyers and accountants.
I will be there representing my business, Better Accounting Solutions, and it will be the upteenth time I’ve attended this tremendous event. But attending industry pow-wows was not how I envisaged spending my working hours at the start of my career.
When I worked at entry-level jobs in accounting firms, I didn’t think attending these events was worth the time and financial investment, instead choosing to believe that if I put my head down and worked for the 24 hours that the events were being held, I’d be positioning myself better for my professional future. And when I opened Better Accounting Solutions in 2011, that attitude didn’t change, especially now that it was my own time and money on the line.
This whole approach changed on the advice of a mentor a few years in. Hearing me explain how I thought the business could be scaling quicker than it was, he suggested attending, and participating, in an accounting conference that was coming up. When I pushed back with my familiar list of grievances, he didn’t attempt to refute them, instead repeating his advice, adding that how could it possibly hurt.
I attended that first conference, and haven’t looked back since.
All the elements of industry events that I had previously dismissed proved to be incredibly valuable and are an integral part of Better Accounting Solutions’ story, and how we got where we are today.
It’s why I encourage everyone that’s involved in the MCA business to shake off the headsets and get their heads out of the screens, and to take this opportunity to connect with real people.
Here are some of the key takeaways that I got out of that first experience that remain true to this day:
1. You never know who you’ll meet. Industry events bring together people from all different backgrounds and experiences, and you never know who you might meet and what kinds of connections you might make. Many of the people I met at these conferences, especially at Broker Fair once we had established ourselves in the MCA space, have gone on to be my mentors, advisors, supporters, clients, and friends.
2. It’s a great way to build your network. I came into the industry very green, feeling my way around by letting my work do the talking. But when I opened my own business, I needed to let my actual talking do the talking, and learn the art of networking. Networking is all about building relationships, and industry events provide an excellent opportunity to meet new people and start making connections that can help you in your career.
3. You can learn from others. When you’re working in your own space, it’s possible to inadvertently build a bubble around yourself, insulating yourself from current trends and happenings in the business. Industry events are a great way to learn from the experiences of others in your field and hear about the latest developments and advances.
4. It can help you find a job and advance your career. Sometimes, all you need is an opportunity to get your foot in the door, and events like Broker Fair are great places to find that chance. At industry events like these, it doesn’t take a lot to bump into industry figures and leaders, and if you connect with them and hit the right notes, these people just might be your next employer, mentor, partner or client.
As a token of gratitude for all that I’ve gotten from it over the years, Better Accounting Solutions is a sponsor of Broker Fair, a testament to our belief in this event. I’ve gotten tremendous value from Broker Fair, and it’s why I’m such an advocate for events like it.
We can’t let ourselves be held up by the reasons we think of to avoid attending, for a supposed lack of finances or time. Avoid naively thinking like I did, that you can grow in this business if you keep doing exactly what you’ve been doing until now, minimizing yourself in the very same circle. This is the best investment you can make in yourself right at this moment.
And once you take the plunge and make a firm decision to come, stop feeling guilty and that you should be contained in your office instead. Networking is real work, and can only come when you let go of that guilt and allow yourself to think bigger.
It’s at places like these where I met people that lent me their ears and gave me a chance, a major factor in Better Accounting Solutions earning our reputation as leaders in specialized accounting for the merchant cash advance industry.
It happened for me, and it can happen for you too.
