Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
Revenue Recognition for the MCA Industry
March 1, 2015This is question #6 in a 6-part interview series about Merchant Cash Advance Accounting between deBanked’s Sean Murray and Yoel Wagschal, CPA and Christina Joy Tharp.
- 1. Merchant Cash Advance How to Guide Intro
- 2. Do I Need a Special MCA Accountant?
- 3. and 4. Recording Merchant Cash Advance Transactions on the Books
- 5. Merchant Cash Advance Accounting Pitfalls
- 7. Q&A – Real questions that MCA companies or syndicators have
Q: How should funders record revenue?
A:
The accounting of MCA companies must not show their transactions in a way that cash advances can be seen as loans. As we all know, a lot of people in the law enforcement community wish to compare MCAs to lending companies. They would like to conclude that MCAs are lending money at a higher interest rate than is currently allowed by law.
When our firm speaks to clients in the MCA industry who continually use the loan method of accounting, it makes our firm very nervous for them. We see that MCA companies are unwittingly affirming what those law enforcement communities want to allege.
By keeping your accounting books on an established lending method of accounting, you are setting up your company for lawsuits while simultaneously setting up the industry for scrutiny. There is one thing we all must agree on: MCA companies must strive against accounting procedures that will ultimately classify them as loan sharks. If an MCA company is unsure as to how to set up their accounting so as to reflect MCA standards, please contact a knowledgeable CPA who can guide you appropriately.
In general, revenue is recognized when a specific critical event has occurred and when the amount of revenue is measurable. Every American business recognizes revenue and gains when goods and services, merchandise, or other assets are exchanged for cash (or claims to cash). However, there are a number of issues with the old US GAAP way of revenue recognition, especially for MCA companies.
A lot of companies are struggling in their attempt to establish the right path for their specific industry. What happens is that certain companies in the same industry conclude differently than other companies and this leads to inconsistencies in reporting. This is why the accounting standard setters now feel a need for new revenue recognition standards. As most accountants are aware, the new standards will be put into practice over the next two years.
Unfortunately, although the new standards reach a wide variety of industries they have not specifically addressed the MCA industry. The MCA industry has its own challenges in accounting for revenue, specifically the ‘right’ way to account for purchasing future sales. Whenever the topic comes up it soon turns into a hot debate regarding how and when to recognize revenue.
Going into all of the nuances would be too complex and truly each side of the argument may have merit. The real issue is when revenue should be recognized. One option is to recognize revenue at the time of funding. The other option is to recognize revenue on an ongoing basis (pro-rate when funds are being collected).
Here we will go back to our initial example and show the difference between the two options. All we need to change is journal entry C and journal entry D.
Here are the original entries, which show immediate revenue recognition:
| Accounts | Debit | Credit |
| Accounts Receivable | $100,000 | |
| MCA Cash | $70,000 | |
| Revenue | $30,000 |
| Accounts | Debit | Credit |
| MCA Cash | $1,000 | |
| Accounts Receivable | $1,000 |
Here we use the deferred method, which show ongoing revenue recognition:
| Accounts | Debit | Credit |
| Accounts Receivable | $100,000 | |
| MCA Cash | $70,000 | Deferred Revenue | $30,000 |
| Accounts | Debit | Credit |
| MCA Cash | $1,000 | |
| Accounts Receivable | $1,000 | |
| Deferred Revenue | $300 | |
| Revenue | $300 |
There are two other methods, both of which are completely incorrect and both of which our accounting firm has seen in use. The first incorrect method is when revenue is only recognized at the end – when the contract is completely paid off. This method could get your organization into real trouble. For instance, what if the contract is renewed? In those terms, a contract could renew over and over and the MCA company would never recognize the revenue. This could lead to the IRS charging you (even criminally) for tax evasion.
The second incorrect method is the loan method. This method calculates each payment’s interest and principal (similar to a conventional loan). As we outlined above, using the loan method of accounting only sets your MCA company up for scrutiny and legal action. Your own books could be used as evidence to show that your company is violating usury laws.
In conclusion, if it looks like a duck, quacks like a duck, and swims like a duck – it’s a duck! Be sure your accounting books do not paint the portrait of a loan company. Simply calling yourself a MCA company is not enough – you must be a MCA company through and through.
Phone (845) 875-6030
Fax (845) 678-3574
Email: cjt@ywcpa.com
http://ywcpa.com
Please consult with an accountant to assess your particular situation and needs.
Letter From the Editor – March/April 2015
March 1, 2015
A single innocuous quote by one of this issue’s sources is all it took to put everything in perspective. “2015 is the year of the broker,” said Sendto’s Amanda Kingsley. Could that even be possible if 2014 was defined by algorithms?
In the pages that follow, we investigate the impact that the OnDeck and Lending Club IPOs had on public awareness but from a unique angle. Loan volumes are up everywhere you look, but so are the number of middlemen that are trying to get in on the action. The broker business is booming.
Even the lending platforms leading the technology charge could best be described as brokers. They connect borrowers with investors for a fee. So too could the investment bankers who have been tirelessly making the rounds to assist with capital raising.
But it was when a 25-year old college dropout told me that deal-making afforded him the ability to go from taking the bus to work to driving a new Ferrari, that I became convinced that 2015 might indeed be the year of the broker.
This isn’t to say that mistakes aren’t being made along the way. The influx of inexperienced newcomers has created a complicated environment.
I was a broker once too. When I launched MerchantProcessingResource.com (now deBanked) back in 2010, I was still making deals myself. Through the blog and publication, I try to cover the wider industry from an insider’s perspective. That often means rolling up my sleeves and experiencing it firsthand.
Just this past February we not only accepted a payment in bitcoin, but the agreed upon advertising price was actually set in bitcoin, not dollars. These are revolutionary times.
Many of the financial companies and systems we delve into might need banks, but they are not banks themselves. That is the essence of the industry we hope to capture. As technology improves, the world is becoming a little less banked. And so with that, hello again. I’m back. I’m excited. I’m deBanked.
I hope you enjoy this issue.
–Sean Murray
Advice to New Loan Brokers, ISOs, and Funders
February 24, 2015
Some words of wisdom to avoid having a bad experience in this industry:
1. If you can’t afford a lawyer, don’t be a funder. This is a litigious business and despite the myth that commercial financing is unregulated, there are plenty of ancillary laws to adhere to. States, FTC, OCC, IRS, etc.
2. Have a lawyer review your contracts (merchant agreements, ISO agreements, syndication agreements, etc.) If you can’t afford one or don’t want to take the time to do it, this business might not be for you.
3. Don’t send your deal to someone with a free email address (yahoo, gmail, hotmail, etc.).
4. Don’t send your deal to some random company just because they posted something on a forum, LinkedIn, or somewhere else. Check them out on Google, ask other forum members to vouch for them. Be extremely smart and overly diligent about it.
5. This is not a get rich quick business or industry. You can lose money funding and syndicating. You can technically also lose money brokering on commission clawbacks for deals that go bad right away.
6. Leads are expensive. Do not launch an ISO with only 2 grand in the bank.
7. Learn to generate your own leads and you will save yourself a lot of stress down the road.
8. A wise man once told me it is better to build a book of business and a long lasting passive income than to grind it out for a quick buck month after month. What’s your strategy?
9. You will lose deals, commissions, arguments, and occasionally your mind. Accept your losses when they happen and focus on the next deal.
10. Use appropriate language. A company that buys future revenues is not a lender and their financial transactions are not loans. Loans have noticeable things like interest rates and fixed terms. Make sure you know which one you’re talking about at any given time.
More Red for OnDeck (ONDK)
February 24, 2015
Back in the red?
It looked like the tide had finally turned. After 8 years and just in time for their IPO, OnDeck had pulled off their first quarterly profit, a meager amount of $354,000. But it was a start right? After their debut on the NYSE, the price swung heavily from a high of $28.98 to a low of $14.52. It closed at $19.37 right before the report was released.
OnDeck reported a $4.3 million loss for the 4th quarter and an $18.7 million loss for the year. Despite this, their margins are definitely improving.
The company issued $369 million in loans last quarter, bringing the 2014 total to $1.2 billion. Sales and marketing expenses doubled in 2014 over the prior year with CEO Noah Breslow and CFO Howard Katzenberg acknowledging on the call they’ve made a big go at TV and radio advertising.
Competition? What competition?
Noticeably, the average APR of loans originated in the fourth quarter was 51.2%, down from over 60% in Q4 of 2013.
One analyst asked if competitive pressures were leading to the reduction in interest rates but Breslow said that wasn’t the case. If anything their closing rate or “booking rate” has been improving and rates coming down is an initiative they’ve taken up on their own. Merchants are actually shopping less according to them.
“Overall this market is still characterized by extreme fragmentation,” Breslow said. “The behavior that we see with our customers is that they might research other competitive options online but then when they actually apply to OnDeck and receive that offer, they kind of have this bird in hand dynamic, and there’s so much search cost associated with going out and looking at other places and so much uncertainty around that, they typically just take that offer that OnDeck has provided to them.”
With their cost of capital down, closing rate up, and defaults steady, a net loss should arguably be a tough pill to swallow. In response to a question about potential regulatory threats, Breslow said there wasn’t really anything on the horizon.
So was it just a weird quarter? Under Guidance for First Quarter 2015 and Full Year 2015 in their quarterly report, they suggest another long year of losses ahead.
To infinity and beyond!
The economic and regulatory environments couldn’t be any more favorable to a company that now has almost a decade worth of data under its belt. But unfettered growth still seems to be the number one priority on the agenda. Breslow and Katzenberg spoke optimistically about their recent entry in the Canadian market and the potential to set up shop in other countries. As for the OnDeck Marketplace… surprisingly they claimed its only real purpose is to diversify their funding sources. They are not aiming to become a marketplace but rather they view the OnDeck Marketplace as just one of many vehicles to sell off loans.
So when does the profit part come in? None of the analysts on the line asked about profit. They mostly all offered their congratulations on a “great quarter”. Coincidentally they were almost all from companies that originally underwrote their stock offering.
Six months ago I wrote that OnDeck’s lack of profits has been intentional. In An Insider’s Perspective, I wrote, “What scares their competitors though, is that this strategy has been intentional. Very few if any players in the industry have had the luxury, guts, or the purse to lose money for seven years as part of a coup to conquer the market.” Nothing has changed.
As long as they have cash in the bank, they’re going to keep pursuing growth. They had $220 million in cash and cash equivalents as of December 31st. So for now that means continuing to turn up the marketing heat to increase volume domestically while planting seeds in other markets like Canada.
But the question remains, at what point does profitability become important? Sure it’s tempting to be lending $2 billion or $3 billion a year instead of the $1.2 billion size they’re at now because it would mean they’ll be that much bigger right? Heck, maybe they can be a $10 billion a year lender. But if they are running in the red at a moment where their cost of capital is low, the credit markets are liquid, the economy is favorable, regulatory threats are nil, defaults are static, there is supposedly no competition, and their margins are at their peak, then what happens when one or two of those things change? What if all those things change at once?
Those rates are too high low
OnDeck’s price jumped in afterhours trading. The market is chalking up the results as a positive. It’s just another losing quarter in a long line of losing quarters for OnDeck and they’ve promised more of the same in the year ahead. Nothing to see here folks, business as usual.
OnDeck may have made it easier for small businesses to get a loan, but they have yet to prove since 2006 if their methodology can actually make money. That should be a wake up call to critics that complain their interest rates are too high.
It is quite possible that their interest rates are actually too low. At an average of 51.2% APR, that’s a heck of a theory to consider.
But it looks like it’s true.
Lending Club (LC) Q4 Earnings Call
February 23, 2015
The first company to bring platform lending into the public eye will release their 4th Quarter and 2014 earnings on Tuesday, February 24th at 5pm EST. Anyone can join the live webcast by clicking here. If not by a computer, you can also dial in by phone at 888-317-6003. Use conference ID 4117710 ten minutes prior to the start of the call.
Investor attitudes are likely to be affected by the outcome of OnDeck’s earnings. While the two companies have different models, they have generally followed the same ups and downs. Many investors are still not clear how they’re different. Lending Club earns fee income by servicing loans and is not exposed to the risk of the loans themselves. Some critics believe that puts them at odds with their platform lenders over the long term.
Lending Club has already experienced a low of $18.30 a share and a high of $29.29. It closed yesterday at $22.89.
Since going public a few months ago, they announced a partnership with Alibaba and Google.
OnDeck 4th Quarter Earnings Call
February 21, 2015
OnDeck Capital (ONDK) will report Q4 and 2014 earnings on Monday, February 23rd at 5pm EST. If you’d like to view the live webcast, you can register here. You can log in as early as 15 minutes before it starts.
This is a surprisingly crucial moment for OnDeck who has recorded losses every quarter since inception except for the one just prior to the IPO. Since then the company has been confused as a Lending Club for businesses. The companies differ in that OnDeck’s core business is lending and Lending Club’s is servicing fees.
Critics have called out OnDeck’s high interest rates which top out at 99% APR.
In just a couple months, OnDeck has bounced from a high of $28.98 per share to a low of $14.52. It closed Friday at $18.37.
Announcement: Dwolla partnership U.S. Treasury
February 19, 2015Company Announcement
Dwolla to help U.S. Treasury go paperless, prepare for a secure digital future
Each year the The U.S. Department of the Treasury’s Bureau of the Fiscal Service collects 400 million transactions worth $3.7 trillion. Ensuring that its collection programs stay relevant, safe, and cost-effective, they recently launched a new Digital Wallet program. The new initiative aims to modernize the way our country collects and distributes payments through the convenient offering of safe and innovative payment options. In June of 2013, the Digital Wallet initiative issued a request for proposal, asking national payment platforms to help the 225-year-old Treasury Department improve its flagship revenue collections product, Pay.Gov.
With existing partnerships with Microsoft Government and state administrations, Dwolla’s flexible architecture makes for an ideal partner in helping modernize public payments. Today, we’re excited to announce our selection as the U.S. Treasury’s first Digital Wallet partners, alongside PayPal (and ApplePay).
What is Pay.Gov? It’s smart government.
Nearly 200 federal agencies, ranging from the Department of Interior to the Department of Defense, use the U.S. Treasury’s Pay.gov platform to create and host custom online payment forms, collecting over 100 million transactions worth approximately $110 billion per year. These simple forms, which hide a sophisticated software and accounting system, allow federal agencies to collect and track non-income tax payments for things like climbing Denali or court fees. It’s a lot like Dwolla Forms, but made exclusively for the federal government.
By outsourcing their revenue collection needs to Pay.Gov, federal agencies not only provide taxpayers an improved experience but also streamline their own payment operations. In doing this, they reduce the operational costs, inefficiencies, and foregone payments. Simply put, Pay.Gov increases revenue for agencies and saves taxpayers money.
How is Dwolla involved? How would this impact me?
Dwolla is now a live payment option for many US agencies (and this will grow over time)–allowing any taxpayer with a U.S. bank or credit union account to use Dwolla’s simple and secure online checkout experience to pay for a whole host of federal fees, products, and permits.
No cards. No checks. No pre-existing Dwolla account required. No sharing of sensitive payment information with the federal government.
What is Dwolla? A secure and modern way to make bank transfers.
When we began building the Dwolla payment network in 2008, we set out to create the ideal way to send money. What we quickly found is that the ideal way to move money has changed since the 1960s and 70s, and the only way to solve the problem was to start over.
Starting fresh with over 40 years of technological advancements, Dwolla was able to create an end-to-end payment network that modernized the legacy bank systems—making it easier to use, more accessible, and more secure. Today, we work with anyone or anything connected to the Internet, from solopreneurs to publicly traded companies, exchange infrastructures to software developers, state governments to financial institutions. We help our community rethink their payment operations, product offerings, and user experiences.
Create new standards in security and privacy: Dwolla has baked new technologies into its network, like authentication and tokenization, that eliminate sensitive financial information from a typical transaction.
Solve problems for all: Free turnkey products, like MassPay or Dwolla Forms, make it easy for anyone to send or receive funds without any existing technical know-how, while a healthy library of developer docs and APIs make it easy to plug Dwolla into nearly any platform, existing operation, or your own creation. Additional levels of support and customization are available and affordable.
Create a powerful, but flexible infrastructure: A simple, and dynamic platform, Dwolla was designed to handle the unique considerations of governments.
Create a platform for future innovation: Whether its mobile applications, real-time payments, or tokenization, Dwolla benefits are freely accessible via our API and developer documentation, allowing the network to scale and solve for the unique needs of an evolving payment landscape.
So what Dwolla can do for you? Grab a brochure from Dwolla.com/government or sign up for our upcoming webinar by emailing government@dwolla.com.
Federal Government Selling Bitcoins
February 18, 2015
If the webpage didn’t say www.usmarshals.gov in the address bar, it’d look like a poorly disguised scam. The page, which looks like it came out of the 1990s (no SSL either for a government website?) is offering 50,000 bitcoins for sale, an amount worth $11.8 million at current market prices.
This sealed bid auction is for 50,000 bitcoins separated into two series: Series A (10 blocks of 2,000 bitcoins), and Series B (10 blocks of 3,000 bitcoins). You will not have the opportunity to view other bids. You will not have the opportunity to change your bid once submitted.
Bidding ends at Noon on March 2nd and in order to bid you have to wire the U.S. Marshals at least $100,000 upfront just to be considered a legitimate bidder.
The old fashion system instructs bidders to email them their driver’s license, completed bidder form, and receipt that says they wired them a hundred grand. There’s a special email address to do this and they should hear back from someone if they get approved.
I bet you never thought you’d seen an email address like this, USMSBitcoins@usdoj.gov.
So why are the U.S. Marshals in the Bitcoin business? Surely you know about Silk Road already…
If you want to get in but don’t have enough to cover a lavish bid, why not syndicate it out? That’s allowed:
Can I form a syndicate of buyers?
The person or entity that registers to bid on this auction must satisfy all registration requirements, including certifying that the bidder is not acting in concert with the defendant or defendant entity. This certification extends and applies to all members of a syndicate. The primary bidder should perform whatever due diligence the bidder feels is necessary in order to comfortably make that certification.
And if you don’t win, the Marshals will just ACH your deposit back, but not until after they’ve probably put you on some kind of watch list. Nothing says suspicious person like randomly wiring 100k+ to the U.S. Marshals just so you can be considered a bitcoin bidder. Expect them to be curious about who you are.
Hopefully their technology is more advanced than the way their website looks though.
