Are You Calculating Defaults Wrong?

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.

As we dive into tax season, it’s crucial for those involved in the merchant cash advance (MCA) industry to have a solid grasp of how to account for defaults. The way defaults are measured can significantly influence financial reporting and tax obligations, so understanding the different perspectives is essential.

There are several ways to evaluate defaults in the MCA industry, each offering different benefits depending on the context.

One common approach is the Right-to-Receive (RTR) perspective, which looks at the difference between the total payback amount agreed upon in a deal and what has actually been repaid.

For example, if a business secures $100,000 with a payback obligation of $150,000, and it repays $135,000, then there’s a remaining $15,000 that constitutes a default—a 10% shortfall from what was expected. This method is excellent for highlighting the gap between expected and actual returns, making it a valuable tool for financial modeling and long-term forecasting.

However, while the RTR method is strong for assessing contractual obligations, it can sometimes feel a bit too rigid. It often overlooks the real-world dynamics of cash flow and the impact of fees, which can give a skewed picture of a deal’s financial health.

Another method is the cash perspective. The approach simplifies things by focusing on whether the initial funding amount has been recovered. Using the same example, if the client repays $135,000, there’s no default recorded since the principal has been recovered. But if only $75,000 is paid back, that’s a 25% default based on the original funding. This approach is particularly handy for tax reporting because it zeroes in on principal recovery without complicating the picture with profit margins.

While straightforward, the cash perspective has its drawbacks. It tends to gloss over important details like origination fees and the overall financial implications of the repayment agreement, which can lead to an incomplete understanding of the deal.

Next, we have the wire perspective, which considers the actual amount transferred to the client after any deductions, such as origination fees. For instance, if a client gets $100,000 but pays a 10% origination fee, they effectively receive $90,000. If they then repay $75,000, the default is calculated based on the wired amount, leading to a 16.66% default rate. This perspective is particularly useful in syndication agreements, where understanding profitability post-fees is crucial.

Yet, like the cash perspective, the wire approach may miss the broader financial picture, focusing too narrowly on fees without accounting for total contractual expectations.

Each of these methods has strengths and weaknesses, but a comprehensive understanding of defaults requires a more detailed approach.

The percentage of payback perspective is the solution, calculating defaults based on the total percentage of the expected payback received.

In a scenario where the RTR is $150,000 and $135,000 is repaid, the default is 10% of the total payback amount. This method accounts for historical trends and repayment behaviors, offering valuable insights for portfolio management and financial forecasting. It allows us to estimate defaults based on historic defaults and post a percentage of the payback as the payments come as defaults. By incorporating both RTR obligations and cash flow realities, it balances the limitations of other methods.

For tax purposes, the cash perspective is practical, recognizing defaults as the shortfall between the funded amount and repayments. However, it oversimplifies the complexities of MCA financing by neglecting origination fees and RTR contracts. Similarly, the RTR perspective, while excellent for identifying contractual gaps, can be too rigid for broader financial analyses, as it does not consider upfront deductions or actual cash flow timing.

The percentage of payback perspective addresses these shortcomings, making it the most effective method for evaluating defaults across all scenarios.

A significant advantage of the percentage of payback perspective is its flexibility for financial projections.

Businesses can use past repayment data to estimate default rates across different portfolios, helping them align with long-term profitability goals. This is especially important in the merchant cash advance industry, where repayment patterns can vary widely. It also works well for situations involving origination fees or syndication agreements, ensuring those fees are factored into default calculations. By doing so, it avoids the distortions seen in cash- or RTR-focused analyses and provides clearer reporting for syndication partners on how their investments are performing. Although this approach requires more effort, its ability to offer accurate and nuanced insights makes it essential for MCA companies in today’s complex financial landscape.

This tax season, understand your accounting options, and leverage them to help you kick off an amazing 2025.

A Glimpse at Simply Funding

In around 2018 Jacob Kleinberger began calling merchants for a well known small business finance brokerage—a job he not only enjoyed but one that sparked his curiosity. “I always wanted to understand what my funders were doing,” Kleinberger says. He frequently asked questions to learn how decisions were being made across the board.

Though he worked closely with funders, being on the sales side didn’t give him the full picture. That changed in 2021 when an opportunity arose to join Simply Funding, a direct funder, as a partner. Today, he serves as Head of Operations.Transitioning from broker to funder was an eye-opener, leading Kleinberger to half-jokingly call the funders he used to work with to apologize for the challenges he had unwittingly created. Despite the learning curve, Kleinberger hit the ground running. Simply Funding, founded in 2017 by Bernard Mittelman, was a relatively small operation when he joined, but his mission was to help it grow. “We more than doubled the following year in funding and more than doubled the year after that,” Kleinberger says, reflecting the impact he’s been able to have with the team, which he’s said has been crucial to the success.

“We’re all a team, all here to show off each other’s strong points,” he says. For instance, the company already had a really good core foundation and underwriter in place when he got there.

The company describes itself as an A/B paper shop, with the majority of its revenue-based financing deals involving weekly payments, though they do daily payments as well. They also offer merchant processing splits.

Now a 28-person company, Simply Funding was originally located in Manhattan’s financial district but has since relocated to Jersey City. Kleinberger recalls the transition vividly, flying straight from the deBanked CONNECT Miami conference in 2023 to the new office to assemble all the furniture—an ordeal that lasted nearly 24 hours straight. One benefit of the move, he says, is access to a large talent pool in the area. But of course, it had to be accessible for the current team.

“A very big part [of the decision] was I had really good staff, and how would my staff come to work?” he says, since they make the whole operation hum. As a New York native from north of the city, Kleinberger is a commuter himself. The office now is just across the street from the PATH train station on the Hudson River. One can see the Simply team in person in the corporate high-rise there if they drop by.

When asked about the importance of security at Simply, Kleinberger is unequivocal: “It’s the most important.” The company takes no chances with data access, even to the extent that Kleinberger himself refuses to store work-related information on a laptop. He also emphasizes the need for clear, unambiguous rules in business operations to ensure everyone understands expectations and outcomes.

The company has no inside sales force, so Kleinberger gets a thrill when an ISO seeks his help with merchant communication—it reminds him of his early days. However, he remains acutely aware that, since it’s the company’s funds on the line, transparency and directness with customers are non-negotiable. From his perspective, some brokers in the industry walk a fine ethical line, and he and the Simply crew are determined to ensure things are done the right way.

“I do feel like there needs to be something to help make brokers accountable,” he says. Despite the challenges, Kleinberger remains optimistic about the future and is excited about what lies ahead as Simply Funding continues to grow.

“I think 2025 is going to be a sick year,” he says.

Smaller Funder? How to Get Fast Tracked With Big Investors

Looking for big money? As a smaller funder your simple financial reports might not cut it when it comes to big investors. In fact, it’s a complaint frequently made by investment bankers and institutional funds looking to get capital deployed in the revenue-based financing space.

“Smaller originators face three key hurdles: first, the lack of institutional-grade portfolio performance and consistency; second, limited data operations and analytics capabilities; and third, a shortage of affordable resources and expertise to close these gaps and engage effectively with capital markets,” said Tomo Matsuo, Managing Partner of AdvanceIQ.ai., “AdvanceIQ.ai was launched to address these challenges head-on through tailored solutions like our new Portfolio Pulse product.”

The Portfolio Pulse is a simple yet robust tear-sheet product that delivers a high-level, third-party validated snapshot of portfolio performance. Designed as a cost-effective tool, it helps funders build credibility and engage institutional investors with confidence. Seamlessly integrating with most industry CRMs, it generates investor-ready metrics tailored for early-stage conversations, enhancing transparency and trust.

But Portfolio Pulse is just one piece of AdvanceIQ.ai’s broader suite of tools. From risk scoring and intelligent lead routing to dynamic portfolio analytics, AdvanceIQ.ai equips funders with the insights and resources to scale efficiently while building investor confidence. These offerings include tools like the SMB Risk Index (SRI), a proprietary scoring system designed for the SMB AltLending sector to predict and enhance asset performance.

Excerpts from Portfolio Pulse:


• Trailing twelve-month (TTM) origination metrics and performance trends.

• Distribution and performance insights segmented by key attributes, including the proprietary SMB Risk Index (SRI).

• Historical repayment trends via collection curve analysis.

“High-quality reporting is an essential first step for smaller funders to break into institutional markets,” Matsuo noted. “Our goal is to provide the transparency and insights that empower them to succeed.”
With deep experience in the SMB AltLending space, Matsuo is no stranger to the challenges funders face. “Having been involved in raising and managing hundreds of millions of dollars in both debt and equity, I’ve seen how difficult it can be for smaller originators to stand out. AdvanceIQ.ai’s offerings are designed to remove those barriers and position them for growth.”

OppFi Encouraged By Early Results With Bitty

OppFi achieved a new record in Q3.

“The record quarterly net income was a result of credit initiatives that continue to drive strong loss payment and recovery performance, marketing cost efficiency and prudent expense discipline across the organization,” said OppFi CEO Todd Schwartz during the quarterly earnings call. One part of that organization is Bitty Advance, which it acquired a 35% stake in this past summer. “We are encouraged by the early results and potential opportunity of this platform and the strength of our relationship with Bitty,” Schwartz said of the progress so far. “We continue to explore similar opportunities that would be accretive and align with OppFi’s strategic vision.”

One analyst on the call inquired further about what similar opportunities Schwartz might be referring to on the M&A front. Schwartz responded with the following:

I mean I think whatever it is, it’s got to be something that’s highly accretive. I mean, OppFi’s vision is to be a platform for digital alternative financial service products where we see large supply-demand imbalances in large addressable markets. There’s definitely different profiles of business out there, different situations are pretty — it’s pretty bespoke, but we’re prepared to handle either-or. So it has to make sense for us, though. And obviously, we’re going to protect and mitigate risk with anything we do to make sure that it’s successful and make sure that we’re going to be getting a return on our capital and it’s highly accretive to shareholders.