Mastering Taxes for Merchant Cash Advance Businesses – Cash Basis 101

December 7, 2023
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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

merchant cash advance accountingFor funders in the merchant cash advance industry, navigating through various funding scenarios is a common challenge. There are many different ways to fund your MCA business–including institutional money, using your own funds, partnering with syndicators, or involving outside investors– and understanding how to recognize income for reporting to your partner, syndicators, investors and the IRS is essential to avoid tax and compliance issues down the line.

When I started Better Accounting Solutions in 2011 and began working with clients in our industry, I found the accounting world wholly unprepared for the different funding streams MCA businesses worked with, and in the years since, we’ve managed to systematize and customize the income recognition process for the entire industry, particularly in the context of accrual basis reporting, as we’ve become more and more ingrained in the space..

Let’s explain how, starting by exploring the different funding scenarios your business might find itself in:

Using Company’s Own Funds: Some funders rely solely on their own company’s money to provide advances. In this scenario, the funding is entirely self-financed, and the company does not seek external investments.

Equity Partner of the Funding Company as Syndicators: Other funders collaborate with partners who contribute money as syndicators, in addition to using the company’s funds. This means that both the company and its partners are involved in funding the deals.

Outside Syndicators and Investments: Certain companies involve outside syndicators, who are not part of the company’s core team or partners, to provide additional funding. This setup allows the company to expand its funding capacity beyond internal resources and institutional investors.

Income Recognition for Reporting and Tax Purposes

Typically, for funders using their own company’s money, there are two primary ways to recognize income— one for reporting purposes and the other for tax purposes.

Cash Basis Reporting: Cash basis reporting recognizes income and expenses when actual cash is received or paid. In this method, income is recognized when the money hits the bank account, and expenses are recognized when the money leaves the credit card or bank account.

Accrual Basis Reporting (GAAP): Accrual basis reporting, also known as Generally Accepted Accounting Principles (GAAP) reporting, is used by Certified Public Accountants (CPAs) when auditing financial statements. Unlike cash basis reporting, accrual basis recognizes income when earned, regardless of when the cash is received, and expenses are recognized when they are accrued. (More about GAAP in a future article)

Challenges in Income Recognition for Merchant Cash Advance

Recognizing income in the merchant cash advance industry can be complex, especially when dealing with cash advances rather than traditional loans. Unlike loans, where regular payments consist of interest and principal, merchant cash advances involve the purchase of future receivables.

Consider this example: A merchant cash advance provider funds a merchant with $100,000 at a commission expense of 12% and a Junk Fee income of 10%. The bank fee income and RTR/Factor Rate is.5, while the merchant will pay back $150,000, $1,500 daily assuming a 100 day duration.

Cash Advance Income Recognition Approach in Cash Basis Accounting:

Because of this unique funding structure, here’s how my team at Better Accounting Solutions recommends reporting the income (BAS will typically use Accrual Basis reporting for business owners, and note-holder investors, and cash basis for tax reporting if the company’s revenue is less than $10 million annually):

Commission Expense and Junk Fee Income: The commission expense and junk fee income are recognized immediately (in most scenarios) on the day the advance is given, deducted from the funded amount.

Factor Income: Until the full contract funded amount of $100,000 is received in the funder’s bank account (not just the amount wired), no additional income is recognized. Once the contract amount is fully received on a cash basis, any payments received after that point constitute factor income or RTR income.

What’s the benefit of reporting this way?

By reporting on a cash basis you are deferring the recognized tax income. For example, if you have a deal that was funded in November over five months, you will have been only about forty percent in the payback by the time the tax calendar year is over. Since you would have not received the contract funded amount back yet , you would not recognize any of the factor income for tax purposes until the following year, thereby deferring your tax liability. This means you have more time to spend that money and grow your actual business.

It’s important to acknowledge that accounting practices can vary, and accountants may have differing opinions on income recognition. The approach outlined here is definitely an aggressive method, but one I continue advocating using for IRS and tax purposes, for the reasons listed above.

As we’ve said, navigating income recognition in the merchant cash advance industry can be challenging due to the unique nature of cash advances. Understanding the funding scenarios, recognizing income for reporting and tax purposes, and considering different accounting methods are crucial for funders and companies in this space, and will give you a leg up come Tax Season.

It’s essential to emphasize that this article is for informational purposes only and should not be construed as accounting or financial advice. It’s strongly recommended for funders and companies to seek guidance from qualified accountants or financial professionals to ensure compliance with accounting standards and tax regulations tailored to their specific circumstances.

Why I’m An Evangelist…. For Outside Accounting Firms in MCA

November 9, 2023
Article by:

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

inspecting booksFor over a decade, since the explosion of the merchant cash advance industry in the United States, my team and I at Better Accounting Solutions have been working with a growing number of people and businesses involved in the industry, including brokers, funders, syndicators and investors. We’ve spent time meeting and mingling with you at industry events like Broker Fair and spent more hours talking on the phone advising you than we can bill for.

All this experience has led me to one conclusion, one reinforced the longer we work together with many of you: to thrive and be successful in the merchant cash advance industry, you need a third-party independent financial expert embedded in your business and books.

To declare the obvious context and biases up front: yes, this benefits businesses like mine and yes, I know this from working with many of you. But people become knowledgeable and experts in their own field that they’ve spent years studying and developing, which is why I feel qualified to discuss this.

In the ever-evolving world of merchant cash advance and its challenging relationship with transparency and ethics, trust with your business partners is a must.

Having independent third-party financial experts that report to both parties-for example between a funder and their syndicators- is the only way to ensure complete transparency without bias or conflict. It eliminates the possibility of the funder misappropriating the syndicator’s investment and skimming off what the investors are owed. Firms like ours excel in tracking the numbers to see the deals that are working and the ones that aren’t, and can demonstrate what is trending down to stop a bad deal from spiraling into a company-killing problem.

People often choose to rely on a single in-house accountant to manage their books because they want exclusive focus, but there are plenty of downsides to that as well. Not only are accountants hired from another corporate job rarely equipped to accurately track deals in the complicated world of cash advance, but they are also incentivized to make their reports as favorable as they can to their own company, which may scare syndicators and investors whom they have no obligations to. By outsourcing these critical functions to a specialized firm, MCA funders send a clear message to investors and syndicators: they take financial accountability seriously and they are a trustworthy and transparent business to work with, with open books for their partners to peer in.

Industry scandals that bring our profession into disrepute- such as the collapses of MJ Capital Funding, LLC and 1 Global Capital– were able to happen because the investors pouring money into what they thought were legitimate MCA businesses weren’t given access to the companies books until it was too late and hundreds of millions of dollars were forever lost.

Obviously, you should be wise about people’s motives, even mine as the author of this article, but you should also take every piece of advice into consideration, particularly one that objectively suggests measures that fosters and promote trust and better business growth practices.

Remember, in the world of finance, trust is the most valuable asset of all.

Originations Increased, Losses Decreased for Shopify Capital

November 2, 2023
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shopify glyphShopify Capital is still experiencing an increase in business loan and merchant cash advance originations, according to the company’s latest Q3 earnings report. The company recently stopped disclosing precisely how much it is they are originating, however. It used to give precise numbers but starting this year Shopify now only cites its loans and merchant cash advance receivables balance.

“Transaction and loan losses decreased for the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a decrease in losses related to Shopify Capital.”

So funding is up, losses are down, which is precisely the opposite situation that is going on at rival PayPal.

Shopify somewhat skimmed over its Shopify Capital business in its Q3 earnings announcements and on its official call except to state that it’s a strong segment that is growing.

PayPal Pulls Back on MCAs and Business Loans

November 2, 2023
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PayPal’s merchant cash advance and small business loan originations in 2023 are down significantly from 2022. The company revealed that it had only purchased $1.3B in merchant receivables for the first 9 months of this year versus $2.3B over the same period last year.

In the earnings call, Acting CFO Gabrielle Rabinovitch said that the company is maintaining a “tightened origination strategy for the PayPal business loans portfolio.”

Charge-offs are up. “The increase in the charge-offs for the nine months ended September 30, 2023 compared to the same period of the prior year was due to the expansion of acceptable risk parameters in 2022, which resulted in a deterioration of the overall credit quality of loans outstanding,” the company disclosed.

Amazon’s Business Loan Program Relatively Flat, And The Company is Now Possibly the Largest MCA Broker?

October 29, 2023
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amazon truckAmazon’s seller lending program, in which the company extends working capital loans to Amazon sellers to buy inventory, has been somewhat flat this year. Its seller lending receivables in Q3 were unchanged from Q1, coming in at $1.2B. It had briefly gone up in Q2 to $1.3B.

Amazon rarely mentions its seller lending business which is but a blip compared to the $143B in net sales the company recorded in just the third quarter. Despite all this cash, Amazon relies on a $1.5B secured revolving credit facility with a lender in the same way many small business lenders do to facilitate this amount of loan volume.

deBanked has been tracking the company’s seller lending receivables balance since 2016.

Amazon’s separate merchant cash advance program is not counted as part of their selling lending program. Amazon partnered up with Parafin in November 2022 to offer MCAs to their clients. One consequence of that is that Amazon sellers talk publicly in the company’s Seller Central forums and this has been no exception. There, most mentions of Parafin have so far been less than flattering.

Much of the confusion reported by sellers is centered around the percentage collected from each sale. Unlike most MCA funding companies, which either withhold a percentage of card sales or debit a fixed daily amount that can later be trued-up upon request, Amazon was previously collecting its percentage “based on whether a seller had received any disbursements, automatic or manual, in the prior week.” However, that changed this past August, according to Amazon who published the following note in their forum:

Payment is deducted from your bank account based on your current Amazon disbursement schedule. If you receive disbursements weekly, payments for your cash advance will be deducted weekly. If you receive disbursements bi-weekly, payments for your cash advance will be deducted bi-weekly. In instances where Amazon sales data is delayed in reaching Parafin, Parafin combines the payment amount with the subsequent payment to avoid debits happening on unexpected days of the week. Sellers whose payments are impacted by these instances receive emails from Parafin detailing the expected payment dates and adjusted amounts.

“Your merchant cash advance will be paid off automatically over time as you make successive sales-based payments. Because your offer is determined in part by your past business performance, our estimate is that you’ll pay your merchant cash advance within the estimated timeframe stated when you accepted it. If your sales ramp up or slow down, your payment amounts (and therefore the estimated payment period) may ramp up or slow down with them. The payment rate itself will not change and is a fixed percentage of monthly sales.”

Although there is some irony to Amazon playing the role of MCA broker and MCA customer service, Amazon also refers its loan-interested sellers to Lendistry and Marcus by Goldman Sachs. All of this activity started late last year just as Amazon was on pace to max out its own credit facility with its own lending program. Since then, the company’s flat business loan receivable balance might suggest that Amazon’s seller financing business is actually growing, just not on its own balance sheet since its brokering the deals out.

So who’s the biggest MCA broker in the US? Amazon generated $514B in net sales in 2022. $1B in MCA deals wouldn’t be so hard for a company already doing about a billion a year in loans. It would be quite ironic to discover that the biggest MCA broker in 2023 was Jeff Bezos, but it’s a real possibility.

Addressing Misconceptions in the MCA Business

October 18, 2023
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frustratedNew to the MCA business? Think you got it figured out? Let’s visit some of the stranger beliefs and misconceptions I’ve encountered over the last year. (Not legal advice as I am not an attorney).

My broker/funding company’s legal address as recorded with the Secretary of State or courts is my personal information and no one is allowed to know it or share it on the internet.

False. The business address you place on file with governmental authorities or courts is generally available to the public. If you opt to use your home address as your business address, just know that it will be open to everyone to see and share. Additionally, starting Jan 1. 2024, any broker soliciting merchants that reside in Florida will have to take the additional measure of including their official business address in their marketing to the merchant. So no, you are not entitled to complete anonymity.

I can fund in all 50 states!

But can you though? If you offer loans, there are a number of state laws that govern the legality of that. If you offer MCAs, there are states like Virginia for which you are required to be registered by law (applies to both funders and brokers). There are penalties for not following the laws.

I don’t need any fancy systems to be a funder

Well you’re going to need something. In the not too distant future you will be required to comply with 888 pages of regulations governing how you can collect merchant data all while having to report the details of every single application you looked at in addition to every single deal you declined or funded to the federal government. You also have to explain the rationale for your decision in every instance. This includes MCA and yes it’s a law not a proposal. I hope you’re ready.

MCA is legal so I don’t need to worry about anything

There are legal precedents that guide what can or can’t be done with regards to the purchase of future receivables. Generally speaking (and please consult with an attorney), one’s right to collect is not absolute. See this recent case, for example.

I sent some deals out to some shady funders who have gone MIA and no longer take my calls. The funder is to blame and is bad

Most brokers who cry foul about no-name fly-by-night funders that offered swift approvals and high commissions only to be ghosted are quick to share that they were swindled out of a potential commission. No one likes to suffer through that. However, consider the legal risk now posed to yourself and your client with the information you’ve passed on. In a recent criminal case, an ISO managing merchant documents is alleged to have stolen their identities and obtained dozens of business loans in their names. So ask yourself on a scale of 1 – 10, how confident are you in the person/company you’re passing a merchant’s deal docs to that they will comply with all state and federal laws? Your commission might not be the only thing they steal and that creates legal hazard for you. For what it’s worth, he’s a good guy isn’t a great standard when it comes to legal due diligence.

As always, please consult a qualified attorney. If you are being solicited by a funder that has not sought any legal advice at all and is instead operating by the seat of their pants because they heard this was a good business, you should probably move on to someone else.

From A to D: How LCF is Aiming High

October 9, 2023
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lcf group
Standing here with several members of the LCF team in the Long Island office

Robert Kleiber was a banker. He started his career at Citi in 2000 and rose up the ranks to become Head of Small Business Banking for North America by 2014. By then times were changing and disruptive fintech technology was becoming the talk of the town. Kleiber saw it firsthand and wanted in. So, he made the daring move to leave Citi in 2016 to go make his mark in the rapidly evolving world of small business finance.

He first served as the CFO of an NYC-based fintech company until another unique opportunity presented itself. It was at a growing company on Long Island that he hadn’t really known that much about previously. The way Kleiber tells it to deBanked, the company had a way of communicating the scale of its aspirations that got him really excited. He went for it. The company was called The LCF Group, a revenue-based financing provider that was headquartered in New Hyde Park. Today, Kleiber is the CFO & COO of the LCF Group. Founded in 2011, the company has solidified itself as a stalwart in what folks often call the “C & D paper” space.

“The goal,” Kleiber reveals, “is to be largest subprime funder by the end of next year.”

That’s a lofty ambition. In an industry oft-filled with big talk and rosy projections, LCF’s trajectory actually appears to support this possible outcome. Between in-office and remote, the company already has approximately 200 employees and it’s been on a hot streak of recruiting talent. Most compelling of all, however, is that LCF recently acquired select strategic assets and licensing rights to a well-regarded name in the industry, Reliant Funding. At the time of the announcement, the company said that “This strategic move not only enhances LCF’s portfolio but also empowers us to offer merchant funding through both ISO partners and directly under the LCF and Reliant brands.”

lcf group“On the direct side, our plan is to build up Reliant on originations […] and get them back to where they were before,” Kleiber says.

In that regard, LCF fully intends to leverage the Reliant name back into a powerhouse funding arm in the prime paper arena, first by going direct to merchant and then by taking on ISO/referral business for it. Between its two brands then, the company is on its way to covering the gamut from A – D. Unsurprisingly, all of this activity requires strong technology to make everything work. Kleiber says that they have 20-25 developers constantly building out their systems, which they rely on to not only increase the speed in which they can approve deals but also to achieve maximum compliance.

“We take compliance super serious,” Kleiber says. “Our differentiator is transparency, operating above board.”

LCF’s new Director of Sales, Jason Redding, who previously spent ten years at OnDeck, echoes same. “Even though it’s C & D paper, we’re doing this the correct way,” Redding says. Redding, who experienced the incredible ride at his former employer from startup to IPO and beyond, explains that LCF is giving him a similar feeling of what that journey was like. “Being part of something like that again is something I’m looking forward to,” he says.

And yet when it comes down to product, the company is perfectly content for the time being to focus on what they’re good at, which is revenue-based financing through and through. They’ve determined it’s better to lean in and try to be the best at something rather than try to offer too many different things.

At the LCF office in New Hyde Park, one can find various departments working to carry out the company’s mission. Among the introductions and small talk made during a walkthrough, one line uttered by a veteran member of their team stands out. “In this industry you don’t have to be earth shatteringly different, just operate with honesty, integrity, and transparency, and success will follow.”

This Funding Shop Puts Students on the Phone for College Credit

October 5, 2023
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cheetah capital“We figured out the best way is to recruit,” said Khoury.

Chris Khoury, CEO of Cheetah Capital, isn’t just hiring talent; he’s teaching it. He introduced a funding academy for college students in the summer of 2022. It’s an actual internship program that is specially tailored to recruit and train aspiring brokers and sales reps and teach them everything from the ground up.

Starting in the business three years ago, Khoury eventually went on to establish Cheetah Capital. He recognized the challenges in finding quality hires in the industry and decided to tackle it head-on with the creation of the program.

“[The interns] learn various skills such as cold calling, crafting professional emails, and acclimating to the corporate environment,” said Khoury. “Our program aims to provide valuable real-world experience that complements their academic learning to develop in business, marketing, and communication. They also gain experience understanding the world of financial services.”

The program is a collaboration between Khoury, Jonah Farella (Director of Sales & Business Development), and Joe Zampell (COO). The program is split into three “spots” (Spot 1, 2, & 3), where they each mentor 10-15 students and assess them on a weekly basis. Each student has an individual mentoring session each week and a team meeting every Monday.

Based in Boston, Cheetah Capital partners with local institutions such as UMASS, Boston University, Boston College, and Endicott College. Many of these schools have accredited their students with college credits upon validation from their team but interns are also compensated for their efforts.

“For Fall 2023, we’ve taken a slightly different approach,” said Khoury. “Rather than our usual remote/and in person internships, we’ve partnered with local Boston schools for a fully in-person co-op experience. These students dedicate their full semester to Cheetah Capital, working regular 9-5 hours, immersing themselves in a comprehensive professional environment.”

Chris Bearden, a current intern from Endicott, discovered the program on LinkedIn and secured an interview with Farella. Considering he is required to complete a 32-hour weekly internship in his senior year, Bearden has decided to cut his teeth in business in the world of b2b finance sales. He actually started at Cheetah this past June despite the internship program not officially starting until the fall. The program, he told deBanked, started off with a lot of training and he says it’s prepared him to be able to talk more confidently to business owners and in general. He mused about the “100 different stories” he’s heard daily. “Everyone will tell you something different,” he said.

“The most I’ve made on a sale so far is $8,000 off of one deal,” Bearden shared. “That was really exciting, I can’t really describe the feeling being 22 years old and coming off of a phone call understanding that I just made that much money. But I think one thing that they have taught me at Cheetah Capital is just to keep your head down and kind of keep going…”

Farella, who oversees the program, also started out as an intern himself. As a graduate from Boston College, he was mentored by Khoury and he adapted to the industry quickly. Once he started closing deals and making money he realized, “I’m making more money than I ever have.” Helping the interns in his program at the time later turned into an offer from Khoury on running the program.

“Right now, we cap at around 45-50 [students] and that’s because we only have them for about three months,” said Farella. “But as it grows, and we bring in more managers, what we want to do is kind of offer interns a return offer.”

Offering real-world work experience to students while building up quality employees has felt like a win-win for Cheetah.

“We try to take good well-rounded kids here and teach them what we wish we knew at their age,” said Khoury.