How The PPP Reporting Oversight Harms MCA Companies

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.

deBanked’s recent story covering the news about how the Small Business Administration (SBA) failed to report many Paycheck Protection Program (PPP) loan charge-offs to credit agencies is a major concern for merchant cash advance companies.

As the deBanked article explained, a new report from the Office of the Inspector General (OIG) found that the SBA did not report 37% of PPP loan charge-offs, and missed deadlines 97% of the time. The OIG report stated that the SBA’s automated system was supposed to report these loans, but it did not always work correctly. As a result, many delinquent borrowers could still get new loans because their bad debt wasn’t reported. The report also pointed out that a large portion of early PPP loan charge-offs were linked to potential fraud, which makes the lack of reporting even more serious.

This oversight could cause real problems for our industry. As an accountant working with MCA companies for over a decade, I understand firsthand how important accurate credit reporting is for making sound and fully informed decisions on which merchants our clients choose to invest in and help advance.

For MCA companies, this incomplete reporting leaves a critical gap in the information that funders rely on. Without accurate credit information, it’s harder to assess the risk of advancing capital to any particular merchant, which can lead to higher chances of defaults and financial losses when you don’t have a complete history that includes any times they’d skipped payments or defaulted. The missing data from the SBA means MCA companies might unknowingly fund high-risk businesses, which ultimately harms the cash advance company itself.

To work through this situation, funders need to take stock of how they evaluate prospective merchants to work with.

First, it’s important to do thorough background checks using multiple sources of information. Relying on just one credit report isn’t enough, especially now that we know there might be gaps. Cross-referencing data from various sources will provide a more complete picture of a merchant’s credit history.

We can also require merchants to provide more documentation and financial information before approving funding deals, removing a complete reliance on credit reporting agencies that have now proven themselves fallible. Pairing up the complete history that they provide along with their credit reports, and continuous tracking of the deal on a strong internal MCA CRM that lets you know of any hiccups, is a proactive approach that helps in making informed funding decisions.

It’s vital to develop strong risk management strategies. This might include setting stricter funding criteria, diversifying the types of businesses we lend to, and keeping enough reserves to cover potential losses. By being cautious and prepared, we can protect our companies from the financial risks posed by incomplete credit reporting, and eliminate our over reliance on that one source of information.

Let’s use this opportunity to ensure we are making the best funding decisions possible, and continue to have healthy companies built on stable foundations.

Why It’s Important To Understand How You Report Syndication Income

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.

In the world of Merchant Cash Advances (MCAs) where financial reporting is complicated and extremely detailed, understanding how to handle syndication income is crucial. Syndication income, which often includes management fees, plays a pivotal role in the operations of many MCA companies, helping fund deals and enable the business to grow to the next level, while also often (hopefully) proving a lucrative investment for the syndicator.

It’s essential to grasp the various approaches to recognizing this cash injection and the implications it has on financial reporting. Let’s explore the strategies that MCA companies typically apply and the accounting principles that guide them.

Companies have diverse methods for charging syndicators, each with its own set of nuances. Some MCA companies opt for a straightforward flat fee upfront. Others choose to charge a flat fee as funds are repaid with each payment, and there are those who employ a combination of both – a smaller upfront fee coupled with fees assessed as funds are recovered. Understanding which method you typically use is the first step in accurately recognizing syndication income.

Most MCA companies operate on an accrual basis, where income is recognized when earned, regardless of when funds are received. This approach is predicated on the notion that once a syndication fee is charged, it need not be refunded even if the MCA deal defaults. Consequently, income is recognized at the moment fees are charged.

For instance, if an MCA company charges an upfront syndication fee, that fee is immediately recognized as income. The same principle applies when fees are assessed as funds are repaid – income is recognized in real-time as payments are received. However, it’s important to note that there are exceptions to this rule. In some cases, MCA agreements dictate that if only a portion of the funds is recovered, a corresponding portion of the syndication fee must be refunded. In such instances, income is not recognized until funds are actually recovered, and the syndication fee income is allocated over the duration of the advance.

So, why does this matter, and how does it impact the financial landscape of MCA companies?

First and foremost, it has a direct bearing on financial reporting. Accurate accounting practices are essential not only for internal financial management but also for external stakeholders, including investors, regulators, and auditors. Understanding when and how to recognize syndication income ensures that financial reports reflect the true financial health of the MCA company, both for yourself and the syndicators.

Moreover, the chosen approach to recognizing syndication income affects cash flow. An upfront recognition of income may paint a more favorable cash flow picture, while a deferred recognition approach may better align cash flows with actual funds received from MCA deals. This can impact budgeting, planning, and investment decisions.

Furthermore, it influences the perception of risk and profitability. MCA companies that recognize income upfront may appear more profitable on paper, while those that defer income recognition may appear less so. This can impact investor confidence and the overall attractiveness of the MCA company as an investment opportunity.

Understanding the various approaches and their implications is essential for accurate financial reporting, effective cash flow management, and informed decision-making. Whether income is recognized upfront, as funds are repaid, or deferred until funds are actually recovered depends on the specific terms of MCA agreements and the associated risk and profitability considerations.

Ultimately, the goal for MCA companies is to employ accounting practices that not only comply with industry standards but also provide a transparent and accurate representation of their financial standing. By mastering the art of recognizing syndication income, MCA companies can navigate the intricate financial landscape with confidence and clarity.

Payoneer Funds $80M in MCAs in Q1

Payoneer, the digital payments provider that also offers working capital on e-commerce platforms like Walmart Marketplace, originated $80M in merchant cash advances in Q1, according to the company’s recent quarterly earnings report. While the company did not draw attention to this stat, it appears in its Statement of Cash Flows. Payoneer originated $299M in funding to merchants throughout all of 2023, which would put the company below Funding Circle in terms of annual funding volume.

When it comes to Walmart, Payoneer offers up to 140% of a marketplace merchant’s average monthly Walmart volume and factor rates that range from 1.015 to 1.10.

“Payoneer will collect a pre-determined portion of each Walmart payout you receive via ACH bank debit from your bank account,” the website states. “Debits typically take place within 1 business day of each payment received from Walmart.”

The program is not new. The two first announced this relationship in December 2021. At the time, a senior director at Walmart said “Affordable working capital is more important than ever to help our sellers grow their business.”