Recording Merchant Cash Advance Transactions

January 13, 2015

This is question #3 and #4 in an interview between deBanked’s Sean Murray and accountants Yoel Wagschal, CPA and Christina Joy Tharp.

• 1. Merchant Cash Advance How to Guide Intro
• 2. Do I Need a Special MCA Accountant?
• 5. Merchant Cash Advance Accounting Pitfalls
• 6. Revenue recognition for Merchant Cash Advance
• 7. Q&A – Real questions that MCA companies or syndicators have

Q: ISOs and funders are often asked by their clients or their accountants how to record selling their future sales on their taxes. Should merchants just record it as a loan?

A: No, No, No, and absolutely NO. “Loan” is a dangerous word. MCA’s do not handle loans because if these cash advances were loans then you could not charge such a high percentages. These percentages on “loans” would be against usury laws. Never, ever, use the word “loan”. Take it off of your websites. Take it off your business letters. Remove “loan” from your vocabulary entirely. The funder is buying and the merchant is selling “future sales”.

Q: How should a funder record buying future sales from a GAAP perspective? From an IRS tax perspective?

A:The IRS does not have any special provisions for the MCA industry so follow GAAP. If you have a departure from GAAP for tax purposes, it is the same as in any other industry.
Here is the typical debit and credit entry for most every normal sale:

The company pays for product XYZ with 1,000 USD:

Account	Debit	Credit
Inventory/Purchases	1,000
Cash		1,000

The company sells product XYZ and collects 1,500 USD:

Account	Debit	Credit
Cash	1,500
Sales		1,500

Very simple. Here you have a profit of 500 USD and this is what you see in your bank account. If the 500 USD is not in the bank it could be for various reasons which is why you need to reconcile.

Of course, there is much more to the merchant cash advance business than these simple transactions but we want to stay focused on this for a little while.

Now remember the business model of the supermarket? Every day the supermarket does thousands of orders and each order has dozens of items. We have to do the accounting for all of those transactions in order to reconcile the proper balances with the inventory. If done manually, we would need an entire staff of accounting clerks just to do those transaction entries.

That’s why everyone in the retail industry understands that they need a good point of sale (POS) system in order to record the information. What do you think the accountant does? The accountant prints out a report at the end of the day/week/month and from that report the accountant creates one entry in the general ledger showing the summary of the day.

I.E.: The summary tells the accountant that registers have rung up the total of 300,000 USD in sales of which 280,000 USD was paid in cash and 20,000 USD was paid on credit.

The entry will be as follows:

Account	Debit	Credit
Cash	280,000
A/R	20,000
Sales		300,000

The idea is that you can sell as many items as you want in a single period but that your accountant should not have more than one transaction to post to the general ledger.

When you want to micro manage you look at the point of sale system. How do you know that the POS system is correct? What is the end goal? Where does the buck stop? Yes, the buck stops in your bank!

If the POS summary is being put in the general ledger, and the general ledger is matching up with the money in your bank – BINGO! If it doesn’t match – TROUBLE!

With this simple transaction in mind we see that the MCA industry has two big challenges:
1) Finding the right management software
2) Finding an accountant who really understands how to reflect these numbers in the general ledger

Unlike in a regular retail business (where you sell a product for money) the product that you are selling here actually is underlying money. It is not a loan, but a purchase of future sales. As this is the case, your bank account becomes the point of sale system. However, a bank typically doesn’t have point of sale capabilities when it comes to reporting and accounting.

To successfully track every cent of your transactions a good cash advance company must have excellent management software. The software must provide a mirror image of the transactions in your bank accounts.

The only way you can do that is if you have one bank account designated to handle only transactions that are reflected in the management software. If you decide to pay a phone bill from this “software transaction only” account, it will be just like a supermarket owner that takes a 100 bill from a cash register in order to pay the store’s phone bill.

Once you establish the “software transactions only” account, (and you have an accountant who can record the summaries into the general ledger while understanding how the general ledger ties into the bank account) then and only then will you be in good shape.

The understanding of the cash advance accounting journal entries can be very confusing if you don’t understand the small steps that make up the big picture. Research reveals sparse results. As that is the case, I will only illustrate a basic example (with no fees).

Please keep in mind that each MCA has different ways of doing some things. This example will cover the basic standards but for modifications and special needs, you will need to find an accountant that understands the eccentricities of your own company’s business model.

Our MCA model starts with the formation of a small fictional cash advance business. We will start this MCA business with 50,000 USD seed money and we make contact with three investors who we will refer to as syndicators. Yes, I know that some of you reading this call these investors or syndicators by different names, which is part of the confusion out there. To avoid further expatiation, we will use only the term “syndicator” in this article.

On day one “ABC merchant” wants to sell 100,000 USD of their future sales to our MCA business for the discounted rate of 70,000 USD. We reach out to the aforementioned syndicators. They agree to contribute 25% each.

Future sales will be scheduled in terms of 1,000 USD per day for the next 100 days
We are going to have 30,000 USD in profit and it is going to be split among 4 people, each receiving 7,500 USD.

Now we will give it some familiar terms:

Funding amount = 70,000
Payback amount = 100,000
Daily ACH = 1,000

MCA cash account transactions:

(A) Seed money:

Account	Debit	Credit
Operating Cash	50,000
Equity		50,000

(B) Funds are received from syndicators and a portion of operating cash is moved to MCA cash:

Account	Debit	Credit
MCA Cash	70,000
Due to/from Syndicator #1		17,500
Due to/from Syndicator #2		17,500
Due to/from Syndicator #3		17,500
Operating Cash		17,500

(C) We provide funds to the merchant:

Account	Debit	Credit
Accounts receivable	100,000
MCA Cash		70,000
Revenue		30,000

(D) Daily ACH from merchant (x 100)

Account	Debit	Credit
MCA Cash	1,000
Accounts Receivable		1,000

Although the next step depends on when a MCA company repays its syndicator investments, we will assume the syndicators are all paid at once to allow for a simple transaction example. There is a credit to cash and debits to the syndicator accounts for the principal and the revenue account or an offset account for their share of the profit. The share that I have to split with syndicators wasn’t really my own revenue in the first place.

Multiply this transaction for the number of days (in our example, 100 days). The net effect on this particular transaction will look similar to this:

(E) We divvy profit to investors:

Account	Debit	Credit
Due to/from Syndicator 1	17,500
Due to/from Syndicator 2	17,500
Due to/from Syndicator 3	17,500
Revenue	22,500
Operating Cash	25,000
MCA Cash		100,000

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Balance Sheet

Cash	57,500
Total Assets	57,500
Equity	57,500

Profit & Loss

Revenue

7,500

After you examine all of the transactions, you’ll see that the chips fall in the right places. We started out with 50,000 USD and received profit from our 25% participated in a merchant funding deal. That deal ended with total revenue of 7,500 USD. It’s all there!

If you truly understand these transactions and you have the proper system in place, then this process should be very easy to follow (even if each of these transactions happens a million times a day).

However, if you don’t understand then you should be very careful because only proper accounting measures can save you from losing tens of thousands or even hundreds of thousands of dollars without ever knowing it. Unfortunately, I have seen it happen with my own eyes. Just like the grocery store example above, the sale of money to MCAs is just like the sale of tomatoes is to grocery stores. If left unaccounted for, those tomatoes could go missing without the store owner even noticing. Don’t let that be you with your money!

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This interview was done with Yoel Wagschal CPA and his staff accountant Christina Tharp. They can be reached at:

Phone (845) 875-6030
Fax (845) 678-3574
Email: cjt@ywcpa.com
http://ywcpa.com

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Please consult with an accountant to assess your particular situation and needs.

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• 1. Merchant Cash Advance How to Guide Intro
• 2. Do I Need a Special MCA Accountant?
• 5. Merchant Cash Advance Accounting Pitfalls

Merchant Cash Advance Accounting – A How To Guide

January 13, 2015

This is the introduction and first question in an interview between deBanked’s Sean Murray and accountants Yoel Wagschal, CPA and Christina Joy Tharp.

• 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
• 6. Revenue recognition for Merchant Cash Advance
• 7. Q&A – Real questions that MCA companies or syndicators have

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Funding small businesses is the easy part of merchant cash advance. Anyone can fund. It’s what comes after that’s tricky and I don’t just mean capturing those receivables you’ve purchased, but also recording everything in such a way that you’re not scrambling around tax time.

I have a B.S. in Accounting but I asked the experts Yoel Wagschal, CPA and Christina Tharp his staff accountant for their insight on managing the books for a merchant cash advance company. We’re still a ways off from April 15th so now is your opportunity to fix whatever you might not have done in 2014 and start off on the right foot for this year. Thanks again to Yoel and Christina for answering these questions.

Q: As a funder, what systems should I have in place to make sure I can:
a. Prepare business tax filing
b. Be ready for an audit to raise capital
c. Know whether or not I am making money

A: First of all you have to understand that every type of business has this exact same question. The answer is that you need to have proper accounting entries and records which will then aid you in creating the financial statements (ie: balance sheet, income statement, statement of retained earnings, and statement of cash flows).

Whether it is a tax filing, a bank audit, or an internal inquiry, the solution is identical because all of those situations require the same financial material in order to answer them. In order to prepare a business tax filing a company must provide its profits and losses. That is the same information provided in an audit to raise capital and it is the same information a business owner needs to see how much money they are making (or losing!).

The exact system is obviously custom fit to your individual business model but it should follow these very basic steps:

i) Think the entire process through from cradle to grave
ii) Be sure to codify where funds are coming in from:
a. Investments from syndicators
b. Payments from merchants
c. Commissions
iii) Be sure to codify where funds are being sent to:
a. Funds to merchants
b. Funds to syndicators
c. Commissions
iv) Be sure there is a system of checks and balances which will alert you to the following common errors:
a. Funds not received from/sent to syndicator
b. Funds not received from/sent to merchant
c. Commissions not received
v) The bank account is the authority while the system is only a representation:
a. Your system balance should reconcile with your bank account
b. It is advisable to have a separate bank account for funding transactions

You will also want to pull up trial balances and earnings reports, which must be input correctly from the very beginning in order for these reports to be accurate and effectual.

What makes this industry different is that an accounting system can make or break an MCA company. For example, a supermarket usually has good POS software for inventory control. If an employee drops a “box of tomatoes” it’s not the end of the world. The loss is either immaterial or if it is material the accounting system will pick up the big monetary discrepancy.

In the MCA industry a “box of tomatoes” could be anything from a $0.05 loss to a $500,000 loss. Because the MCA industry deals with money as its product and is often processing transactions at breakneck speed, there needs to be safeguards in the system to catch any and all mistakes in real time.

Our accounting firm has seen where people built attractive systems which seemed good to the funder. However, if the funder lacks accounting knowledge when this “box of tomatoes” falls out they may not be able to place exactly where the loss occurred. Or even worse, they may not realize a loss has taken place until it is too late. For example, if you wait until the end of the tax year and then discover that merchant payments have been missed how do you recoup those funds? It’s the same situation if incorrect amounts are funded to merchants, if incorrect commissions are paid out, or if syndicators have not invested the funds they were expected to.

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This interview was done with Yoel Wagschal CPA and his staff accountant Christina Tharp. They can be reached at:

Phone (845) 875-6030
Fax (845) 678-3574
Email: cjt@ywcpa.com
http://ywcpa.com

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Please consult with an accountant to assess your particular situation and needs.

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• 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

Heather Francis Launching New Funding Company

January 5, 2015

One of the Six Women of Alternative Finance is leaving their current position to launch their own funding company. Heather Francis, EVP of Merchant Cash Group appeared in the September/October issue of DailyFunder. A regular at the industry’s conferences and who was in many ways the face of Merchant Cash Group, Francis is moving on to start Elevate Funding.

When the news broke, deBanked asked Francis about the change. This was her response:

“So the start of the new year begins with something exciting for me as I will be leaving Merchant Cash Group to pursue heading up my own funding company. Elevate funding is still in the set up stages and will not be operational and funding until Mid February but I can assure you that with each unveiling of what we will be funding and what we will offer to the Alternative Industry as well as the business owners will help shape a new future. I enjoyed my time at Merchant Cash Group and I wish them all the best but I am excited for this new adventure and to take a lot of the ideas that have been kicking in my head for a while and see them come to fruition. I know it will be difficult and I am greatly looking forward to the challenge. In the words of a Fort Minor song : This is 10% luck, 20% skill, 15% concentrated power of will, 5% pleasure , 50% pain, and a 100% reason to remember the name… Best of luck to all in 2015!”

Elevate will be based in Gainesville, FL.