The Top Small Business Funders Now Vs. Then

Top Small Business Funders By Year

Many people look at 2023 vs 2008 and arrive at the conclusion that the fintechs rose to the top, but if one were to narrow down the definition of those players a little further, they’d notice that PayPal and Square are payment companies, Shopify and Amazon are e-commerce companies, and Intuit owns the Quickbooks accounting software. These are actually older companies that took an old idea (split-funding) and made it new again with some key changes. Although in the present moment it may feel like some of them cannot be beat (which is how the industry felt about the top funders in 2008), much can change over the course of this decade.

Keep your eye on:

• AI
• Blockchain (as payment rails, record-keeping)
• Regulation

Mastering Taxes for Merchant Cash Advance Businesses – Cash Basis 101

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.

For 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.

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

Amazon’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.

AltFinanceDaily 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.

Maxim Commercial Capital Doubled Fundings in Q3 2023

LOS ANGELES, CALIF. (Oct. 17, 2023) – Maxim Commercial Capital (“Maxim”) announced robust demand across its diverse financing programs for the third quarter of 2023. The hard asset secured lender reported a 100% year-over-year increase in truck financings for the period. Furthermore, it experienced a surge in demand for second-lien mortgages to refinance Merchant Cash Advance (MCA) loans and to support working capital. Maxim is a national provider of loans and leases from $10,000 to $3 million collateralized by class 6 and 8 trucks, trailers, heavy equipment, and real estate.

“The current climate of healthy residential real estate valuations, coupled with low-cost first mortgages and conservative banking practices, makes our Real Estate and Structured Finance programs highly appealing,” noted Michael Kianmahd, Maxim’s Executive Vice President. “Many homeowners don’t realize they have liquidity in their homes that can be tapped to grow their businesses, often at significantly less expense than MCA loans.”

Notable fundings during the period include a $400,000, 5-year second-lien mortgage at a 60% combined loan-to-value (LTV) for an experienced optometrist with four business locations in Los Angeles. The funds were used to pay off MCA loans, reducing monthly debt service by $15,000, and for working capital. Maxim also funded aa $125,000 second-lien mortgage to an experienced construction project manager in Las Vegas at 58% combined LTV to fuel business growth and pay off an expensive MCA loan.

Maxim’s credit matrix featuring lower down payments for truck owner-operators, ranging from better credit to subprime borrowers, continued to prove popular among loan brokers and truck vendors in Q3 2023. Truck financings during the period included 75% purchase financing for an experienced owner-operator with a 607 FICO to buy a 2018 Peterbilt 579 with 399K miles for $58,695; 68% purchase financing for an owner-operator with a 593 FICO to buy a 2019 Peterbilt 579 with 547k miles for $62,250; and 71% financing for a start-up owner-operator with a 618 FICO to buy a 2020 Freightliner Cascadia with 465K miles for $51,275.

“Fortunately, the used truck market has softened in light of the current economic volatility “We are committed to helping hard-working truck drivers stay on the road, earning a living,” noted said Behzad Kianmahd, Maxim’s Chairman and CEO. “The current economic volatility has improved truck pricing while also causing some lenders to retract, creating an opportunity for Maxim to fill a void.”

About Maxim Commercial Capital

Maxim Commercial Capital helps small and mid-sized business owners nationwide by providing loans and leases (“financing”) from $10,000 to $3 million secured by trucks, trailers, heavy equipment, and real estate. It funds equipment purchase financings and leases, working capital, and debt consolidations. Maxim’s more creative financing structures leverage equity in real estate and owned heavy equipment to facilitate growth and preserve customers’ cash. As a leading provider of transportation equipment financing, Maxim supports startup and experienced owner-operators and non-CDL small fleet owners by funding loans and leases for class 8 and class 6 trucks, trailers, and reefers. Learn more at www.maximcc.com or by calling 877-776-2946.

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Contact:
Michael Kianmahd
Executive Vice President
Maxim Commercial Capital
michael@maximcc.com
(213) 984-2727