Managing Director, BRP Onesta – 21st Century Perspectives

The Merchant Cash Advance – Accounting (A Bit) Demystified.

By Thomas W. Tramaglini, Managing Director at BRP Onesta

It is tax time and once again we have seen the IRS go after several of our loan origination clients because they reported their MCAs as liabilities (Merchant Cash Advances), not correctly accounting for the MCA as income.  In some cases, the back taxes and penalties have been significant (over $100,000).  Small business owners should take the accounting of Merchant Cash Advances into consideration before they file their taxes, especially bringing in their accountant for their opinion as it may make a rather huge difference.


There is certainly some misunderstanding of what Merchant Cash Advances are and how they differ from loans so my attempt with this article I am writing aims to clarify a bit what MCAs are versus what loans are and more importantly, generating an accurate accounting of Merchant Cash Advances in a small business’ books. 

Further, most states require businesses to ensure that they have their liabilities and assets balanced in one way or another and we have seen many a business owner exposed with not accounting for Merchant Cash Advances in their books accurately. As demonstrated above and from numerous interactions with our clients and small business owners, it is important to grasp the concept of an MCA and the implications of an MCA with regards to the IRS.

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Most Small Business Owners We Pooled Think an MCA is a Loan

The majority of the small business owners we pooled in a survey last year thought MCAs were loans.  In our survey, 742 (58.6%) respondents who were small business owners (of 1266 total respondents) said that MCAs were loans given to small businesses with high interest and short payback periods.  Although another pool might show a different result, our statistically generalizable result and our interactions with our client suggest at a minimum, clarification is needed.

What is a Loan?

Simply, a loan is when a lender agrees to provide money or resources to a borrower (small business in this case) and the borrower agrees to pay back the loan over a period of time, usually with interest.  Loans can be personally guaranteed, and lenders can require collateral on some loans.  Loans also are usually paid back monthly, however there are other iterations which loans can be paid back depending on the lender.  For a detailed description of different loan products, you can review them on our website.

Loans are listed on a company’s balance sheet as a liability and most loans (unless forgiven or specifically codified by Statute as non-taxable, e.g., PPP) are not counted as taxable income for a business because it is money that you are paying back.

Lenders like banks who provide loans are also subject to regulation from various organizations and follow strict rules and underwriting guidelines. 

What is a Merchant Cash Advance?

A Merchant Cash Advance is not a loan in any way.  A Merchant Cash Advance is an advance of a business’ future receivables.  Lenders gauge how much to advance a small business owner in several ways, including previous credit card sales and revenue going into their business bank account.  Variables such as industry, number of deposits, daily balances among others are used by the lender to hedge risk.  Regardless, MCA lenders offer to advance a portion of a small business’ future sales as well as an agreement with the business owner on the percentage of future sales which are being sold to the lender.


MCAs do not carry interest. Advances carry factor rates, which are also called buy rates that are simply an agreement of how much of a small business’ future sales will be paid to the lender.  In most instances, points sold for MCA brokers are added to the buy rate and in turn the sell rate is 10-20% higher than the buy rate.  

Merchant Cash Advances are much easier than a loan to get (see This Blog Post for Data), not usually secured, not personally guaranteed, and come at a high cost, short payback periods, as well as daily or weekly payback terms.  Some advances may also collect repayment terms by taking a portion of business’ credit card receipts each day as well until their agreed sale of future receivables is completed.  Finally, most advances carry origination fees for the work by the lender, which can be as high as 10% of the loan.

Because Merchant Cash Advances are not loans the industry is not heavily regulated, however in recent years the SEC and FTC have become more involved in holding some lenders such as Quarterspot, Yellowstone Capital, and RAM Capital.  For more information on the regulation of the industry, read this blog post.

What is the best way to account for a Merchant Cash Advance?

The short answer is that different people have different ways of accounting for a Merchant Cash Advance.  What is clear is NOT to record the Merchant Cash Advance as a loan and account as a long-term liability, which is where our clients have been hit on their audits. 

Because advances are advances of future receivables or the sale future receivables one should take note that receivables should be taxed accordingly.  According to Robert Jacovetti, an attorney at Jacovetti Law, P.C. in New York, “Merchant cash advances are not loans and, therefore, are not reported as income. At the time the advance is made, the money received from the cash advance is not subject to tax. However, income that is used to repay the cash advance provider is considered income and therefore taxable.”1

So, MCAs are not tax-deductible in any way.  The fees however are fees and can be recorded as deductible.  Therefore, regardless of the payback method of the Merchant Cash Advance, the fees deducted each day, week or month can be recorded as fees and ultimately listed on the Profit and Loss Statement. 

While there are several ways that a business can account for an MCA, some accountants still suggest setting up the funding received as a liability so balances can be accounted for.  Whether the balance sheet has a liability for an MCA, clearly because they are an advance of future sales there need to be an accounting of that.  An easy way to do so is to set up an income account (minus the fees) and record the MCA as such.  Then, have a line for fees in the P&L for the MCA.  As each payment is made, that payment can be applied to the MCA Income account.  Eventually there will be a negative balance in that income line.  Because another line has accounted for the income the MCA company hedged against, the percentage of future receivables which would be paid back are deducted from the overall income.  Thus, the deductibility of the agreed payback of future sales (not interest) is not tax deductible. 

It is good practice to go over how the accounting is going to be recorded with your tax professional as their opinion certainly matters and they may prefer one method over another.


BRP Onesta is not an accountancy and we do not offer tax advice, as CPAs and Attorneys are more appropriate to do so.  However, our commentary is specifically our own opinion, and albeit accurate, readers should continue to always seek advice from professionals like accountants when making decisions for their own businesses.

Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.

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