How to record ISO commissions in an MCA funder's books

An MCA funder we work with closed seven deals in the first week of October. Each came with an ISO commission between 9 and 13 percent of the funded amount. By the 5th, the books showed $42,000 in broker commissions against almost no income from those deals yet. The owner called to ask if October was going to be a bad month.

October was not a bad month. October was the strongest month of the quarter. The commissions were real costs, but the income from those deals would arrive over the next five months in daily remittances. The books were recording a cost that belonged to five months of revenue in a single week.

What ISO commissions are

When an ISO (a broker who sources deals) brings a merchant to a funder, the funder pays a commission on funding day. Rates vary: 5 percent on a competitive deal with a strong merchant, up to 13 or 14 percent on a deal that required more broker effort. That payment goes out the same day the advance is wired.

On a cash basis, expensing that commission on funding day is straightforward. The cash moved, and the cost is recorded.

On an accrual basis (recording income when it is earned, not just when cash moves), the commission is a cost of originating a deal whose income will arrive over months. Under accrual accounting, costs belong in the periods when they generate income. A $5,500 commission on a 180-day deal belongs across 180 days of remittance income, not on day one.

Even for funders running cash-basis books, a second problem affects everyone: commissions are almost never tracked at the deal level.

Four gaps that follow a lump-expense approach

Commission goes into a shared account with no deal reference. Most MCA companies code broker payments to a single Broker Fees or ISO Commissions line. When you fund eight deals in a month across four ISOs at different rates, the month-end total tells you what you spent but not what any individual deal cost to originate.

P&L swings with deal volume rather than portfolio performance. A month when twelve deals close will show three times the commission expense of a month when four close, even if portfolio income from both months is similar. Revenue from a deal funded in August arrives in September and October. The origination cost hit in August. For accrual-basis funders, this mismatch is built into every monthly report.

ISO rate variation is invisible. One ISO charges 8 percent. Another charges 13 percent. If commissions are not tracked per deal, you cannot calculate which ISO delivers the lowest origination cost per dollar of receivable funded. That is material information if you are funding 40 or more deals a month.

Deferred cost assets go unrecorded. On accrual basis, a commission paid at funding is not a fully consumed expense on day one. The portion belonging to future months is a deferred cost, an asset that sits on the balance sheet until the income arrives. Most MCA companies never record it, which means the balance sheet is missing an asset and the current-period expense is overstated.

What one deal looks like in the books

A single $50,000 advance makes the difference concrete.

On the day this deal funds, the funder’s bank decreases by $55,500 (advance plus commission). Income from the deal arrives at $383 per day for roughly 180 days.

If the $5,500 commission is expensed on day one, the first month’s Profit and Loss report (P&L) shows $5,500 in broker commissions against $8,426 in collected remittances from this deal. Month one looks thin. Months two through six show $8,426 per month in income and $0 in commission expense for this deal. Those months look profitable without acknowledging the origination cost that made them possible.

On accrual books, $5,500 deferred over 180 days is $30.56 per day, or about $916 per month. The matched approach shows approximately $916 in commission expense alongside $8,426 in remittance income each month. The margin is consistent across the term because the cost lines up with the income it generated.

On a portfolio funding $2M per month across 40 deals, the gap between day-one expensing and matched recognition can run $150,000 to $200,000 in any given month.

What proper ISO commission accounting looks like

For MCA clients we work with, every ISO commission is recorded with four data points at funding: deal ID, ISO name, funded amount, and commission rate. The commission is held in a deferred origination cost account on the balance sheet. Each month, the portion earned in that period moves to commission expense. By the time the deal closes out, the full commission has been recognized, matched to the income it produced.

We also run a per-ISO origination cost report each quarter: total commissions paid to each ISO divided by total funded amount sourced by that ISO. The result is a cost-per-dollar-funded rate for each source. On a $2M monthly funding volume, a 1-percent difference in average ISO rate is $20,000 in annual origination cost. That number is invisible in a lump Broker Fees account.

Best practices for MCA funders

A few practices that keep ISO commission accounting accurate over time:

• Tag every commission to its deal at funding: deal ID, ISO name, funded amount, and commission rate. Never let a commission hit the books without those four fields.
• Create a dedicated account for ISO commission expense, separate from other operating costs. The line should be its own row on the P&L.
• On accrual basis, record the full commission as a deferred cost at funding and recognize it over the expected deal term, in line with incoming remittances.
• Run a per-ISO origination cost report every quarter. Total commissions paid divided by total funded amount gives you the cost rate for each source, so you can compare brokers on an apples-to-apples basis.
• Reconcile ISO commission payments against your deal book monthly. Any deal without a matching commission payment, or any payment without a matching deal, is a discrepancy that grows harder to trace over time.

Three questions worth asking

If you are not sure how ISO commissions are being recorded today, three questions will tell you quickly:

1. Can you pull a report showing each ISO commission paid in the past 90 days, tied to the specific deal it originated?
2. What is your average origination cost per dollar funded across all ISOs, and how much does that rate vary by source?
3. On your current P&L, where does ISO commission expense appear, and can you separate it from other broker or referral costs?

If the answer to any of those is unclear, the commissions are in a lump account and the deal-level data is gone. The fix is a process change at funding: capture the four fields every time a deal closes, and the reporting follows automatically.

If you want a second set of eyes on your setup, send a recent month of funded deals with the corresponding commission payments. We will review whether your books are tracking origination cost at the deal level, and what the numbers actually say about your ISO portfolio.