As with a small business loan, a merchant cash advance (MCA) involves a contract between you and your provider. If you stop making your payments, it could result in a merchant cash advance breach of contract, and the MCA lender could sue you.
Dealing with merchant cash advance legal issues can be a pain for small business owners. It can also lead to even more significant problems for you and your company. Here’s what you should know if you’re dealing with a merchant cash advance breach of contract lawsuit.
How Does a Merchant Cash Advance Work?
A merchant cash advance is a type of financing you can get for your small business. It’s not a loan, but an advance on future sales. Borrowers receive money upfront from the lender, and then repayment happens in one of two ways:
- A percentage of your credit and debit card sales: The MCA provider will automatically withdraw a portion of the sales borrowers receive from debit and credit card transactions and future receivables until the borrower has repaid the advance in full plus fees.
- Fixed daily or weekly withdrawals: As with an installment loan, the lender will take monthly withdrawals from the borrower’s business bank account, though typically daily or weekly instead of monthly.
Borrowers pay fees based on a factor rate rather than an interest rate. For example, if the advance is for $20,000 and the factor rate is 1.5, the borrower will pay a total of $30,000.
If you’ve defaulted on your obligation, the merchant cash advance breach of contract will likely result in a lawsuit. But unlike many other situations, you’ll have a harder time fighting back with MCA providers.
Why Merchant Cash Advances Are Different
With other types of small business debt, it’s possible to work something out before the MCA funder files a lawsuit. However, with merchant cash advances, things work a bit differently.
Many contracts from MCA providers include what’s called a confession of judgment. When you sign a contract that includes this clause, you’re effectively signing away your rights to defend yourself if there’s a breach of contract and the funder files a lawsuit to collect.
In other words, the funder can simply file the lawsuit and get a judgment to start seizing your business assets through UCC liens or other methods to recoup its money.
In many cases, merchant cash advance companies also require a personal guarantee. If your business can’t repay the debt, you’re liable to pay it back with your personal assets. So if the funder files a lawsuit, it could also impact your personal finances, not just your business.
Steps You Can Take to Defend Yourself
While a confession of judgment doesn’t give you many options, it’s not ironclad. In some states, you may be able to fight it if you can prove any of the following:
- The confession of judgment doesn’t comply with state law or local rules.
- The confession of judgment is inaccurate in terms of the parties involved and the amount owed.
- Your breach of contract doesn’t meet the stipulations to trigger the confession of judgment.
- The funder was negligent in clarifying what the confession of judgment meant when you signed the contract.
If you have reason to believe that any of these are true, you may be able to request that the court vacate the confession of judgment. If you’re facing merchant cash advance legal issues, it’s a good idea to enlist the help of an attorney who can help you make the right moves.
How to Avoid Merchant Cash Advance Legal Issues
Ideally, you’d opt for another type of financing for your business from the get-go. Merchant cash advances are expensive, there’s very little regulation surrounding them (which gives providers an advantage), and the contracts work heavily in favor of the funder.
But if you have one and you think you might default on your obligation, reach out to the MCA provider to see if you can get on a modified payment plan. Depending on the contract, there may be a set plan that you can use if you can’t pay as outlined in the MCA agreement.
Even if it’s not directly spelled out in the contract, it may still be in the MCA company’s best interests to work with you, so that it can avoid legal fees.
Alternatively, you can try to settle the debt for less than what you owe. Again, this may be a difficult sell if the MCA provider can get more through a lawsuit, even with legal fees. But if you can show that it’s in their best interest to negotiate a settlement, you could avoid a costly and challenging process.
Finally, look for opportunities to get out of the merchant cash advance. For example, you could consolidate the debt using a term or traditional loan, apply for a secured loan or line of credit, or even file bankruptcy.
That said, consider bankruptcy for your business only as a last resort.
Why You Should Consult with an Attorney
Regardless of what you plan to do, it’s a good idea to speak with an attorney who can help you understand the entire situation and all of your options, including ones you may not be aware of.
Tayne Law Group is a debt resolution law firm with years of experience helping to strategize, implement and resolve business debts for businesses of all sizes.
Merchant cash advances and other forms of business financing have been an area of focus for Tayne Law Group, a New York-based debt relief firm, since 2001. We know the process and can help you find the best path forward for you and your business.
Our attorneys can help you save time by providing expert information that could take hours to research. We can also work with you to develop a tailored plan to keep your company running, increase your cash flow and resolve your merchant cash advance legal issues.
The process is straightforward, and the initial consultation is free, so you can determine if we’re the right fit for you. An experienced staff member from the firm will discuss the situation and some solutions from our attorneys based on your particular situation.
Even if you decide to go it alone, taking the time to consult with a professional can give you the information and confidence you need to make the right decisions for your business.
The Bottom Line with a Merchant Cash Advance Breach of Contract
Merchant cash advances are best to be avoided in most cases. Between the high costs, predatory lending practices, and consequences for default, they can do a lot more harm than good.
If you’ve already taken out a merchant cash advance loan, whether or not you can make the daily payments, consider steps to get out of the contract before you have to deal with legal issues.
And if you’re in a situation where a merchant cash advance lender is suing you, look for ways to defend yourself against the confession of judgment in the contract. While there’s no guarantee you’ll get recourse from the court, it’s worth consulting with an attorney and developing a plan to protect both your business and personal assets.