As a small business owner, maintaining cash flow can be challenging. For example, you might have relied on a merchant cash advance to cover your expenses. Except now, you’re behind on payments and facing an MCA lawsuit in New York.
You might be wondering, “now what?”
First, know that there’s no need to panic. Below, we walk you through what happens when facing a merchant cash advance lawsuit in New York, plus what to do next.
A merchant cash advance (or MCA for short) is a type of alternative financing for small businesses. Some well-known merchant cash advance companies include Bitty, Everest, and Cloudfund. Technically, an MCA isn’t a loan. Instead, it’s a type of credit in which a business receives funding in exchange for a portion of its future sales and receivables. As such, merchant cash advances aren’t subject to the same regulations as loans.
Relying on merchant cash advance lenders can be expensive. The cost of doing business is the factor rate based on your risk as a borrower (the higher the risk, the higher the rate). MCAs typically charge a factor rate rather than an interest rate, as business loans typically do. Factoring in fees, the typical annual percentage rate on an MCA can equal 350% or more.
When it comes to repayment, the MCA company may automatically take a cut of receivables in the form of weekly or daily payments until the debt is satisfied. Or the company might make daily or weekly withdrawals from the business bank account until the balance — plus fees — reaches $0. For these reasons, it’s easy for businesses to become trapped in a cycle of debt. And for small businesses that are still growing and might have unpredictable cash flow, defaulting on their payments can be a real danger. Moreover, the MCA company may sue when that happens.
Are Merchant Cash Advances legal in New York?
Yes, merchant cash advances are legal in New York. MCAs are financial products that provide businesses with lump sum cash in exchange for a portion of their future sales. They are often used by businesses that may not qualify for traditional loans or need fast access to capital.
Legal Aspects of Merchant Cash Advances in New York
In New York, as in many other states, these agreements are structured as commercial transactions rather than loans. This distinction is crucial because it exempts MCAs from many of the state laws that govern interest rates and other loan terms, which might otherwise be considered usurious.
However, the legality and terms of MCAs have been subject to scrutiny and litigation, particularly concerning their costs and collection practices. It’s important for businesses considering an MCA to carefully review the terms and understand their obligations under these agreements.
What Happens With a Merchant Cash Advance Lawsuit?
Ideally, you should only take out an MCA if you’re confident that you can pay it back. Of course, owning a small business means income and expenses can be unpredictable. And you never know when extenuating circumstances (like a global pandemic) could harm your business.
If you fall behind on your MCA payments, the funder will likely work to recoup that money through legal action. They might even revise your payment plan. However, if you continue to miss payments, you could face a lawsuit for breach of contract. You could also have UCC notices sent to your payors.
Merchant cash advance lawsuits are often filed with the state of New York. That’s because laws in this state tend to be more favorable for MCA lenders. In addition, many MCA companies include a stipulation in their contracts that allows them to file lawsuits in New York. This applies even if your business is not located there.
Additionally, many MCA contracts include a “confession of judgment.” This clause states that if you stop making payments, the creditor can obtain a judgment against you. They can do so without ever notifying you or allowing you to represent yourself in the court proceedings. A judgment allows the creditor to collect your debt more aggressively by freezing your bank account, placing a lien on your property and business assets, and more.
If you’re located outside of New York State
Say your contract does not include that clause, and the MCA provider decides to sue you. In that case, you will be served an official complaint letter and court summons. Often, the MCA agreement you signed with the MCA creditor will alter the usual service of process in lawsuits. The typical process is to have the paperwork handed to you directly at home or work. This process is considered a “proper service.”
However, some New York law firms representing MCA funders may have these documents served through the US mail or email. So even if you operate out of state, you can be served in NY — but you might not know you have been sued if you miss the email or letter. This can be very dangerous.
Service may be considered effective if the summons date was emailed or dropped in the mail. So if you are located outside the state of New York, the time you have to respond to the lawsuit could be cut significantly by the time it reaches your hands (if it even reaches your hands). Depending on the contract you signed and other circumstances, it may be possible to contest this type of service as improper. The worst case is that you do not know about the suit, and they enter a judgment against you and your business. It is essential to work with an attorney to resolve these matters.
What to do if You’re Facing an MCA Lawsuit
If you are sued by an MCA lender, it’s important to respond right away. Your summons will include a
If an MCA lender sues you, it’s important to respond right away through a licensed New York merchant cash advance attorney. Your summons will include a deadline — often 30 days — by which you need to file a formal defense. If you don’t, the MCA company can eventually file a motion for a default judgment. At that point, you could have your accounts frozen, liens placed against your property, business cash flow seriously interrupted, etc.
Hiring an attorney with experience defending against merchant cash advance lawsuits should be your next course of action.
How a Seasoned MCA attorney can help:
A seasoned MCA debt settlement attorney can:
- Evaluate whether the creditor followed the law. There are certain rights you have as a borrower. Violating any of those rights could cause the case to be dismissed. A lawyer knows the ins and outs of debt collection laws and can identify when an MCA lender breaks them or if the contract has questionable terms that can be a basis for a defense in an action.
- Determine if the breach of contract lawsuit is valid. For example, your lawyer can require the creditor to prove that you owe the debt and that it is legally owed to the MCA company. If there was a confession of judgment clause and you already have a judgment against you, an attorney can review the contract and see whether it was valid.
- Look at whether you were served properly. In some cases, your court documents and summons may have been served improperly. Your attorney can assess your situation and determine whether the case should be dismissed based on how you were served.
- Help you settle your debt. You may be able to avoid going to court entirely by working out a settlement with the MCA lender through the attorney. This involves paying less than you owe and requires careful negotiation. An experienced MCA debt settlement attorney can negotiate on your behalf and get you the best deal possible.
- Help you overturn a judgment or win the lawsuit. If you already have a judgment against you, your attorney may be able to have it dismissed. If you were sued in error, your lawyer could help get the judgment vacated or help win the suit where the matter is dismissed.
The Bottom Line
Tayne Law Group, a New York-based business debt relief firm, has been focusing on merchant cash advances and other types of business debt for more than 20 years. If you’re being sued by an MCA lender or think you will be, we can help you put together a strategy to resolve your business debt and keep your business running.
Though it’s possible to handle an MCA matter or even a lawsuit on your own, it’s risky. Working with our experienced MCA relief attorneys can save you hours and the stress spent researching and communicating with creditors. Plus, you don’t have to deal with harassment from constant phone calls and emails. We have the expertise to navigate debt collection laws and help you devise a custom plan.You don’t have to commit right away to the process. Find out your options and what we can do to help. The consultation is free so that you can learn about our process and the best strategy available to you.
At the very least, you’ll have a better idea of how the process works and the position your business is in before, during, and after it’s over. You’ll know your choices for how to proceed. Give us a call at (866) 890-7337 or fill out our short contact form. We never share your information, so you can ensure all information and discussions are confidential.
