It’s common for small businesses in need of extra cash to seek out merchant cash advances (MCAs). Unlike a traditional loans, merchant cash advance companies provide a lump-sum payment in exchange for a certain percentage of your future sales or revenue. The approval and funding process is very quick — sometimes just one or two business days — which can be attractive to a struggling business.
However, MCAs are also quite expensive, making it easy for borrowers to fall into a cycle of debt or begin missing payments. The contracts can also include tricky wording so that borrowers have little recourse if they do fall behind.
Does that sound familiar? If you’re experiencing other merchant cash advance legal issues, know that you do have rights as a borrower. Find out what to do if you have a merchant cash advance collections problem.
How Merchant Cash Advances Work
Sometimes called credit card processing loans, merchant cash advances are not actually loans at all. Technically, they are an advance on future sales and receivables. You receive a lump sum upfront to cover whatever business expenses you may have. For example, you could use an MCA to buy equipment or supplement your cash flow. The MCA lender will then either withdraw a certain percentage of your sales revenue or take regular installment payments from your business bank account. Lenders genreally require daily payments or weekly payments towards repaying the advance.
MCA lenders decide how much to give you based on your company’s performance. However, they don’t charge interest. Instead, the lender charges a factor rate that’s based on the risk level of your business. (The riskier your business, the higher the rate.) Usually, the factor rate ranges between 1.1 and 1.5. The total repayment amount is calculated by multiplying the amount of the advance by the factor rate. For example, if you receive an advance of $50,000 and the factor rate is 1.2, you’d repay a total of $60,000 ($10,000 in fees).
Merchant Cash Advance Collections: What Happens Next?
As you can see, this type of financing is expensive. And considering that payments are deducted from your sales often, it can be tough to maintain enough cash flow to keep your business running. If you fall behind on payments, your account may go into collections and you could even be sued.
Unfortunately, because MCAs are not loans, they aren’t regulated the same way business loans are. In fact, many MCA contracts include clauses that leave the borrower with little recourse if they default. And often, defaulting is considered a breach of contract, in which case the MCA company may file a lawsuit against you.
There’s a good chance that your MCA contract included a confession of judgment (COJ). This is an agreement between you and the MCA lender that says if you default, they can sue you without giving you any notice or opportunity to defend yourself. This helps the lender avoid a long legal battle and get a judgment without presenting any evidence. Once there is a judgment against you, the lender can seize business assets to recoup the debt.
It’s also common for merchant cash advance lenders to include a personal guarantee and use liens to recover funds. This means that if the business is unable to satisfy the debt, you are personally liable for doing so. Your personal assets, such as your home, bank accounts and other property could be at risk if you default on your MCA and the MCA provider takes legal action.
Dealing with Merchant Cash Advance Legal Issues
If you have a merchant cash advance in collections, there are a few options for handling the situation. It’s always advised to speak with a debt relief attorney who can walk you through your choices and the best course of action. In the meantime, here’s a brief look at what you can do:
Dispute the Debt
Borrowers of MCAs have certain rights and protections under the law. If the MCA lender violated debt collection laws, you may be able to file a countersuit or have the debt dismissed.
In other cases, you may be wrongfully sued for breach of contract. Again, an experienced debt relief attorney can review the contract and require the lender to prove you truly owe the debt in question. If you signed a confession of judgment clause, it’s especially important to get in touch with a lawyer as soon as possible.
Borrowers with good credit may be able to qualify for a personal loan. These loans can be used to consolidate existing debt, often at a lower interest rate and/or lower monthly payment. Personal loans also come with fixed payments and a defined repayment period. They can be secured, meaning you put up collateral to improve your chances of approval and more favorable terms. Personal loans can also be unsecured, though this usually means paying a higher interest rate. Either way, you shouldn’t pursue debt consolidation unless you are confident you can afford your new loan payment.
Consolidate your debt
Negotiate a Settlement
Debt settlement is another option you can pursue. This involved negotiating a deal with the lender so that you pay less than you owe. Some lenders are willing to accept a settlement in order to avoid going to court or spending more time attempting to collect a debt.
It’s possible to negotiate debt settlement on your own. However, it can be difficult and stressful. Hiring a debt settlement attorney can take the pressure off of you and streamline the process. These lawyers have negotiated many settlements in the past and know which strategies will get you the best resolution.
File for Bankruptcy
Filing for bankruptcy is often used as a last resort. However, it could provide much-needed financial relief and a fresh start. In some cases, your debt could be fully discharged. If your financial situation allows it, you may be placed on a payment plan instead.
There are some major pros and cons of filing for bankruptcy. Again, it’s important to consult with a professional before making a decision. An attorney can help you determine if bankruptcy is the right move for you. And if so, what type of bankruptcy is best for your situation.
Merchant Cash Advance Collections: Bottom Line
Defaulting on a merchant cash advance can have serious financial and legal consequences. You don’t want to deal with merchant cash advance legal issues on your own. Not only is it time-consuming and stressful, you may not be aware of all your options.
Tayne Law Group is a New York-based debt resolution law firm that helps small business owners resolve debts of all sizes. We have focused on merchant cash advances over two decades. Our experienced attorneys can help you come up with a strategy to deal with your debt while keeping your business running.
If you’d like to learn more about how we can potentially help you, give our office a call at 866-890-7337. You can also fill out a short contact form. There’s no obligation to use our services — we provide a free hour long consultation to go over your situation and possible solutions. Any information you share with us is also 100% confidential.