Are you a merchant cash advance borrower who is facing legal action from an MCA provider? This can be a scary and stressful situation. The good news is there are measures you can take to safeguard yourself and your rights. Read on to learn the options available for a merchant cash advance defense when facing a lawsuit.
What Are my Rights as a Merchant Cash Advance Borrower?
Understanding your rights is key if you have a merchant cash advance, especially if you’re facing a lawsuit from a merchant cash advance company.
A merchant cash advance (MCA) is a type of financing that allows small business owners to access funds quickly. However, it often comes with high fees and confusing terms. MCAs are not considered loans, so they aren’t subject to most of the laws that apply to traditional business loans. In fact, MCAs are largely unregulated. The regulations that do exist usually vary by state.
That’s why critics say MCA lenders often lack transparency. Many small business owners don’t fully understand the terms of the agreement before signing, which can lead to confusion and financial problems later on. Some critics even argue that MCA providers engage in predatory lending practices by targeting businesses with poor credit histories and offering them loans they can’t afford to pay back. This can lead to a cycle of debt and financial instability for the business.
Further, some MCA contracts include provisions that make it difficult for business owners to defend themselves if they are sued. For example, a confession of judgment (COJ) is a clause that essentially says you allow the creditor to obtain a judgment against you in court without any notice or hearing if you fail to make payments according to the terms of the contract. You also waive your right to defend yourself in court.
Additionally, you may have been required to sign a personal guarantee. This means you are personally liable for repaying an MCA if your business cannot do so.
Despite these issues, as an MCA borrower, you have certain rights. These can vary based on the jurisdiction and the specific terms of your contract. However, here are some general rights that you might have:
- Right to transparent terms. Before agreeing to an MCA, the funder should provide you with clear and understandable terms. This includes the advance amount, the payback amount, the holdback percentage, and any other fees or charges.
- Right to fair collection practices. Even though MCAs are not loans and are generally not governed by the same regulations that apply to loans, you still have a right to be treated fairly by the lender. This includes ethical collection practices and the absence of abusive or deceptive tactics.
- Right to grievance redressal. If you have any disputes or grievances related to your MCA, you should have access to a clear process for addressing these issues. Reputable MCA providers offer some form of dispute resolution or customer service department to handle such concerns.
- Right to privacy. Your financial and business information should be kept confidential by the lender, except as required by law or as necessary to collect the advanced funds.
- Legal recourse. If you believe your rights have been violated, you may have the option to seek legal recourse. This can include filing a complaint with regulatory authorities or pursuing legal action against the lender.
It’s crucial to thoroughly review your merchant cash advance agreement and understand all the terms and conditions before signing. If there are aspects of the agreement you’re unsure about, consult with a legal professional who can provide guidance specific to your situation.
Merchant Cash Advance Defense: What to Do if You’re Sued
First, don’t panic. Following the steps below will allow you to get the situation under control.
Review your MCA agreement
The contract you initially signed when you took out your MCA will detail the consequences of a breach of contract. Review your contract to understand what actions the MCA provider may take next so you can begin to protect your business.
Here are key elements to look for and understand before you sign:
- Advance amount and payback amount. Clearly identify how much money you will receive and how much you will need to pay back in total. This includes understanding the factor rate, which is typically between 1.1 and 1.5 times the advance amount.
- Holdback percentage. The holdback is the percentage of your daily credit card sales that will be withheld to pay back the MCA.
- Repayment structure. Unlike traditional loans, MCAs are repaid via a daily or weekly deduction from your sales. Understand how these deductions work and ensure the frequency and structure match your business’s cash flow.
- Fees. Be aware of all fees involved, including origination fees, underwriting fees, and any other additional charges that may apply.
- Term of the advance. While MCAs do not have a fixed term like traditional loans, it’s useful to estimate how long it will take to repay the advance based on your business’s average monthly revenue and the holdback percentage.
- Prepayment terms. Some MCA agreements include clauses that penalize prepayments or early payoff of the advance. If you anticipate potentially paying off the advance early, look for an agreement that allows this without penalty.
- Confession of Judgment or personal guarantee. Some MCA lenders might require a confession of judgment or a personal guarantee. Understand the implications of these clauses. For instance, a COJ can allow a lender to obtain a court judgment against you without a trial if you breach the agreement.
- Recourse. Understand what happens if your business fails or if there’s a significant downturn in your sales.
- Renewal and rollover terms: Be wary of terms that allow the lender to roll over the debt into a new advance with additional fees.
Consult with a merchant cash advance lawyer
Carefully review your contract and lawsuit with an MCA debt relief attorney with extensive experience defending clients with MCAs. They can help you understand your options and provide guidance on how to proceed while protecting yourself and the business.
Respond to the lawsuit
Never ignore a lawsuit. It’s important to respond to the lawsuit as soon as possible. If you don’t submit your answer within the time limit specified in the legal documents (usually 20-30 days), the MCA provider may obtain a default judgment against you. This means that you automatically lose the lawsuit, and the merchant cash advance lender can take more aggressive steps to collect the debt. That may include freezing your bank accounts and seizing business assets. Your attorney can help you draft a response to the lawsuit with defenses that address the claims made.
Also, keep in mind that just because you didn’t receive the papers from a process server directly doesn’t mean you weren’t served.
Pursue a counterclaim
If the MCA provider violated any laws or interfered with your business, you may want to file a counterclaim. You must include any counterclaims in your response at the time the answer is filed. Again, this should be done by an experienced MCA attorney to avoid your answer being ignored or stricken by the court.
Gather evidence
Next, you should collect any evidence that can help support your case. This includes payment records, receipts, and communication with the MCA company.
Try to negotiate out of court
Your attorney may recommend negotiating a settlement or alternative repayment plan with the creditor before the case goes to court. This is often the preferred outcome, as it costs both parties time and money to go through a lawsuit.
Debt settlement allows the MCA provider to recover a portion of their debt without wasting resources in court. Plus, you may be able to resolve your debt for much less than what you originally owed.
However, this can be tricky, especially with MCA debt collection or MCA attorneys. They will require you to sign a new agreement, and the terms of that agreement could include a COJ or other restrictive language. You should consult an experienced MCA attorney to review any agreement before signing it. Never sign if you feel pressured or have not read the terms of any agreement.
Your attorney will have the negotiation skills and MCA knowledge to negotiate an agreement that satisfies the MCA provider and works within your budget.
Attend court hearings
If the case goes to court, attend all hearings and follow any orders issued by the judge. Only an attorney licensed in the state where you are sued should appear for you, as they know the laws and court processes that work to your benefit. This attorney can represent you in court and advocate for your interests.
Remember, being sued for merchant cash advance debt can be stressful, but it’s important to take prompt action and seek legal advice to protect your rights and interests.
5 Common MCA Lawsuit Defense Strategies
Businesses facing lawsuits from MCA providers might consider several common defense strategies to challenge the legality or terms of the advance. Here are some typical defense strategies used in MCA lawsuit cases:
- Usury and loan mischaracterization: One common defense is to argue that the MCA is, in fact, a loan rather than a purchase of future receivables and should be subject to state usury laws that limit interest rates. If it can be shown that the agreement functions as a loan with interest rates exceeding legal limits, the court may deem it usurious.
- Unconscionability: This defense argues that the MCA agreement is so unfairly one-sided that it is unconscionable. This might include egregious terms that no reasonable business owner would agree to if they fully understood the implications. Courts can look at factors like whether the terms were hidden, the bargaining power of the parties, and overall fairness.
- Breach of contract: Defendants can also argue that the MCA provider failed to uphold their part of the agreement, thereby breaching the contract. This could involve failing to fund the advance as agreed or incorrectly calculating or withdrawing funds.
- Constructive fraud: If it can be demonstrated that the MCA provider misled the borrower about critical aspects of the agreement, such as the true cost or terms, a defense of constructive fraud can be raised.
- Confession of Judgment Abuse: In states where confessions of judgment are allowed, this clause can be abused by MCA providers to bypass the normal court process. Challenging the validity or the circumstances under which a confession of judgment was obtained can be an effective defense.
Get Help From a Merchant Cash Advance Attorney
Unfortunately, many MCA funders have been accused of taking advantage of small business owners through predatory lending practices. If you’re sued for MCA debt, it’s important to work with an MCA attorney who understands the industry and will protect your rights.
Working with a reputable debt relief lawyer can help ensure you have the best merchant cash advance defense possible. With an experienced professional, you can protect yourself against any legal action related to MCA debt, including wage garnishment, liens, and more. You can’t afford to make errors working with the wrong people and make matters worse for you and your business.
Tayne Law Group is a New York-based law firm that has been helping clients resolve debt for more than 20 years. If you’re struggling with MCA or other business debt, contact our law office for a free, no-obligation phone consultation. Call today and speak to a team member from Tayne Law Group (and not a call center) at (866) 890-7337. Or fill out our short contact form, and we’ll reach out ASAP. All conversations are confidential, and we never share or sell your information.
