If you’re facing a merchant cash advance (MCA) dispute, you may be wondering whether arbitration or a lawsuit is the better path to resolve it. MCA agreements often include arbitration clauses, forcing business owners to settle disputes outside of court. But is arbitration always the right choice? Or could going through the process of a lawsuit provide better legal protections?
Read on to learn the key differences between arbitration and lawsuits for MCA disputes — including cost, speed, fairness, and enforceability — so you can make the best decision for your situation.
Legal Disputes in Merchant Cash Advances
Legal disputes over MCAs are common, primarily because of the high-risk lending practices, aggressive collection tactics, and complex contract terms used by many MCA providers. An experienced debt relief attorney specializing in MCA debt can offer assistance.
When these disputes arise, there are usually two main ways of handling them: arbitration or lawsuits.
Arbitration in Merchant Cash Advance Disputes
What is Arbitration?
Arbitration is a method of resolving disputes outside of court, where an impartial third party (the arbitrator) reviews the evidence and makes a binding or non-binding decision. It is often used as an alternative to litigation in business, consumer, employment, and financial disputes.
Key aspects of arbitration:
- Private and less formal: Unlike court proceedings, arbitration is typically more flexible and confidential.
- Binding or non-binding: A binding arbitration decision is final and enforceable, while a non-binding decision can be appealed in court.
- Chosen arbitrator(s): The parties involved usually agree on an arbitrator or a panel of arbitrators to hear the case.
- Faster and cheaper: Arbitration is often quicker and less expensive than going to court, though complex cases can still be costly.
- Limited appeal rights: If arbitration is binding, there are very few grounds to challenge the decision.
How Arbitration Works for MCA Disputes
Many MCA agreements include arbitration clauses. These clauses require borrowers and MCA companies to settle disputes outside of court through arbitration instead of litigation. Here’s how the process generally works:
1. Filing an Arbitration Claim
If a dispute arises (such as predatory lending practices, unfair collection tactics, or contract breaches), the business owner or MCA provider can initiate arbitration by filing a claim with the designated arbitration forum. The other party is then notified and given a chance to respond.
2. Selection of Arbitrator(s)
The arbitration organization will assign or allow the parties to select an arbitrator. Some MCA agreements require a single arbitrator, while others allow a panel of arbitrators.
3. Discovery & Hearing Process
Similar to a court case, both sides present evidence, provide witness statements, and make legal arguments. However, arbitration is often less formal and quicker than a court trial.
4. Decision & Enforcement
The arbitrator(s) issue a binding or non-binding decision (MCA agreements usually require binding arbitration). If binding, the decision is final and enforceable in court. If non-binding, either party can reject the decision and pursue litigation.
Pros and Cons of Arbitration for MCA Disputes
Arbitration is a common method for resolving merchant cash advance disputes, but it has both advantages and drawbacks — especially depending on whether you’re the business owner or the MCA provider.
Pros
- Faster resolution: Arbitration is quicker than a lawsuit, often resolving disputes in months. Court cases can be delayed due to backlogs, hearings, and appeals.
- Lower costs (sometimes): Arbitration can be cheaper than litigation, especially when avoiding court fees and prolonged legal battles. However, arbitration costs can still add up, especially if an MCA contract requires splitting fees.
- Less formal process: Unlike a courtroom setting, MCA arbitration is less rigid and allows more flexibility in presenting evidence. Business owners may not need to go through complex legal procedures.
- Privacy and confidentiality: Arbitration proceedings are private, unlike lawsuits that become public record. This can prevent negative publicity for business owners and MCA providers.
- Limited appeal process: MCA Arbitration decisions are final and difficult to overturn. This benefits parties looking for certainty and a quick resolution.
Cons
- Potential bias toward MCA providers: Many MCA companies use the same arbitration forums repeatedly, which may create bias in their favor. Arbitrators may be less likely to rule against lenders they see regularly.
- High costs for business owners: Some MCA agreements require borrowers to pay part or all of the arbitration fees, which can be expensive.
- Limited appeal rights: If an arbitrator rules against you, there’s little recourse. Unlike court rulings, appealing an arbitration decision is extremely difficult.
- No jury: Arbitration removes the option of a jury trial, which might be fairer to small business owners. Instead, a single arbitrator (or a small panel) makes the decision, which could be one-sided.
- MCA contracts may dictate terms: MCA agreements often set arbitration rules, including which arbitration firm is used, where arbitration takes place, and who pays arbitration fees, which can favor the MCA company.
Lawsuits in Merchant Cash Advance Disputes
How Lawsuits Work for MCA Disputes
If a dispute arises between a business owner and an MCA provider, a lawsuit may be an option — especially if arbitration is not required or the arbitration clause is deemed unenforceable.
A lawsuit may be filed if:
- The MCA company sues the business owner and business for non-payment.
- The business owner sues the MCA company for fraud, deceptive practices, or illegal collections.
- A third party (e.g., a bank or another creditor) gets involved in a dispute over funds or collections.
Here’s how the MCA lawsuit process generally works when the MCA provider is the one initiating it:
- The MCA provider files a formal complaint in court, detailing the business’s alleged breach of contract.
- The business owner and business is served with the debt lawsuit.
- Both parties proceed to court hearings, where the defendant business and business owner must defend against the claims.
- If the MCA company wins, they may obtain a judgment to seize assets, garnish bank accounts, or enforce the judgment through different collection processes.
- If the business fights back successfully, the court may dismiss the case or rule in the business’s favor.
Note that some MCA agreements often include a Confession of Judgment (COJ), allowing the MCA company to obtain a judgment without notifying the borrower. Although COJs have been banned in most states, some MCA companies still use them in jurisdictions where they’re permitted. Talk to an experienced MCA attorney to find out how this may impact you.
If a COJ is filed, the MCA provider can immediately seize bank accounts or assets without going through a full lawsuit.
Pros and Cons of Lawsuits for MCA Disputes
While litigation can be more formal and time-consuming, it may offer greater legal protections, especially for business owners facing aggressive MCA collection tactics. Here are the pros and cons to consider.
Pros
- More legal protections for business owners: Court proceedings must follow due process, ensuring fairness for both parties. Judges are independent, whereas arbitrators may have bias toward MCA lenders who use their services frequently.
- Ability to appeal a court decision: If a judge rules unfairly, you have the right to appeal to a higher court. In MCA arbitration, decisions are usually final, and appeal options are extremely limited.
- Jury trials are an option: Unlike arbitration, where a single arbitrator decides the case, a lawsuit may allow a jury to hear the case, which can be more favorable to small business owners.
- Public record can expose MCA misconduct: Court cases are public, which means lawsuits against MCA lenders can bring bad press if they engage in unethical practices. Public exposure may pressure the MCA company to settle quickly or change their practices.
Cons
- Longer process than arbitration: Lawsuits can take months or even years to resolve, while arbitration is typically faster. ALthough this could work to the businesses advantage with the help of an experienced MCA debt attorney.
- Higher legal costs: Court cases often involve attorney fees, filing fees, and other legal expenses.
- Public record may be a drawback: While public records can expose MCA wrongdoing, they also mean that a lawsuit against you is public information. This can hurt your reputation as a business.
- MCA companies may use a COJ: Some MCA agreements include a Confession of Judgment, which allows the MCA providers to obtain a judgment without a lawsuit. If a COJ is filed, the MCA company can immediately freeze bank accounts or seize assets without a court hearing.
Arbitration vs. Lawsuit: Which is Better?
When dealing with merchant cash advance disputes, deciding between arbitration and a lawsuit depends on several factors, including contract terms, costs, speed, fairness, and legal protections.
When arbitration is the better option:
- Your MCA agreement requires arbitration and you cannot challenge it.
- You need a faster resolution and cannot afford a lengthy court battle.
- You prefer to keep the dispute private rather than making it a public lawsuit.
- You want to avoid court costs, but be aware that arbitration may still be expensive.
When a lawsuit is the better option:
- Your MCA contract does not require arbitration, or you can challenge the arbitration clause.
- The MCA company engaged in fraud, deceptive lending, or illegal collection practices.
- You want the ability to appeal if the decision is unfair.
- You prefer a jury trial, which might be more favorable to small business owners.
- You need stronger legal protections, as courts follow strict rules of evidence and procedure.
- You want the case to be public to expose wrongdoing (e.g., predatory MCA lending practices).
Call Tayne Law for MCA Help
Tayne Law Group is a New York-based law firm that offers a transparent and straightforward process to help resolve MCA matters. Our team is made up of experienced attorneys who resolve MCA debt every day. Our team will work with you to come up with a customized approach to resolving your merchant cash advance debt (and other types of business debt, too). We strive to protect your business cash flow and operations while negotiating the best possible agreement with your MCA provider while protecting the businesses assets and credit
Give us a call at (866) 890-7337 or fill out our short contact form for a free, no-obligation phone consultation. We never sell or share your information and will keep your matter confidential.
