Navigating Merchant Cash Advance Legal Issues: Essential Guidance for Small Businesses

March 14, 2024 11:17 am

: 7 Minutes to Read

Navigating Merchant Cash Advance Legal Issues: Essential Guidance for Small Businesses

Navigating Merchant Cash Advance Legal Issues: Essential Guidance for Small Businesses

Ever felt confused about what exactly a merchant cash advance (MCA) is, and how it’s different from a regular loan?

Or maybe you’ve wondered about the tiny details in your MCA contract and how to deal with pushy debt collectors?

Let’s clear up the fog around these tricky topics! This quick guide will shine a light on important legal stuff you need to know about MCAs.

Plus, we’ll share some handy tips on how to tackle or avoid problems with them. Get ready to become an MCA whiz!

Key Takeaways

  • Merchant Cash Advances (MCAs) operate in a largely unregulated space, offering an alternative to traditional loans but require careful scrutiny of agreements due to their unique repayment obligations and lack of standard financial regulations.
  • MCA agreements contain specific terms and additional fees that significantly impact the financial health of businesses, and may include Confessions of Judgment (COJs), which can lead to asset seizure without due process.
  • Businesses must be aware of aggressive MCA debt collection practices and consider diverse strategies such as seeking legal help, understanding legal rights, opting for alternative financing, and being prepared to negotiate settlements or possibly take legal action.

Understanding Merchant Cash Advance Legalities

Operating in a relatively unregulated space, the merchant cash advance industry offers an attractive alternative to traditional small business loans, such as merchant cash advance loans.

As a merchant cash advance company, they are not categorized as loans, and hence, they dance around the stringent regulations that govern other commercial financing products.

This means that merchant cash advance lenders can operate without the same regulations that apply to other financial products, which has implications for businesses seeking funding through this avenue.

As a result, it is essential for businesses to carefully review merchant cash advance agreements before committing to this type of financing.

The nature of MCAs, whether they are loans or sales of future receivables, has profound implications on the obligations of repayment.

Therefore, it becomes crucial for businesses to understand these legal nuances before entering into an MCA agreement.

The Fine Print in MCA Agreements

MCA agreements are more than just contracts; they are roadmaps that define the relationship between the borrower and the MCA lender.

These agreements outline the upfront amount paid to the merchant for purchased receivables, which may be delivered in small chunks, defined as installments, in the contract.

The agreement also defines receivables as all ordinary course payments from the merchant’s business, including cash, checks, card payments, and electronic transfers.

In addition to these, MCA agreements often include additional fees such as underwriting fees, wire fees, and NSF fees. They also mention potential legal and court costs resulting from disputes.

The merchant must sell, assign, and transfer all rights to future customer payments to meet the specified receivables amount due to the MCA provider.

Moreover, the merchant authorizes the MCA provider to automatically debit an agreed percentage of receivables from the merchant’s bank account on a daily basis via ACH.

Understanding these terms is crucial as they have significant implications for the financial health of the business.

The Role of Confessions of Judgment in MCAs

A key component of MCA agreements that businesses must understand is the role of Confessions of Judgment (COJs). A COJ in an MCA contract, also known as a cognovit note or warrant of attorney, is an agreement where borrowers waive all legal defenses, potentially triggering certain conditions of the funding contract.

This waiver can have dire consequences for businesses, including asset seizure without due process.

Different states have varying legal positions on the enforceability of COJs, with some having enacted laws to limit or prohibit their use, particularly to protect out-of-state merchants from aggressive debt collection tactics.

 Moreover, the Federal Trade Commission has taken legal action against misuse of COJs in the MCA industry, as seen in the case against Braun and RCG Advances.

 Despite this, merchant cash advance companies favor using COJs due to their ability to facilitate the quick collection of outstanding debts upon default, avoiding the cost and delay associated with formal lawsuits.

Strategies to Handle MCA Debt Collection Practices

Strategies to Handle MCA Debt Collection Practices
Navigating Merchant Cash Advance Legal Issues: Essential Guidance for Small Businesses 5

The aggressive debt collection practices of MCA lenders can be overwhelming for small businesses. However, there are strategies available to navigate these rough waters.

Let’s probe into these strategies.

Responding to Constant Harassment from Lenders

When facing constant harassment from MCA lenders, it’s important for business owners to remain calm and realize they have options to manage the situation effectively. Swift action is crucial when falling behind on MCA repayments to avoid the onset of aggressive lender collection tactics.

One effective strategy is to enlist the services of an MCA attorney. An experienced MCA attorney can help put an end to the endless ACH withdrawals from the borrower’s bank account and reduce harassment experienced from lenders during settlement.

Additionally, maintaining a clear division between personal and business assets can ensure personal assets remain unaffected by MCA lenders in case the business defaults on payments.

It’s also essential to notify key vendors and customers of ongoing disputes with MCA lenders. This can preempt and counter disruptions caused by aggressive debt collection efforts.

Understanding Your Legal Rights and Defenses

Understanding your legal rights and defenses is crucial when dealing with MCA lenders. Some examples of legal rights and defenses include:

  • Invoking a reconciliation clause in MCA agreements for a payment adjustment if revenue declines
  • Taking action if lenders improperly try to withdraw all funds upon default
  • Filing a motion to dismiss based on improper service or jurisdiction issues

These are just a few examples, and it’s important to consult with a legal professional for advice specific to your situation.

Engaging legal counsel is essential for:

  • Analyzing whether a default is a contractual breach
  • Understanding the potential legal defenses available
  • Raising affirmative defenses such as fraud, duress, or unconscionability to invalidate MCA contracts
  • Filing counterclaims if the lender has engaged in improper practices.

Maintaining accurate financial records is crucial in defending against MCA claims and demonstrating the business’s financial situation.

Seeking Professional Help from an MCA Attorney

In the face of MCA legalities and aggressive lender practices, businesses can greatly benefit from the services of an MCA attorney. These professionals can:

  • Provide specific advice tailored to a business’s situation
  • Represent them in any legal proceedings
  • Assist with understanding the implications of personal guarantees and their impact on credit in the event of default.

An MCA attorney, also known as a merchant cash advance attorney, can often get lawsuits dismissed, judgments vacated, and may be able to negotiate settlements with the MCA Company.

Their expertise in restructuring merchant cash advance payments and representing clients in debt restructuring negotiations with lenders is invaluable.

Avoiding MCA Pitfalls: Precautionary Measures

Avoiding MCA Pitfalls: Precautionary Measures
Navigating Merchant Cash Advance Legal Issues: Essential Guidance for Small Businesses 6

To avoid falling into MCA traps, businesses can take several precautionary measures. These include:

  • Diversifying merchant processors
  • Seeking legal advice for structuring assets and operations
  • Closely reading MCA contracts
  • Understanding applicable state laws
  • Considering alternative financing options
  • Negotiating terms wisely
  • Limiting personal liability

Evaluating Alternative Finance Options

Considering alternative financing options is a proactive measure businesses can take to avoid the pitfalls of MCAs.

Traditional business financing, such as term loans or asset-backed loans, often offer better terms and lower interest rates compared to MCAs, presenting a viable method to refinance MCA debts.

There are lenders that provide specialized financing solutions to small businesses, including those with poor credit or lower revenue, offering multiple loan options and potentially lower barriers to approval.

Meticulously comparing financing costs, including interest rates and estimated APR, and reviewing repayment terms of various small business loan options can help businesses find an alternative that is more economical than MCAs.

These alternative financing options may support the preservation of credit ratings and enhance cash flow management for business owners, due to manageable repayment schedules that are not excessively burdensome, as compared to traditional business bank accounts.

Careful Review of Contract Terms

A careful review of MCA contract terms can save businesses from potential pitfalls. MCA borrowers should review their contracts thoroughly to understand all terms related to payments, fees, and defaults, and should avoid signing any agreements they are uncertain about.

Examining the MCA agreement for a reconciliation clause can help in adjusting payment amounts if business revenue declines, potentially avoiding being considered in default.

Also, reassessing personal asset ownership to ensure they are not at risk due to personal guarantees signed with MCA providers is a smart move.

These precautions can help businesses protect their assets and avoid costly legal battles.

When Legal Action Becomes Necessary

When Legal Action Becomes Necessary
Navigating Merchant Cash Advance Legal Issues: Essential Guidance for Small Businesses 7

There are situations where businesses may need to seek legal intervention to protect their interests. These include cases of MCA default where businesses need to file a formal defense, and extreme cases where considering bankruptcy becomes the last resort.

Filing a Defense in Federal Court

Filing a defense in federal court against an MCA company requires a thorough understanding of all contractual terms, including the presence of a jury waiver, which denotes both parties’ agreement to forgo trial by jury in disputes.

The process of responding to a lawsuit involves the following steps:

  1. Respond to the lawsuit within the stipulated time, usually 30 days.
  2. Consider filing a motion to dismiss if there are issues like improper jurisdiction or service.
  3. Seek the assistance of experienced attorneys to navigate the court proceedings.
  4. Ensure that all necessary defenses are raised, and the business’s interests are adequately protected.

The Possibility of Bankruptcy as a Last Resort

Bankruptcy, although a drastic measure, can provide relief from MCA debt and protect personal assets from MCA claims.

Small businesses overwhelmed with MCA debt have the option to file for bankruptcy under Chapter 11, Chapter 7, or Chapter 13, with the choice depending on the business’s specific circumstances.

Filing for bankruptcy can have several benefits for business owners facing MCA debt:

  • It immediately halts any collections lawsuits
  • It can eliminate or restructure MCA debt, potentially preventing the business from dissolving completely
  • Upon filing for bankruptcy, the automatic stay provision comes into effect, making it unlawful for MCA lenders to pursue a business owner under a personal guarantee during the proceeding.

Bankruptcy can result in the discharge of MCA debt and resolution of personal guarantee obligations, allowing a business the chance to regain profitability away from high-interest debt traps.

The Impact of Regulatory Bodies on MCAs

The merchant cash advance industry has not escaped the scrutiny of regulatory bodies. The Federal Trade Commission (FTC), for instance, has taken legal action against individuals and companies in the merchant cash advance industry for deceptive practices, resulting in merchant cash advance lawsuits.

In one case, a merchant cash advance lawsuit led to a court-issued permanent injunction against Jonathan Braun, initiated by the FTC, barring him from the merchant cash advance and debt collection industries due to predatory practices and threats of violence.

There is also anticipation that government regulation may be introduced for the alternative lending market, possibly including the merchant cash advance industry that could mandate rate disclosures and rate limitations.

This potential for future regulation further underscores the necessity for businesses to understand MCA legalities.

Long-Term Solutions for MCA Repayment Challenges

Facing MCA repayment challenges can be stressful, but there are long-term solutions available. Some options to consider include:

  • Refinancing existing MCA debt with more traditional forms of business financing, such as term loans or asset-backed loans that generally offer lower interest rates and longer repayment terms
  • Seeking assistance from a financial advisor or consultant who specializes in small business debt management
  • Exploring alternative funding options, such as crowdfunding or peer-to-peer lending, to help pay off the MCA debt

These solutions can help alleviate the burden of daily MCA repayments and provide a more manageable repayment plan.

Businesses can consider the following options to manage repayment and avoid default on their MCA agreement:

These strategies can help lower operating costs and make MCA repayments more sustainable.

Another effective strategy is to open a dialogue with MCA lenders to request hardship relief or to negotiate modified payment terms to protect business assets from MCA claims.

Navigating Settlements and Negotiations

Navigating settlements and negotiations with MCA lenders can be a complex process. It involves understanding the lender’s security interests, the borrower’s legal rights, and strategic negotiation tactics.

The Art of Settlement Negotiations

MCA settlement is a negotiation process between debtors and creditors, where creditors are not legally obliged to accept settlement offers. However, successful negotiation requires understanding the priorities of both parties and reaching a mutually beneficial agreement.

In MCA settlement agreements, it is vital to include a clause that provides a release from future deficiency judgments, ensuring the borrower accepts liability for the agreed-upon terms.

This protects the borrower from lenders pursuing any forgiven debt amounts in the future.

Obtaining Legal Counsel for Negotiation Support

Obtaining legal counsel for negotiation support can lead to more favorable outcomes. Legal counsel offers strategic benefits during settlement negotiations with MCA lenders, ensuring their client’s interests are robustly protected.

Attorneys specializing in consumer debt relief are often more skilled in settlement negotiations than debt settlement companies, paving the way for more favorable outcomes.

Opting for legal representation during negotiations with MCA lenders can often entail lower costs when compared to the services of debt settlement companies.

Law firms may offer a structured plan for handling legal fees that supports the business’s operational needs throughout the negotiation process.

Protecting Business Assets from MCA Claims

Protecting Business Assets from MCA Claims
Navigating Merchant Cash Advance Legal Issues: Essential Guidance for Small Businesses 8

Protecting business assets from MCA claims is crucial for small businesses. Defaulting on an MCA can lead to actions such as filing a UCC-1 lien, commencement of a lawsuit, and freezing or levying business and personal bank accounts.

Therefore, businesses should implement strict internal controls and monitoring systems to quickly identify any UCC-1 financing statements filed by MCA lenders against their assets.

Also, businesses should:

  • Establish multiple merchant processors to prevent a single MCA lender from disabling all credit card processing capabilities
  • Take steps to protect business assets from MCA claims
  • Ensure the continuity of business operations

These measures can help safeguard the business and its operations.

Summary

In conclusion, understanding the legal landscape of MCAs is crucial for small businesses considering this form of financing.

From understanding MCA legalities and contract terms, to handling aggressive MCA debt collection practices and protecting business assets from MCA claims, businesses must tread carefully.

With the help of professional advice and strategic planning, businesses can leverage MCAs while minimizing potential legal pitfalls.

Wake Up Without Worry: Your Business Debt Solution Is Here

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We specialize in cutting through the complexity of Merchant Cash Advances (MCAs), vendor debts, and unsecured lines of credit that are suffocating your business.

Our team has been navigating the treacherous waters of business debt since 2006, crafting lifelines for businesses just like yours.

With our expertise, we negotiate terms that actually fit your ability to pay, protect your assets, and prevent the nightmare of litigation.

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Ready to reclaim your nights from worry and your days from debt? It’s time for action. Reach out to Regroup Partners today. Let’s transform your financial fears into a future where your business shines, debt-free.

Frequently Asked Questions

What happens if you don’t pay back a merchant cash advance?

Failing to repay a merchant cash advance can have severe repercussions for your business, such as additional charges, legal proceedings, the confiscation of assets, and a tarnished credit reputation. If you’re struggling to keep up with payments, it’s crucial to reach out to the lender at your earliest convenience to discuss workable solutions.

Are merchant cash advances predatory?

Yes, merchant cash advances are often considered predatory due to their controversial nature and warnings from lawyers. It’s best to be cautious when considering this type of lending product.

How do I get out of paying a merchant cash advance?

To avoid paying a merchant cash advance, consider options like seeking interest-free loans from family or friends, using personal savings, or exploring conventional loan options. Selling assets or renting out part of your business space could also help alleviate the financial burden.

How bad are merchant cash advances?

Merchant cash advances can be incredibly expensive, with APRs as high as 35% and factor rates of 50 to 100 percent. This can lead to disruptive repayment and predatory terms. Be cautious when considering this option.

What is a Merchant Cash Advance (MCA)?

A Merchant Cash Advance (MCA) is not a loan, but rather a sale of a portion of a business’s future receivables, with the business agreeing to repay a percentage of its daily sales until the advance is paid off.

Claudia Stefano

Claudia Stefano is a seasoned finance professional and the esteemed President of Regroup Partners, a company she founded with the vision of assisting business owners who are suffering from debt and helping get their businesses back on financial track. With a career that spans over three decades, Claudia has established herself as a leader in the finance industry, known for her strategic acumen and commitment to excellence.

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