Credit card processors often offer loans to businesses that accept credit cards. While these loans may have seemingly inviting agreements, there are some terms that offer the credit card processor speedier debt collection relief against you.
Here are a few things you may want to consider before agreeing to the terms of the loan.
With most loans, failure to pay as required by the underlying agreement or failure to maintain a minimum balance constitutes a default in the loan agreement. Loans from a credit card processor work differently. There are many ways to default under the terms of the lending agreement:
- A predetermined percentage drop in total sales
- A predetermined percentage drop in settlement amount
- Failure to process any charges through the processor during a fixed number of days
- Use of another credit card processor
- Worries from the credit card processor and/or their lender that they won’t be repaid
The laundry list of situations that constitute a default makes it far easier for a buyer to “default,” which enables the lender to accelerate payment, penalties, and the like.
In most standard loan agreements, a lender is required to provide the borrower with notice of default. Once provided, a borrower will generally have a fixed amount of time to cure their default by payment (and penalty) or by depositing funds to meet a minimum balance. If the default is properly cured, the agreement may be reinstated.
However, for most of the loans from credit card processors we reviewed, the borrower agrees to waive their right to notice of default. Waiving your rights to notice of default means there is no period to cure and there is no reinstatement of the agreement. The loan is accelerated and the lender may avail themselves of extreme remedies.
Right of Setoff
Without going legal, a lender will assert a security interest on your accounts receivable and maintain a right of setoff from deposit accounts maintained at the lender’s financial institution. A credit card processor has more pre-litigation rights and remedies afforded to them by the loan agreement than another lender might have.
A loan from your credit card processor goes far further than other processors and other bank accounts, seizing any monies that may be owed to you from credit card receipts and ACH accounts that might have received these deposits or any other accounts owned by the borrower.
Consider what could happen if the credit card processor lender feels insecure about your ability to repay. That insecurity could trigger a default for which you receive no notice and would allow them to offset any credit card receipts owed to you by them, other processors, and more until the accelerated balance together with interest, costs, and penalties have been paid in full. That is unless you are put out of business by the lender.
Other Unfair Advantages Offered to the Credit Card Processor
In addition to the pre-litigation remedies the processor lender has, they also have an unfair advantage by way of the access to information granted to them by the loan agreement. Generally, the lending agreement from a card processor will grant them access to contact any past present, and future processors to obtain any information that the processor deems necessary.
Information provided to the credit card processor can trigger a default in the underlying loan agreement thereby enabling the processor to call in the loan and pick up those credit card receipts as well.
Thinking about taking a loan or concerned about a possible default? Contact Frank, Frank, Goldstein and Nager for a consultation.