A merchant cash advance agreement, or MCA, is a type of business financing agreement. A merchant cash advance company offers financing to companies in exchange for an interest in the company’s future earnings. Merchants repay the loan by giving the merchant cash advance company an interest in future credit card sales.
MCAs are generally short-term contracts, ranging from 90 days to two years. In exchange for near-instant funding, you will be required to pledge a personal guarantee, which, if enforced, could encumber everything from your future income to your personal assets.
Merchant cash advance agreements are not considered loans in the traditional sense, which means they avoid the interest cap rates. In New York, an interest rate above 16% could be considered civil usuary, and anything above 25% could be considered criminal usuary. That being said, if one were to calculate the fees, interest, and all charges, imposed by the MCA companies and convert the total as interest, the rate would be in excess of 50%.
Often, businesses that choose MCAs would not qualify or are not eligible for traditional loans. MCAs have fewer qualification requirements than loans. Most MCA companies look at a merchant’s average monthly credit card sales. The higher those sales are, the easier it is to get approved for a merchant cash advance. Another benefit of an MCA is that the merchant will receive a lump sum of cash almost immediately, which is a stark contrast to the slow process of getting a loan.
MCA repayment periods are much shorter than traditional bank loans, and there are higher borrowing limits.
Additionally, the merchant’s credit card sales determine how much their monthly payment is. The repayment figure is set at the time of funding. Therefore, if a business has a slow period of sales or is short of cash, there is a high likelihood of default on the loan.
MCAs also allow the merchant to use the cash advance however they see fit. Small business loans come with restrictions on what a borrower can use the money for. The flexibility of an MCA can be attractive to a business, especially if they need to use the advance for a few different expenses including paying off another loan.
Many MCAs contain a reconciliation clause in the contract. Reconciliation clauses may offer a borrower an opportunity to restructure their MCA if revenue significantly declines but, the payments must continue during the time frame that a reconciliation is requested and during the process. The company’s inability to pay before and during the reconciliation period can and often puts the borrower into default.
The total cost of an MCA is determined by the factor rate: A combination of the business’s credit and the overall risk of lending. The factor rate is usually between 1.1 and 1.5.
For example: If you take out an MCA for $30,000 with a factor rate of 1.3, the total cost of your MCA is $39,000 ($30,000 x 1.3). The MCA company might also charge other fees in addition to the interest, which can be hidden in the contract. It is important to make sure that you fully understand the deal before you sign it.
Generally, the merchant cash advance company secures permission from the borrower merchant to ACH debit the bank account at the time of the loan. The auto debit is of a fixed amount to be withdrawn weekly or in some cases daily.
If the merchant cash advance company does not have sufficient funds to cover the amount of the ACH debit, the borrower merchant is in default, as this is a breach of contract.
Other ways to go into default include:
When a borrower/merchant defaults on their merchant cash advance, the MCA funder will go to the borrower’s accounts (including credit card processing accounts) and grab whatever balances they can to repay the debt.
The MCA funder may freeze the merchant’s personal and business accounts, and try to disrupt relationships with vendors and payroll companies to get them to pay directly. The terms of the underlying contract provide the necessary authorization and security interests to allow the MCA company to do so.
It is important to avoid defaulting on an MCA loan, as it will harm your business and personal finances. Once a default occurs, the MCA company severely restricts cash flow into the business by seizing your credit card payments and available deposits in your bank account. The shortage of available funds will most likely cause the borrower to seek immediate financing from another merchant cash advance company.
Many MCA contracts include a reconciliation provision that allows you to restructure payments if they become unmanageable. If your business income drops, and, as long as you continue to make the required payments during that period, the MCA lender will still get paid, and you might avoid default. Although many try to avoid defaulting on a merchant cash advance agreement, it is not always possible. Sometimes, it is unavoidable.
The merchant cash advance company drafts the underlying agreement with a default in mind. The MCA company immediately seizes any cash or assets it has been given access to.
Then, if the borrower has already given the MCA a consent judgment to be filed in Texas or somewhere else, the lender can rush to judgment. The judgment from Texas or elsewhere can then be domesticated in New York, thereby offering the MCA company a New York judgment.
Before the change in policy, MCA lenders would secure a confession of judgment from their borrowers at the time of the loan. Upon a default in payment, the MCA lender would immediately file and secure judgment against the borrower and guarantor in New York without notice.
Due to abuse, New York outlawed the practice of allowing confessions of judgment executed outside of NY to be filed within the state. But, as an alternative, MCA agreements may provide that the lender can file suit in any venue they see fit.
MCA lenders can also designate New York as the venue for filing lawsuits. New York has very liberal judgment enforcement policies thus affording the merchant cash advance company great opportunities to collect it’s judgment without court intervention or interference.
Many companies include a clause in their contracts that allow them to file lawsuits in New York even if the merchant’s business does not have a New York address. Still, there are many loopholes that allow the MCA lender to collect from the merchants. The state still allows lenders to pursue borrowers even if neither party has a connection to the state.
This allows the creditor to collect the merchant’s debt aggressively–freezing bank accounts immediately upon entry of judgment. Many merchants find out they were sued when they go to use their debit card and find their accounts were frozen.
With a lawsuit, creditors can also reclaim the money owed by seizing assets.
Most often, a merchant borrower has agreed to accept limited notice of any court action in the underlying agreement. The borrower may receive notice that the MCA lender has sued the company and the guarantor based on the default in payment.
The underlying MCA agreement may have required the merchant borrower to agree to accept notice of any legal action by email and/or certified mail. Had the merchant borrower not agreed to service by email and/or certified mail, the borrower would have to be served with the legal papers (summons and complaint or other pleadings) as dictated by state law.
Most borrowers first learn that a judgment on default has been entered when their bank account has been restrained. If a borrower is lucky enough to receive notice of the lawsuit, they have a chance to defend the lawsuit and have their day in court. They then may argue the same arguments as any party looking to invalidate a contract.
The services you need will depend on your unique situation.
Have you just defaulted and are looking to settle with the MCA lender? Are you being sued and need help defending the case?
Or has a judgment on default been entered against you without your knowledge?
Regardless of which of these scenarios apply, we can help.
The MCA settlement agreement will be binding on you and your company.
You need to understand what can happen if you sign the agreement.
We can negotiate an agreement, review a proposed settlement agreement, and advise you of the risks.
Not receiving notice of the lawsuit is an excusable default under New York state law.
If you have a meritorious defense, FFGN can file an application to vacate judgments.
This emergency application to the court requests a stay on further enforcement of the judgment.
Are you being sued due to a default in an MCA agreement?
We can assist in defending your company and you as guarantor.
As a debt collection firm, we are well-versed in civil litigation.
We understand the industry and what needs to be done to secure you the best outcome.
Whether you just defaulted, judgment has been entered against you, or you need to defend the case, we can assist.
MCA companies build protections for themselves into the contract. This includes the ability for the MCA lender to ACH debit your account for all payments, and seize money in your bank accounts and your credit card processing accounts immediately upon default. Lenders can also go after the guarantors personally and offer limited, if any, notice of impending lawsuits.
Past performance does not guarantee future performance.
There are many downsides to merchant cash advances. A merchant cash advance, or MCA, is a type of financing agreement for businesses. An MCA company purchases a portion of a business’s future revenue in exchange for a lump sum. That money is often repaid with a percentage of the business’ credit card sales, what’s known as the hold-back percentage. These
Merchant cash advance agreements are drafted in a way that offers an advantage to the lender. Since the documents anticipate a default in payment by the buyer, why then do merchant cash advance companies record judgments in New York? In the past, merchant cash advance companies and other lenders required their clients to sign a confession of judgment that could,
New York state law governs most merchant cash advance agreements – even though neither the borrowers nor lenders are typically located in New York. When there is a default on these agreements, the lender must pursue the borrower through debt collection in New York. Until recently, all agreements secured by merchant cash advance companies required borrowers (both corporate and personal