A merchant cash advance or MCA agreement is the provision of a lump sum of cash by a merchant cash provider in exchange for future receivables. While technically not a loan, there is the expectation that the receiver will pay back the provider a larger amount of future receivables—essentially a guarantee of future revenue.
It is typically easy for companies to qualify for these types of advances. The approval process is quick with a fast provision of the cash. However, there are several aspects of a merchant cash advance you should be aware of.
1. MCA Repayment Schedule
MCAs have aggressive repayment schedules that usually require a minimum payment each week. If you miss a single payment, you could be considered in “default.” Your profitability will take a hit until you repay the cash advance. Additionally, from our firm’s experience, MCA’s usually have draconian “default” provisions that provide remedies the merchant cash provider can pursue, often without additional notice to the receiver. There is also usually a provision that the receiver waives. personal service of process of any court action, and allows service by e-mail.
2. You May Be Personally Responsible
The MCA is usually provided with the understanding that both the receiver company and a personal guarantor, usually the owner or CEO, are responsible for repayment. This means your assets could be at risk if you sign as the guarantor for the advance provided to the receiver business.
3. No Regulation From the Banking Industry
The banking industry does not regulate MCAs since these types of advances are not considered “business loans.” This allows merchant cash providers to charge interest rates that are well beyond that permissible under banking usury laws. Usury occurs when a lender charges a higher rate than is legally permissible.
Typically, you can sue a loan provider in a civil action if they charge 16% or more annual interest. Those who charge 25% or more can be charged with criminal usury. However, because MCAs are not considered actual loans, the usury statutes do not apply to these transactions, allowing the MCA provider to charge an exorbitant interest rate. This makes it more difficult for the receiver to repay, and more likely that the receiver will default on repayment.
4. An MCA Agreement Can Cross State Lines
Our firm has found that while the merchant cash provider is often located in New York, the borrower is usually located out of state. An MCA agreement will most likely provide that any suit brought by the provider be brought in a county within New York state, usually Ontario County.
The borrower usually agrees as part of the terms of the MCA agreement for the summons and complaint to be served by mail or email. The statute requirement of personal service or delivery of the summons and complaint is waived.
Often, the receiver company of the cash advance and the guarantor do not know of the lawsuit until after a judgment has been entered and the receiver’s company account has been restrained by the provider’s counsel. It is obviously more difficult for the receiver of a cash advance located in California or Arizona to defend a case brought in New York due to logistics and cost.
It should be noted that even though the judgment is entered in New York, if the receiver (now judgment debtor) banks at a national bank, the MCA provider’s counsel can restrain the receiver’s bank account wherever they are located in the U.S. Subsequently, the judgment creditor can domesticate (file) that judgment in the judgment debtor’s home state and then use a local sheriff or marshal to execute on the bank account or other assets.
If you need assistance with a legal matter involving an MCA agreement, contact Frank, Frank, Goldstein and Nager.
