Thank you for visiting Delancey Street. This article is for Phoenix business owners who are contemplating looking to hire an MCA debt relief lawyer because they’re in immense business debt and need a way out.
We are Delancey Street. We’re a business debt relief company that works on merchant cash advance debt nationwide. While we are not a law firm, we have a network of attorneys we coordinate with on a nationwide basis. Based out of New York City, we have attorneys in almost every state and can help resolve business debt, including in Phoenix.
The goal of this article for Phoenix business owners
We typically get calls from Phoenix business owners every week who are typing in keywords like MCA debt relief lawyer into Google after they’ve missed multiple payments. The goal of this article is to give you a candid explanation of what lawyers can and cannot do in Arizona, what’s driving the outcome that you need, and where the law is genuinely pointing to. Not all situations require lawyers, and this article is geared towards helping people understand whether they actually need a lawyer or a business debt settlement company.
Arizona law does not cap what an MCA can cost
Many people assume there’s an Arizona law that caps what an MCA can cost. There is not. Arizona has a general interest rate law which sets a default rate of 10% a year. But it also says that if a different rate is agreed to in writing, any rate may be agreed to. Arizona stripped out its interest rate ceiling decades ago. What that really means is a Phoenix business owner can’t go into a superior court and say the funding was too expensive under Arizona law.
The disclosure gap in Arizona
The second gap that many legal experts talk about is the disclosure gap. A lot of states are now requiring commercial financing providers to show standardized APR rates before a business owner signs an MCA agreement. Industry and law firm websites online consistently list ten states with these laws in force, including California, New York, Utah, Virginia, Georgia, Florida, Connecticut, Kansas, Missouri, and Texas. Arizona is not on that list as of this article date. Arizona also does not require MCA funders or brokers to get licensed. The practical result is blunt. In Arizona, the contract is the only thing that really matters.
Most MCA contracts point to New York
Many people think that they’ll be able to hire an MCA defense lawyer in order to invoke the usury argument. Unfortunately, if you open your agreement and find the governing law and venue clauses on most MCA contracts, they point to New York. Sometimes you’ll see New Jersey, Florida, or Utah. Funders have chosen these states on purpose, and that’s because it leans better in their favor. New York, for example, has a criminal usury cap of 25 percent per year for corporate borrowers. It also has developed a number of cases that talk about when a purchase of future receivables is really a loan in disguise.
The three-factor framework New York courts have applied
In order to determine this, New York courts have applied a three-factor framework.
- Point one is whether the agreement contains a reconciliation clause.
- Point two is whether it has a finite term.
- And point three is whether the funder has recourse if you, the business owner, goes bankrupt through no fault of your own.
If the MCA you took is really a loan, then the usury math and the consequences of that become unavoidable. Because MCAs typically translate into triple-digit annualized interest rates. Many courts have also applied this and recharacterized MCAs into loans successfully.
Recharacterization of MCAs into loans is not the norm
Here’s the honest part: recharacterization of MCAs into loans is not the norm. While it has occurred, it’s not going to be an automatic thing that occurs in your case, and anyone promising you that outcome is probably just selling you the best-case scenario instead of what’s likely to occur.
Reconciliation clauses are where MCA cases are won or lost
Often the reconciliation clauses where MCA cases are either won or lost. Most MCA contracts say you may request a reconciliation if your revenue drops so that the daily and weekly MCA payments get adjusted down to the agreed percent of your actual revenue. That clause is what makes the deal look like a purchase of receivables instead of a loan. The question courts are asking is whether that clause actually works in practice. For example, if the clause exists in your contract but the funder makes it practically impossible to use, then that leans towards the recharacterization of the MCA into an actual loan.
Your evidence matters more than the legal theory
That actually means then that your evidence matters more than the legal theory.
- For example, if you’ve sent multiple reconciliation requests through email and over the phone, then that documentation will help.
- If you’ve sent bank statements showing the debit stayed the same while your revenue fell 40%, that also matters.
- It’s also crucial to save emails where the funder ignored you or demanded documents that no one could produce in just 24 hours.
If your reconciliation clause required you to get discretionary funder approval, if you were unable to reach the funder to invoke it, or if they straight out ignored you, then it starts looking more and more like this is a possible recharacterization case.
What collection actually looks like in Phoenix
Now, let’s talk about what collection actually looks like in Phoenix if you are about to default on an MCA or have already defaulted. Typically speaking, when you first get the MCA, you get daily and weekly payments. Now, say you miss a daily or weekly payment. What’ll happen is you’ll be hit with NSF fees and possible default fees from the funder.
Next, the funder will send notice of assignment to your customers due to the UCC filing they did when you first took out the loan, and they’ll tell them to pay the funder directly. For anyone who has a number of clients where optics matter, this can be worse than a lawsuit because now reputationally your clients think that you are insolvent and lenders are saying that you owe them money. Typically, once your clients will get the UCC lien, receivables will stop within days.
Often then comes the lawsuit filed in New York under the venue clause. If the funder wins there, it doesn’t have to relitigate. Typically, what the funder is banking on is the fact that you can’t afford an attorney in New York or you ignore the lawsuit, and in return they’re able to get a default judgment.
Personal guarantees in most MCA contracts
Another thing to consider is the personal guarantees that might have been in the contract. Often, most MCA contracts in the country also have a limited personal guarantee or a performance guarantee where you or someone else is personally guaranteeing that the MCA will be repaid.
When a litigation attorney is the right call
Virtually any MCA that is being litigated has a number of different issues that have to be contemplated in order to figure out what is the correct pathway forward. A litigation attorney is the right call when you have been sued or when a judgment against you is being domesticated in Arizona. It’s also a good idea when customers receive assignment notices or when your reconciliation record is strong enough to support a real defense strategy.
A settlement firm like ours is built for a different problem
A settlement firm like ours is built for a different problem. You’ve got multiple stacked positions, debits are exceeding how much you make on a daily and weekly basis, and you need help to stabilize your cash flow. While Delancey Street is an attorney-founded company and negotiates MCA, SBA, and stacked business debt, we’d like to be candid in that negotiation is not litigation and does not replace counsel when you are in court. If you’re already in court, you probably need an attorney.
The decision to hire a settlement company versus a law firm
The decision to hire a settlement company like ours versus a law firm hinges on a few questions. For example, how many positions are debiting you, whether your contract points to New York, and how badly the reconciliation clause was ignored. Another variable is who signed the guarantee. If you’re right now pre-litigation, Delancey Street is probably the best pick because we can help navigate you and talk to lenders and secure an outcome that works for both you and the lender. In order to get started, reach out to us and schedule a risk-free consultation today.
