6 Steps for Medical Practice Owners Struggling With MCA Debt

Thanks for visiting Delancey Street. We are a nationwide business debt settlement company that helps medical practice owners struggling with MCA debt. In this article, we’re going to talk about the six steps medical practice owners can take when they’re struggling with MCA debt. At Delancey Street, we work on business debt for a living, and specifically merchant cash advances. Merchant cash advances are not like typical loans. In fact, they’re not loans at all.

Why medical practices turn to merchant cash advances

Medical practices are not the typical MCA customer people picture. There’s no retail counter, and there’s no credit card swipe in the classic sense. But practices are showing up in these files more and more. As reporting from Bloomberg Law notes, there’s an immense liquidity strain and shrinking bank credit, which is pushing distressed healthcare business owners towards merchant cash advances, including independent practices and treatment facilities.

Payor lag and real business expenses

Often, medical practices have a payor lag problem that a restaurant doesn’t. You deliver healthcare today, you bill tomorrow, and then you get paid in 30 to 90 days if nothing goes bad. But there are always issues like denials, prior authorization fights, and underpayments, which push that further out. Meanwhile, you’ve got real business expenses like payroll, rent, malpractice coverage, and equipment leases. And don’t forget, you also have to make a living.

In addition, reimbursement rates aren’t going to bail you out either. Under the Medicare physician fee schedule final rule, CMS set the conversion factor at approximately $33 for clinicians and qualifying alternative payment models, and around 33.4 for everyone else. While it’s a modest bump, it’s not a cash flow fix, and obviously you’re going to turn to what is the quickest and fastest way to get funding when you need it.

Stacking and daily debits

Often, we’ve seen business owners, medical practice care owners take $100,000 to cover a payroll gap, but then the daily debits start, and then they take the next advance in order to cover the debits from the first one. In the MCA world and business debt settlement world, we call this stacking, and it compounds in weeks. What are your options if you’re looking to get out of this predatory MCA structure?

Map out every position before you call anybody

First, you have to map out every position before you call anybody. If you’re reading this article, it’s likely because you are now struggling with the MCA debt and you’re exploring ways to get out of it. The first thing you have to do is pull the actual agreements.

For each position, you should write down:

• the funder name

• the amount funded

• the purchased amount

• the remittance amount, frequency, start date

• the dollars that have already been remitted

• your remaining balance

• and of course whether there’s a personal guarantee or not

In addition, you should see if there’s a UCC-1 filing against your entity. It’s likely that if you took an MCA loan, an MCA advance, one of the things that they did was file a UCC-1 filing against your business.

Calculate the real cost, not the factor rate

After you’ve done all this, you should calculate the real cost, not the factor rate. For example, a 1.49 factor rate repaid over five months is not a 49% cost of money in any meaningful way. They do this in order to make it so you don’t realize the true APR cost of the money you’re borrowing.

You should do this before you negotiate, because the first question any funder is going to ask you is how many positions exist and in what order they landed, if they’re going to give you a consolidation loan, or if they’re about to bail you out of this. If you can’t answer that quickly, you’ll negotiate blind, and you’ll accept a consolidation offer that just resets the clock and doesn’t really give you any meaningful way out of these advances.

Consolidation loans and a reverse MCA

Often we’ve seen many medical practice owners take consolidation loans or a reverse MCA in order to bail them out of existing MCAs. But all that does is resets the clock, but you’re still paying 100 to 200% APR on the money that is now allegedly consolidating these MCAs into one new payment.

Read your reconciliation clause and use it before you miss a payment

The second and most important step you can take is read your reconciliation clause and use it before you miss a payment. Almost every drafted MCA agreement contains a reconciliation clause, which lets you request a reconciliation of how much is being debited from your account on a daily and weekly basis. When your deposits and revenue start going down, this is not a courtesy; it’s actually a structural legal process.

The three-part test in New York State court

In New York State court, they’ve adopted a three-part test which asks whether an agreement has a reconciliation provision, whether it has a finite term, and whether the funder has recourse if you file bankruptcy or shut down your business, all in order to determine whether this is an MCA or an actual legal loan.

The case law has also shown why wording matters. If a clause says the funder may adjust, this reads as discretionary to the court, whereas if it says shall, then it reads as an obligation. This litmus test is important because it distinguishes between a loan or an MCA. MCAs by law are required to give you reconciliation as a part of the agreement.

Practically means you can invoke the reconciliation in writing, especially if you do it on time, with bank statements and payer remittance data. It’s important if you do this, you keep the proof.

At Delancey Street, we’re proud to offer the Reconciliation Shield program, which is described as a pre-default intervention that is built on the actual contract that you signed with the lender, the MCA lender specifically.

Be honest with yourself about the limit here

It’s important to be honest with yourself about the limit here. Many owners find that invoking reconciliation is slow. Often it’s ignored by lenders or it’s fought by lenders. The documented rule is that the clause exists and matters legally, and it’s something you can invoke if you need it. This is usually the first step we recommend every business owner take when they are considering defaulting or are thinking that they will be forced into a situation where they default on the MCA agreement. If you haven’t invoked this, this is your first line of defense.

Understand what a funder can and cannot reach in your medical practice

The third step that we recommend is understand what a funder can and cannot reach in your medical practice. This is where practice is different from other small businesses in a way that actually helps you. Federal regulations prohibit Medicare from paying amounts due to a provider to any other person by assignment, power of attorney, or any direct payment arrangement. Having said that, there are narrower exceptions, for example, government agencies or court-ordered assignments, which meet specific conditions, and billing agents whose pay isn’t tied to amounts billed or collected.

Generally speaking, a funder cannot stand between CMS and you in the same way that a factoring company stands between a trucking company and shipper. Payments land typically in your operating account first, but the funder’s leverage is the ACH debit and the UCC lien on your accounts, which aren’t essentially a direct claim on the government payer.

Don’t read it as permission to hide money

This definitely changes your defense, but don’t read it as permission to hide money. If you quietly moved deposits to a new bank, this is considered a breach in almost every MCA agreement and typically will trigger the personal guarantee and hands the funder a clean default story if this goes to court. In the past, we have seen business owners try to skirt their daily ACH by shutting down the previous bank account, opening up a new one. Possible consequences of this can involve an acceleration of the repayment where the full balance is now automatically due due to the default terms and conditions in the MCA agreement you signed. The more disciplined approach is a written reconciliation demand, then a negotiated modification, and perhaps an offer in compromise or a final settlement.

Build a cash flow record you’ll negotiate from

In order to really pull all of this off, you really need to build a cash flow record you’ll negotiate from. Funders settle typically when there’s evidence, not adjectives. For example, if you built a rolling 13-week cash flow projection, month-by-month deposits over the last 12 months, and an accounts receivable aging by payer and a payroll schedule, it’s more likely you’ll be able to put forth a compelling reason for why the funder should accept new terms. For example, if a major payer terminated you, dropped a rate, or held claims for audit, get that in writing so you can show the downtrend in revenue and invoke reconciliation.

Know the real leverage you have

Most importantly, it’s important to know the real leverage you have and separate it from any wishful thinking you may have in mind. There’s definitely genuine enforcement history here.

For example, New York’s Attorney General announced a judgment and settlement over $1 billion against Yellowstone Capital and its many affiliates. This resulted in almost $500 million of merchant cash advance debt being canceled, and it resulted in the ban of the various entities from the MCA business altogether. In addition, the FTC obtained an order permanently banning RCG Advances and its owner from the MCA industry and required millions to be repaid due to misrepresented terms and abusive collection practices. Bottom line is, there’s a growing set of states that now require standardized commercial financing disclosures that help protect borrowers and inform them on the real cost of the money that they’re borrowing.

The honest read is simply put this: there are outcomes against specific parties that can happen if you have specific facts in place, but none of this voids your contract automatically. What they give you is a credible argument that the agreement that you signed looks like a disguised loan and that a collection practice engaged by the lender crossed the line, and that a judgment was obtained through a mechanism which was restricted. Bottom line is this is all negotiating leverage and litigation defense, not a guaranteed result.

Your exit and three realistic doors

The last thing you really need to consider is what is your exit and then commit to it. There’s three realistic doors.

• First is a modification or reconciliation while you’re still current. This preserves your relationship with the MCA lender and keeps you eligible for further funding from that lender.

• The second one is negotiating a settlement after default, which usually costs you the relationship with the funder. It invites certain litigation risk and it can also result in UCC liens and guarantees being put in place.

• The third option is a reorganization, subchapter 5 of Chapter 11, is the small business track, and the debt limit is very generous, ranging in the $3 million range.

Bankruptcy also opens up the recharacterization question whether the advance you took was really a loan, which can affect claim treatment.

What actually will change the answer

In summary, no MCA lender wants to go through this perilous path, and they will negotiate if you have good documentation in place. What actually will change the answer is the four facts below:

• whether you’ve already defaulted

• how many positions you have

• whether your revenue decline is documented or you’re just describing it without any evidence

• whether the practice still has any value worth preserving

For example, if you’ve just got a two-position MCA stack, but you have clean books and you have some real documented payer disruption, then there’s room to modify those payments.