Thank you for visiting Delancey Street. This article is about whether MCA debt relief companies are actually legitimate or not. The short version is this: yes, the category is legal. As a business owner, you can hire someone to negotiate your merchant cash advance debt, and some firms actually do real useful work.
But legitimate is not a yes or no license check here. There’s no single registry which sorts good firms from the ones that are just grabbing fees and running away with your money. You definitely have to judge the work itself, read reviews, and do your own due diligence.
This article is about helping you figure this out and being able to answer the question itself. We do this work, so you should read this as a view from inside the industry rather than a neutral referee. What follows in this article is a description of the mechanisms, the regulatory gaps, and the facts that can actually change your outcome.
Four different jobs sold under one name
Now let’s talk about what a MCA debt relief company actually does, because there’s four different jobs that all get kind of sold under one name. Most confusion about the legitimacy of MCA debt relief comes from lumping four different services together.
Reconciliation
The first thing is reconciliation. Most properly drafted MCA contracts contain a reconciliation clause. It lets the business owner ask the funder to reconcile the fixed daily or weekly payments when actual receivables come in below what they were normally estimated to be. This is a contract right that you already have when you took the MCA. It’s typically used before default. It can lower the cash drain without triggering default remedies.
Settlement
The second service is called settlement. After default, settlement is how you negotiate a reduced payoff or a structured plan. This is the classic debt relief product.
Litigation defense
The third service is called litigation defense. Typically this involves answering a lawsuit, challenging a COJ, fighting to vacate a lawsuit, or arguing the advance was actually a disguised loan. You need a licensed attorney for this one.
Refinance or consolidation
The fourth option is refinance or consolidation. New money is borrowed to pay off old positions. This is usually where the worst outcomes occur. Sometimes the consolidation is just another advance stacked on top of the ones you have, with a new fee and a shorter term.
In our opinion, the first three can genuinely help. The fourth one deserves a lot of skepticism because while it can look like relief, it’s actually just making your math much worse.
Why MCA does not behave like credit card debt
Before you go down any of these routes, you have to understand why MCA does not behave like credit card debt. Almost everything you will read online is about debt settlement in the consumer debt context. MCA is commercial and the protections are far different. The Fair Debt Collection Practices Act is generally a consumer statute, so the collector conduct rules people expect often don’t apply in MCA debt relief. Truth in lending disclosures do not apply either.
When it comes to the funder, you typically have signed a UCC-1 blanket lien on all of your receivables, you’ve signed a personal guarantee, an ACH authorization, and often a broad arbitration clause that favors the lender unilaterally. Some older contracts even include a confession of judgment. All of these items change the leverage.
Typically speaking, because of the immense protections the lender has, they are not waiting on a slow collection process. They’re pulling money out of your business bank account every day, and they can accelerate the full balance the moment a debit bounces. Any relief firm that describes MCA work using consumer debt language is either sloppy or selling you something built for a very different problem.
The regulatory gap that nobody really explains
Now, there’s a regulatory gap that nobody really explains. Here’s the part that most articles on the internet get wrong, including some written by law firms. The FTC’s telemarketing sales rule does, in fact, ban advance fees for debt relief services sold over the phone. That rule took effect in 2010, and it is real. But Part 310 also contains an exemption, which exempts most business-to-business telephone calls, with a carve-out for non-durable office and cleaning supplies.
The common claim that any MCA relief company charging upfront fees is violating the FTC rules is an interpretation. It’s not settled yet when it comes to commercial debt. You should treat it as an argument, not as an actual rule.
In addition, state debt adjuster and debt settlement licensing statutes are also written mostly around consumer debt. While newer state commercial financing disclosure laws have passed in almost 10 states, they do not license MCA debt relief companies that you are looking to hire. What still does apply is Section 5 of the FTC Act, which reaches deceptive practices aimed at businesses, and state unfair and deceptive practice laws and ordinary contract and fraud claims.
The practical effect of all of this is that upfront fees in the space aren’t automatically illegal, and they are not automatically fine either. Anyone claiming they are licensed is sending you a weak signal because there are no real licenses for this industry. If someone’s talking about exactly what they do, when they do it, and what you pay for it, that could be a stronger thing to consider when evaluating different MCA relief companies.
What the enforcement record actually shows
Here is what the enforcement record actually shows. While the public record is heavy, it mostly points at the funding side. The FTC has obtained orders permanently banning many different advance companies, such as RCG Advances. Other companies like Ram Capital Funding have also been banned and ordered to pay numerous lump sums of money to people they hurt due to their conduct. Federal courts have ordered MCA operators to pay tens of millions in fees and monetary relief and civil penalties. The allegations include misrepresenting terms and fees and using threats, including threats of violence, to collect.
All of this is true but does not apply to MCA debt relief companies. It is only focused on MCA companies themselves.
How to evaluate an MCA debt relief company
Typically speaking, if you’re looking to hire an MCA debt relief company, you should evaluate them on a number of different angles.
- For example, how is their fee structure set up? If fee structure is tied to work performed, with the trigger spelled out in writing, this could be a sign that the company is reliable. Contingency on savings, flat fees for defined tasks, or milestone fees can also be very defensible. Vague monthly drafts into an account with no described deliverable are not defensible postures when hiring an MCA debt relief company.
- If an MCA debt relief company is unable to guarantee a settlement percentage, this could also be a good sign. Nobody can promise a number before contacting the funder, and anyone doing so ahead of schedule, without even seeing your file, should be looked at skeptically. Outcomes depend on the funder’s own posture, its portfolio, and whether it has already sued or not.
- Another thing to look at is a clear answer on who handles litigation. If a lawsuit is filed against you or a judgment is entered, you need a licensed attorney in the right state. You should ask for the name and the bar admission and check it.
- Another thing to consider when evaluating an MCA debt relief company is a written plan for the ACH. If you’re choosing to stop payments, that’s a strategic decision with consequences. It’s not a default first step. If the MCA debt relief company’s plan starts and ends with stop paying, ask what happens next.
- Another thing to consider is how is the MCA debt relief company looking at reconciliation. If your contract has a workable reconciliation clause and your revenue has dropped, that is often a cheaper and lower-risk path than default and settlement.
All of these are different things to contemplate when evaluating and looking at MCA debt relief companies.
Trade-offs when hiring a debt relief company
There are trade-offs you are actually choosing between when hiring a debt relief company to handle your MCA. First and foremost, stopping payments to force a settlement usually triggers a default and acceleration of the overall debt, and it can bring upon you a lawsuit, a judgment, enforcement against different receivables you’ve pledged. The MCA lender could also reach out to your customers and your credit card processor, and they can also file a claim on your personal guarantee.
If you do hire an MCA debt relief company, it is possible you may get a discount. You may also, though, lose access to future funding from the funder and others who see the default. Some MCA debt relief companies will put you in a position where you have permanently damaged your lending relationships in a way that can cost more than the savings. That is a real position worth weighing, and something only you can consider and contemplate in how it impacts your business.
If you stay current while using reconciliation, it preserves the relationship but does not reduce the overall obligation. It can, though, buy you time and cash flow, but not forgiveness.
More formal options
Having said that, there are more formal options, though. For example, Chapter 11, which includes Subchapter 5 for smaller businesses, can help you escape this deep hole of MCA debt. In certain situations, this could be the settlement program if the debt load is beyond what the revenue can service. A firm that never mentions these is narrowing your options to the one it sells. If you feel that your business is defensible and can be revived based on an improvement in cash flow, then it could make sense to work with a settlement company instead of bankruptcy.
Facts that can change the overall answer
There are, though, other facts that can change the overall answer. For example, whether a lawsuit or judgment already exists, whether a confession of judgment is filed, the governing law and venue in your contract, and whether the reconciliation clause is genuine or written to be impossible to use. Another factor to consider is how many positions you carry and in what order they were funded, if your revenue is recovering or still falling, and whether your personal guarantee is unconditional. These facts determine whether negotiation, defense, reconciliation, or bankruptcy is the best recommendation for your business.
New York State law has held that when a funder refuses reconciliation or takes fixed payments unrelatable to the actual receivables and secures itself against every downside your business may suffer, a court can treat the advance as a loan subject to usury limits. That is a possible defense argument, but it depends on your specific contract, your conduct, and the overall state of your business, and it’s not a guarantee.
Things to ask and think about
If you’re still looking at an MCA debt relief company, here are some things to ask and think about. Ask any firm you’re talking to to explain in writing what it will do in the first 30 days, what triggers their fee, who the licensed attorney is if litigation does commence, and why it decided the strategy that it did for your business. Then compare that to other services and see which one you are actually buying.
The industry has genuine operators and genuine predators. But the burden falls on you to test out their plans and decide what’s right for you. At Delancey Street, we make sure to describe the exact limit, mechanism we are going to use to help you escape this predatory debt. If you’re still looking for help, please consider us and reach out to us for a risk-free consultation.
