One of the most common questions we hear from clients is: How do I stop MCA withdrawals from my account? At Delancey Street we negotiate with merchant cash advance funders on behalf of business owners, and we understand why the question comes up. The pain of the daily withdrawals combined with the knowledge that you paid top dollar for your MCA (compared to what a traditional lender would offer) leads to some dirty thoughts about your funder. But the answer that works is rarely a trick. It starts with the contract you signed, and with what that contract says the funder actually bought.
When you enter into an MCA agreement, you’re agreeing to sell your business’ future receivables to the funder in exchange for the cash advance. While not a traditional loan, a merchant cash advance gives the funder access to the business’s bank account to pull daily or weekly payments - allegedly a percentage of collected revenue. Merchant cash advances have two repayment options: (1) the funder takes a certain percentage of sales until the advance is paid off; or (2) the funder takes a fixed daily or weekly amount through ACH withdrawals, plus fees, until the advance is repaid. The second is where most of the pain comes from. This means no matter what your sales are each day, you pay the same amount each day until the advance is paid in full. This means if you have a day when sales are really low, you still need to make the same repayment.
Reading the agreement itself isn’t easy. MCA contracts are brimming with terms that business owners seldom encounter. A “specified percentage” refers to the percentage of a business’ card sales you agree to pay back, the “purchase price” is the amount you get, and the “receipts purchased amount” is the total amount you have to pay. Of course, MCA providers do not provide an APR, so you can’t even put those terms in comparison to other financing.
It is worth the effort, though, because the contract is where the first real lever sits: the reconciliation provision. In a true MCA, the funder bears the risk of the merchant’s capacity to collect receivables. Its repayment is thus confined to this capacity. A real MCA contract thus contains a reconciliation clause: upon the merchant’s demand, the funder agrees to adjust the daily/weekly payments based on the actual collected receivables. So, in a really slow day where sales are really low, the funder should be getting less, but the funder is demanding the same amount. In many jurisdictions, courts have held that this reconciliation provision must be mandatory and absolute. If the merchant only “may” reconcile, courts may view the agreement as a loan. At the very least, the language should indicate that the merchant has an absolute right to request the repayment schedule be adjusted based on collections. The first option, and the one we recommend, is to make sure your contract gives you the legal right to force a reconciliation of the payments, and exercise it if you have that right.
Challenged as Being a Loan
If your contract doesn’t give you that right, the weakness may point to the second lever. MCAs are not technically loans, and therefore are not regulated as loans (instead of an “interest rate”, an MCA is based on a “factor rate”). But a fixed daily or weekly payment, with no obligation to reconcile the agreement? Sign of a loan, some courts have said. A personal guarantee? Yes, sign of a loan, said courts. Confession of judgment? Same thing. Loans are subject to state usury laws. The criminal usury limit in New York is 25 percent. MCAs usually show APRs between 40 percent and 750 percent. Above the limit, and the court may declare the deal to be void. And most MCA funders are based in New York. Usury laws exist in Massachusetts, California, Texas, Florida and about 30 other states. New York’s Attorney General sued in state court, asserting that these MCA deals are really loans under New York’s criminal usury statute; that would mean that the entire transaction is void. The FTC lawsuit in federal court is based on deceptive advertising employed by those same funders to entice vulnerable businesses. MCAs are not subject to federal regulation; they are subject to each state’s Uniform Commercial Code. But FTC truth-in-advertising laws apply. Read and understand the provision, and figure out if the funder really required that the advance be repaid regardless of sales.
None of this means you should simply cut the funder off. If you can’t force a reconciliation, the second option is to consult with a lawyer to see if your agreement can be challenged as being a loan by one of the other measures that get a court to determine that it’s really a loan. Keep in mind what else you may have signed. A personal guarantee means the owner is personally on the hook for repayment. Many contracts also include a confession of judgment, where the owner surrenders their right to contest the lawsuit by the funder. If the problem goes deeper than short-term cash flow, consider speaking with a lawyer with experience in this area before you cut them off.
If you owe money on a high interest rate cash advance, taking out another advance to cover your payments is not the solution. It’s only a temporary fix. A debt cycle can result when the high cost of the funds and the frequency of payments encourage the owner to obtain another advance shortly after receiving the first. And business owners get no benefit from paying the advance off early - all of the fees the funder is owed are due regardless of when they pay. So refinancing the MCA simply means paying the same fees (and perhaps an early repayment penalty).
The contract is the owner’s first best chance, and it can be time consuming and frustrating to try to negotiate a resolution on your own. It’s hard to look at a contract and see anything other than future payments and interest rates. Part of why we come in and negotiate for you is because you are emotionally invested in your business. Our senior advisors work with MCA funders to negotiate for less than the full balance due; we don’t try to sell you another loan. We are not a law firm. We will refer you to a vetted independent attorney if we determine that litigation or bankruptcy is the appropriate option for your business.
Our first consultation is free and confidential. If we cannot win your case, or a cheaper option exists, we will tell you on your first call. If you’re not certain of the nature of the contract you entered into, please consider consulting a lawyer or reach out to us for guidance.
