When you watch the cash leave your account each day, it can feel like an assault on your business. It’s natural to want to protect the money that keeps your doors open and your employees paid. Many of the businesses that contact us are at their wits’ end about an ongoing cash crunch, and the easiest solution for them is to open a new bank account and move their deposits there. They feel like this is the only way to stop the bleeding. It often is not, and it can backfire badly.
Here is how the money comes out under an MCA. The funder is buying a share of your future revenue (what it calls the Purchased Amount). It collects this share by ACH debit from your bank account daily or weekly. In theory, the amount is supposed to equal the Specified Percentage of your daily or weekly revenue. So that bank account is the funder’s entire collection mechanism. That is why the contract pays so much attention to the account you must use.
Events of Default
So before you touch anything, read the agreement carefully, because switching bank accounts without notifying your funder, or closing an account without telling the funder, or opening or using a new business account without telling the funder, or blocking any debit, all seem to be events of default according to many MCA agreements. And if you have too many debits rejected because of insufficient funds within a certain time frame, that, too, can be an event of default. Switching bank accounts doesn’t mean the debt will go away, it means you are in default. Does that sound harsh? It is. But with MCAs, the funding agreement matters more than anything.
Once you are in default, the funder can enforce its UCC lien on your business assets–such as your clients and customers–without filing a lawsuit. But it also may sue you in state or federal court for breach of contract and breach of your personal guarantee, or it may do both at the same time. This means if you signed a personal guarantee, it can go after both you and your business.
There are some warning signs you need to know about once you have defaulted. You might hear from customers that they got letters from the funder telling them to pay the funder instead of you. You might get a Summons and Complaint in the mail. Or you might not see the Summons, and then discover your bank account is suddenly frozen. If you ignore the lawsuit, a default judgment may be entered against your business and against you personally.
There is a second trap worth naming. Because MCAs are so expensive, many businesses have to take another advance just to make the payments. Funders call that stacking, and most will charge you a monetary penalty if you fail on the original advance because of it. Just like a second bank account, taking on another advance can make things worse.
Request a Reconciliation and an Adjustment
Instead of trying to run away and open a new bank account, there is a better solution: request a Reconciliation and an Adjustment. The adjustment lowers your daily or weekly payment and the reconciliation (often called a “true up”) returns any over-collected funds from a downturn. Reference the contract and say something like, “Our sales have declined substantially and the resulting daily debit amount no longer represents our current revenue.” Ask them to review and adjust your payments accordingly. Put the request in writing and back it up with evidence, for example your bank statements. If you eventually fail due to a lack of revenue, you should also inform the funder and provide proof if possible.
Here is why that request carries weight. A number of funders argue and some courts have held that an MCA is not actually a loan because it is not repayable no matter what. The funder can lose everything if your business closes, fails, or files bankruptcy. That is different than a loan, which is supposed to be repaid no matter what. An MCA is supposed to be contingent on your business generating revenue, so to make that true the agreement must provide for reconciliation, which lowers payments when you slow down, and an indefinite term. And that right to lower payments is built into the deal.
It also helps to know where you stand. If the business collapses or stops receiving receivables, then the MCA should end, and you should no longer be paying. There may be grounds to end the contract (and therefore not pay) if the funder has violated the terms or committed fraud or other wrongdoing. For instance:
- the funder has double or triple debited your account;
- the funder has collected more than the Purchased Amount;
- the funder has refused to reduce payments or reconcile when asked;
- and the agreement may be considered an illegal loan if the funder treated it as a loan.
But it is better to stay in the contract than to run.
A Business Debt Settlement Company
MCA debt can be settled, but the MCA funder will want the settlement to be on their terms, not yours. Most business owners don’t know what to ask for in a settlement agreement, so a person whose job is to protect the owner and make sure the owner’s needs are met first is a valuable addition. At Delancey Street, we are a business debt settlement company. We aren’t a law firm, we negotiate with funders for less than the balance due, and we can refer you to an independent attorney when it comes time for litigation or bankruptcy.
If you are about to switch banks during your MCA, stop and talk to someone first. The first consultation is free and confidential. We send owners to bankruptcy counsel, for example for a Subchapter V case, when that’s the smarter move.
