You signed a personal guarantee on a merchant cash advance, and you’re falling behind. You can’t pay, and you’re thinking you’re going to lose your house and your car. That’s not the whole truth, but it’s part of it. The good news: your guarantee is narrower than you think. You signed it to back up the business, not to empty your bank account. The bad news: it’s still real, and if you default it can hit you. But there are options, both before a default and after one. Here is how it works, and what we tell the owners we talk to at Delancey Street.
Merchant cash advances don’t work the way the name sounds. The “advance” isn’t a loan to the company. Instead, the funder buys an amount (the “Purchased Amount”) of the company’s future sales or receivables at a discount, for a lump sum of cash (the “Purchase Price”). The funder collects the money it’s bought through ACH withdrawals from the company’s bank account, usually daily or weekly. The owner personally guarantees the company’s performance, so in the event of a default, the funder can collect against the business and the owner’s personal assets.
Event of Default
So you’re late on your Merchant Cash Advance and you don’t see how it’s possible to catch up. If you read the agreement you signed, you’ve probably noticed that falling behind is not the only way to cause an Event of Default, though most of the others are variations on that same theme. Blocking the funder’s debit to your account, for example. So is having more than a set number of debits bounce for insufficient funds within a set period. Closing or changing your bank account without letting the funder know. Opening another account without letting the funder know. There’s more. (Stacking can also be considered an Event of Default, and the funder usually imposes a penalty for doing so.)
If you defaulted on an MCA, it can get crazy, and pretty ugly, too. The funder can file and/or enforce its UCC lien against the business’s assets, including your customers (and clients), without bothering with a court case. It can sue you in state or federal court for breach of contract and breach of the personal guarantee. It can do both at once. Common symptoms: Customers start telling you they got a letter from the funder telling them to send their payments to the funder rather than to you; you receive a summons and complaint in the mail, or you don’t even get a summons, but rather your bank account gets frozen.
Don’t just ignore the summons. If you don’t answer it, you may wake up to a judgment against your business and against you personally. Another thing: forum shopping. If the funder finds a court somewhere with better laws or procedures, it can file the lawsuit there, even if you’ve never been there, even if the deal never happened there. It’s a sign that it’s time to call a lawyer.
Owners start panicking when they get a personal guarantee in connection with an MCA. But here is the part that matters most. The guarantee covers the performance of the business. An MCA is supposed to be repaid only to the extent that the business makes revenues, unlike a loan, which is always repaid no matter what. The funder takes the risk of losing all its money if the business dissolves, closes shop or files for Chapter 7 bankruptcy. So if the business can’t pay the MCA because there are no receivables (the business closes, or files Chapter 7 bankruptcy), then the advance is no longer owed. Your customers don’t pay you, you don’t get paid and the funder doesn’t get paid.
Ask Your Funder for a Reconciliation and an Adjustment
If you’re struggling with payments to an MCA, there’s something you can try before you default. Ask your funder for a Reconciliation and an Adjustment. Adjustment reduces the daily or weekly payment amount to reflect a downturn in the business. A Reconciliation (sometimes called a “true-up”) means you ask the funder to return the money over-collected. If you can’t make the payment because you aren’t getting enough revenue, go to the funder and show them the proof. Do not wait until you are in default to talk to the funder.
Is an MCA a loan? If you are in New York, that can be the question. New York’s criminal usury law caps interest at 25% a year. Most MCAs earn far more than 25% when annualized. According to the funders, an MCA isn’t a loan so that there can be no interest and hence no usury. Some courts accept that. Usury can still come into play, though, if the funder acts like a lender, refuses to lower your payments, or fixes the terms of the agreement. But even if the funder is offering a legal deal, you still might have a case if it breaches the terms of the agreement, or commits fraud or some other wrongdoing.
When something goes wrong in an MCA, it can really go wrong. Your funder might keep the original terms of your advance even after you call and ask for a lower payment and a reconciliation, for example. It might debit your bank account for the same amount twice, or three times, or four times in a row. It might even collect more than the Purchased Amount. It can give you the carrot - promising you a bigger second advance if you pay early, or a bigger loan that never comes, to keep you paying when you can’t afford to. Keep track of all of this.
Settle for Less than the Full Balance
After you stop repaying, it is possible to settle up for less than what you owe. The lender, of course, would like the terms to favor it, and most owners have no idea what they are supposed to ask for in a settlement agreement. Your interests need to come first.
At Delancey Street, we are not a law firm, and we are not a lender. We’re a business debt settlement company, and our senior advisors negotiate with your MCA funder to settle for less than the full balance. We won’t try to sell you another loan. And when litigation or bankruptcy is the right solution, we will refer you to an independent attorney. Our first consultation is free and confidential, and if there’s a cheaper way, we’ll tell you on the first call.
