It’s never pleasant to settle an MCA that you couldn’t pay. Once you have decided to try, though, the first question is almost always how long it will take. There is NO simple answer to that question. Indeed, any “answer” you’ll hear to that question will fall somewhere along the spectrum of: It depends. Some accounts are larger than others, and it’s impossible to put an average on how long the whole process will take. There is a best case scenario and a worst case scenario. Here’s the thing. Neither one of them will be much help. What really sets the pace is who’s owed, what’s on the books, and whether the clock is already running against you. However, it is helpful to explain the process and the steps so business owners can make informed decisions.
Start with what a settlement is. It is written as a percentage of the debt paid back, so a 40% settlement means that you pay 40% of the total outstanding debt. The other 60% is forgiven. For a $40,000 debt, a settlement quote of 40% will cost you $16,000.00 to pay and settle the debt. Getting a funder to agree to that number is a negotiation. Many factors come into play and each business is unique. One company might sign for a settlement agreement right away but another might wait months to sign. The goal is to negotiate the settlement when it makes sense for the business owner.
The Number of Funders
The first thing that stretches a timeline is the number of funders. Suppose a broker places their client - your business - with more than one funder. If so, this can significantly slow down your negotiations. Brokers work on commission and are not the ones lending you the money, so they often stack a business with more advances than it can handle, sometimes funded at the same time. Further, not every debt is the same. Different providers require different negotiations. With every advance added to the pile, the tangle becomes harder to untangle.
What Can Happen While Your MCA Settlement Is Being Negotiated
It is important to understand what can happen while your MCA settlement is being negotiated. Business owners sign up for a settlement provider because they are hopeful that a good deal will come. They expect the collection of the debt to stop while the talks go on. The funder does not see it that way. Expect action. In the same way that a judgment allows the funder to freeze your bank account, a UCC lien does the same, and worse, because it allows the funder to start collecting your receivables before they hit your bank account. Funders who attach a UCC lien don’t wait around for your funds to deposit into your business account. A UCC lien buys you little time. If you gave the funder the customer information (a customer list, trade references, bank statements, or access to your account), they can write to your customers to tell them to direct their payments to the funder. Within a day or two of filing, a copy can land with your card processor and with every customer they know of. Picture a longtime customer calling to say, “I received a letter and copy of a UCC filing today. It says I have to pay them instead of you. What should I do?” It is a frightening possibility, but it is real. Some customers will take the notice as a sign of weakness and do business elsewhere.
Lawsuits run on their own schedule, and owners waiting on a settlement need to assume a lawsuit is coming, even if the funders don’t call or send emails. A judgment can result in a hold on the business’s bank account. A lien can intercept the money that is flowing in before it gets to the bank. Some contracts also include a confession of judgment. A confession of judgment is a document in which a party voluntarily gives up its right to defend itself in court in the event of a breach of the agreement. The business owner could then have debt taken from his or her bank account or receivables without the business owner ever having to attend court to provide a defense. As you might have guessed, these borrowers are not put in a great position to negotiate terms and conditions with a merchant cash advance funder. In 2019, the New York State Legislature closed the “door” that has allowed merchant cash advance funders to file confessions of judgment against out-of-state businesses. As the saying goes, when one door closes, another opens. Funders started filing them in Texas, Illinois, Utah and a few other states. And a judgment won in one state can be domesticated, brought into the state where your assets are, and enforced there.
Then there are the fees. Once you stop paying, most funder contracts add charges of their own:
- insufficient fund fees (typically $35 each time),
- stop payment fees ($500 to $5,000),
- fees for changing bank or merchant accounts ($100 to $2,500),
- and default fees and third party interference fees ($2,500 to $5,000 each).
Of course, you cannot avoid default fees simply by failing to read your advance agreement. That means that the total amount left to pay is not decreasing at the same pace. The funder is charging more in fees, and the pay down is getting further and further out of reach. Do you really want to add those extra weeks, if those weeks will cost you money on the back end?
This is where the choice of who negotiates for you matters most. Many settlement companies promise to cut your payments in half and settle everything for less through a single escrow payment, with estimates that set unrealistic expectations. When you call them they make promises but what they actually do is charge you a hefty fee and keep kicking the can. The next thing you know, your bank accounts and receivables are frozen. You call the settlement company to find out what is going on, and well… they don’t say much of anything. The fact that the company you hired never gave you a firm answer tells you the situation. No progress has been made. By the time you fire the company, so much damage has been done that it is too late. The fees you paid will not be refunded, and the funders have added their own on top. Weigh your options, be sure that the company is legit, and understand exactly how they will be handling your money. You must find out what will happen to your business while this process is going on. You’ll find most companies are not willing to discuss these topics with you.
Settlement is also not the only road. The choice between these options depends on a business owner’s specific circumstances. A merchant cash advance is a way for a business to get money without borrowing it. The business gets cash up front in exchange for a share of future receivables. In a true MCA, the funder assumes the risk that the business’s receivables will not come in. That distinction matters, because a state may have a usury law that limits how much interest a funder can charge, and the profit on some advances runs from 100% to 200% or more. Many MCA contracts are not drafted well enough to hold up as true purchases of receivables, and if a court treats one as a loan, that profit would be usurious by most states’ standards. Bankruptcy is the last resort, and this is where the personal guarantee comes in. The personal guarantee is in place because most of the time, an MCA lender wants the ability to come after the business owner personally for any default on the debt. The choice between filing for personal or business bankruptcy depends on your specific situation. Filing for personal bankruptcy could protect your personal finances, but it doesn’t automatically discharge business debts. A business filing works the other way around and leaves your personal liability in place. The same is true of settlement. If the business does settle the debt, but the personal guarantee remains, the owner still has to go back and negotiate the personal guarantee agreement.
Is there an end in sight? Yes, but nobody can honestly put a date on it before looking at your contracts and your funders. To answer the basic question, you need to ask more questions, I’m afraid. If there are multiple funders, liens, lawsuits or growing fees, settlement can take longer, and every week of delay costs money. Work with people who will lay out the risks as well as the savings, because you don’t want to get stuck with a crushing time frame with no end in sight.
