Most of the business owners who call Delancey Street are not juggling a single merchant cash advance. Instead, they have a stack. As Kathleen DiSanto, a small business bankruptcy trustee in Florida, put it: “nobody has just one. They all have multiple.” You’re not alone in that. Because we work with business owners that have stacked MCAs, we are often approached with a question: “Can I consolidate my MCAs? One of my funders has sued me, but I am still being debited daily from the others. I need to find a single payment.”
A business can of course get a new MCA to pay off old ones, but it will in most cases just be more stacking. The viable options are either negotiation with the funders, along with an attorney to resolve the lawsuit, or, for some owners, bankruptcy. Here is why, and what each path looks like once a funder has already gone to court.
The word consolidation usually means something specific. A loan consolidation company attempts to find a third party that will provide a new loan. The proceeds from the new loan are used to pay off all previous loan balances. The benefit is that the debtor will then have one monthly payment from the new lender, instead of multiple payments to all of the original lenders. With merchant cash advances, though, the new money on offer is very often just another advance. When a business is unable to keep up payments on their advance, it becomes a common practice to “stack” by acquiring another advance to pay off the original one. Stacking - taking out more advances when the business cannot keep up with payments in order to dig itself out - is increasingly a precursor to collapse. “Debtors are using these MCAs as sort of their last Hail Mary to stay out of bankruptcy,” says Daniel Etlinger, a bankruptcy attorney in Tampa, Florida. Rogers Landworks LLC, a Florida land clearing and trucking company, filed for bankruptcy in December. The company said bankruptcy “was necessitated by accumulated MCA debt and aggressive MCA collection activity.” Rogers’ bankruptcy listed 21 MCA deals signed before filing, totaling more than $3.6 million.
It helps to understand why the balances grow so fast. There is no stated interest rate. Instead, funders have a “factor rate.” The rate is usually between 1.1 and 1.5. Multiply the factor rate by the advance. That is the fixed cost to the business. Funders receive the fixed cost back through daily or weekly payments. Leslie Tayne, a debt relief attorney in New York, said in some cases the factor rate can work out to an effective annual interest rate of 100 percent. Even 200 percent, in some cases. She said restructuring with aggressive funders can be “like negotiating with the mob.” Adding one more advance on top of that math is how stacking starts. We are not afraid to say that increasing debt is just making things worse in the long run.
A Lawsuit Requires a Lawyer
When the first MCA funder hits you with a lawsuit, that’s a 180-degree shift. Lawyers say bankruptcy has become necessary, often where the default has been enforced with high-priced fees or refusal to settle. Often, it’s the owner who is on the hook to pay the debt when the business has defaulted. A lawsuit requires a lawyer. We are not a law firm; when litigation is the right move, we refer the owner to a vetted independent attorney, and the attorney-client relationship is between the owner and that attorney. Don’t take a new advance to make the lawsuit go away; that’s stacking.
Discharged Through Bankruptcy
Bankruptcy is the option nobody wants to hear about, but the lawyers who handle these cases talk about it differently. In the courtroom, MCA funders often fail to show up and contest the discharge. When they do, lawyers say, the funder faces a tough battle to hold the debt - as a purchase agreement rather than a loan - or to convince a judge it must be repaid. DiSanto put it this way: “The MCAs are very ruthless until a bankruptcy petition is filed. I’m loath to think of an instance when bankruptcy isn’t the best solution for a debtor who has multiple merchant cash advance loans.”
In an October decision, a Florida bankruptcy judge agreed that a fertility clinic’s obligations could be discharged through bankruptcy. Judge Tiffany Geyer of the Middle District of Florida said the debts owed by the clinic were more like loans than purchase agreements, and the company had no property interest to convey in future revenues. In Houston, a bankruptcy judge allowed a trustee to pursue a suit against a MCA funder for usury - and for disguising a loan as the purchase of future sales. In Ohio, attorney Patricia Fugée, of FisherBroyles, says there is a “lot of caselaw that recategorizes them as loans, but it’s not universal or automatic.” “I think MCA funders are losing on the sale versus loan argument more often than they’re winning.” Etlinger says bankruptcy often serves as a ‘quick litmus test’ of how an MCA funder postures itself.
We Negotiate
We don’t sell our owners another loan. We negotiate. Our senior advisors negotiate with the funders and other lenders for less than the amount owed. Our initial consultation is free and confidential. If there is not a good case, or another less expensive option, we’ll say so on the first call, and refer owners to bankruptcy counsel (like Subchapter V) when that makes more sense. Don’t sign another advance just to buy time. Get the lawsuit to a lawyer, put the whole picture on the table, then decide.
We will end where Fugée ended when she talked about these advances. “In my experience it is a terrible thing,” she said. “It begs for regulation. It begs for education. I wish there was a way to educate small businesses before they seek this sort of assistance.”
