Seasonal slowdowns happen in every industry. Business owners sometimes find it difficult to maintain financial flow and liquidity between revenue periods or when they need funds to grow. Banks may not offer loans, and merchant cash advance (MCA) companies may be only too happy to make financing more available. There is a burgeoning sector of debt relief companies that has sprung up to service these business owners. And while there’s certainly no shortage of these debt relief companies, some business owners have found that these companies might only add to their problems, not solve them.
A merchant cash advance is an industry term that has been given to a sale and purchase of future receivables. Merchant cash advances or business cash advances involve an upfront sum of money in exchange for a slice of future revenues. The amounts are typically offered based on a few short months of previous bank statements. A business that cannot, or chooses not to obtain a loan from a bank (for one reason or another) may look at a merchant cash advance as a solution to their problem. Cash advances are more readily available than bank loans. With a merchant cash advance, a business owner can receive funding very quickly, sometimes within 24 hours.
The agreement obligates a business owner to pay money to the company that funded the MCA, known as the funder. Some merchant cash advances offer a daily debit from a bank account, others a weekly debit. With an MCA, if the business genuinely fails, the funder has no recourse to recover the lump sum. If the MCA is drafted properly and is legal and enforceable, bankruptcy cannot be a default event.
More than One Merchant Cash Advance
Stacking is the industry term for when a business owner obtains more than one merchant cash advance at the same time. Often, the situation looks bleak for a business owner with mounting and insurmountable debt from multiple MCAs. Debt relief businesses, in general, cater to business owners who are in more than one merchant cash advance. Business debt relief companies, in theory, consolidate debts to bring some financial relief to the business owner who may be drowning in numerous merchant cash advances. Debt relief companies and business debt consolidators may offer a “solution” at a price.
In a typical consolidation, the merchant agrees to pay the debt relief company a reduced monthly payment instead of the funder. That, in itself, breaches the MCA contract with the funder. The debt relief company holds the money until enough has built up to offer the funder a discounted lump sum. If the funder accepts the reduced settlement, it’s generally fine for everyone concerned. The problem arises when a funder won’t accept the reduced offer.
When that happens, the funder typically sues the merchant who breached the contract. Now, the owner who paid the debt relief company every month is still short of cash, and may owe the full receivables to the funder in a lawsuit. In that case, the business owner may have gone from owing one debt to two debts: the funder and the debt relief company.
Debt relief companies now offer third-party attorneys to defend merchants sued by funders. The court pleadings and discovery responses are often generic boilerplate papers with no facts of the case, and are often ineffective. If the merchant loses, the funder can get a judgment for full contract value, plus all of the attorneys’ fees and costs, and the full obligation can include all future receivables. Default fees, and NSF fees can also be added on in some cases, as well.
Business owners can end up in an even worse position than where they began. Business owners who find themselves being sued on an MCA or MCAs, or who are considering a debt consolidation company, should know what their options and risks are. It’s prudent to discuss the options with an experienced MCA attorney who specializes in the area before taking any actions. Don’t sign a contract with a debt consolidation company or send any money to a debt relief company before having it reviewed by an attorney.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
