Merchant cash advances are often the last thing left for a small business owner to help cash flow. If they can’t get an SBA loan or any other form of business loan, MCA providers are often too happy to hand over the cash. It can be done in a few days, with little paperwork. What starts as a stop-gap can turn into a vicious spiral with no end in sight. That’s the point an MCA attorney gets called in. An MCA attorney will sit down with the business owner, and go through the details of their contract. An MCA attorney will investigate, to find out all the different things that are going wrong.
Merchant cash advances aren’t like bank loans with standard terms. The default rules in MCA agreements vary wildly. Before you’re in trouble, you need to know what your rights are under the contract you signed. When a collector gets aggressive, they’ll hit the business bank account. If you put up a personal guaranty, they’ll go for your personal assets too. In some agreements, you might sign a confession of judgment, which lets them take a judgment against you without you even hearing about it.
Merchant cash advances are a different world because there’s very little oversight. New York just recently banned something called a confession of judgment against out-of-state borrowers. That’s why a lawyer gets a first look at the agreement.
Criminal Usury
In many MCA cases, funders get so aggressive about collecting that borrowers claim it was a usurious loan all along. The math backs them up: some of these deals cost more than 100% interest. If you see 100% interest, you could be on to something. In New York, anything over 25% is criminal usury. If the court buys the argument, the agreement is void and the borrower doesn’t owe any interest or principal.
Unfortunately, a lot of New York courts have said an MCA isn’t a loan, it’s a sale of future receivables. Because of that, they don’t have to obey usury laws, and they can do things we’d call highway robbery. But there is a test: whether the repayment is absolute or contingent. Does the funder take the risk that the business closes and there are no receivables to collect, or does it have a guaranteed right to be repaid no matter what happens? If absolute, the advance is a loan and the usury rules do apply. If contingent, the advance is a purchase of a portion of the business’s future receivables and the usury laws don’t apply. This sounds like a de minimis, subjective distinction. It’s not.
Courts have said there are three things an MCA deal must have to not count as a usurious loan. The first is that the merchant can reconcile the fixed daily ACH payment to its actual daily sales. That means the amount isn’t rigid; it’s tied to what the business actually collects that day. The second is that the agreement has no fixed end date, which makes sense because you’re collecting on future sales that haven’t happened yet. The third is that the funder doesn’t have recourse if the merchant files for bankruptcy. An attorney should check each of those boxes in your agreement, because whether they’re there can make all the difference between an MCA and something that looks very much like a loan.
Most modern funders know how to make an MCA look like an MCA, which means setting up all three factors. But not all funders are great at it. A lender might tack on other language to protect its interests, and that can convince a court that the advance was a loan. Because of that, each agreement needs to be reviewed individually. There are still occasional cases where a judge calls an MCA a loan.
The Reconciliation Provision Is What Matters
In McNider Marine, LLC v. Yellowstone Capital, LLC, a judge ruled on a funder’s motion to dismiss the case. The court said the reconciliation provision is what matters, because it’s the one that usually determines the funder’s risk. If the funder is really just collecting a percentage of receivables, the risk of a downturn in the merchant’s business is the funder’s to bear. If the merchant can’t change fixed payments even when receivables dry up, and the funder can collect through a personal guarantee and a confession of judgment, the funder is at much less risk. That structure makes repayment absolute, which is how courts tend to see a loan. In the McNider Marine case, the court said the “reconciliation” parts of the agreement were illusory - there was no real obligation for Yellowstone to reconcile, and Yellowstone could refuse if it claimed McNider hadn’t documented a basis.
McNider Marine had a problem it couldn’t ask to fix. The agreement only let it request a reconciliation within five business days after the end of the calendar month. The default happened on December 16, 2016. The next chance to ask for reconciliation was the first week of January 2017. Yellowstone filed for judgment by confession on December 22, 2016, and received the judgment on December 28, 2016. The court concluded that McNider Marine didn’t have a real right to reconcile, and the deal was a loan with a criminally usurious interest rate of more than 285%.
After a Default
There’s a lot that can go wrong after a default. The funder may not have drafted the agreement correctly, which could make the loan usurious. Other times, the funder enforces the contract so aggressively they freeze every account connected to your business. Or they might fail to enforce their rights properly. And predatory ones will try to pressure you and your customers to pay them directly, even if they never filed the right judgment in your state and have no legal right to demand payment that way. The funder can do a lot of things, but the funder can’t do everything. There are limits to a funder’s powers. MCA attorneys can tell you exactly what the agreement permits the funder to do, and help you make sure the funder does not violate the agreement or harm the business in the process of collecting.
The thing to know about what a merchant cash advance attorney does for business owners is that they read the documents. They read the actual agreement. They check whether it triggers the three factors. They look for a usury defense. They look at what the funder has already done and whether it’s permitted by the agreement and by law. An MCA attorney will make the business owner understand that the situation isn’t hopeless. If you’re behind on an advance, have your situation checked by a lawyer. And don’t wait until you’re already in default to do it.
