If you need to renegotiate or settle a merchant cash advance, start by reading the agreement. It matters whether the transaction is structured as a sale of receivables or a disguised loan, because the funder’s rights change a lot depending on which one it is. Some deals look like sales on the surface, but also contain loan-like features. The funder throws those in to be safe, but they make it harder to tell what kind of deal you actually have. Is it really selling you future receipts, or is it just a loan in disguise? The answer runs through every clause that matters in a settlement.
Funders usually structure their deal as a purchase of your future receivables, because that way the receivables won’t be part of your bankruptcy estate if you go under. If it’s a true sale, the automatic stay doesn’t stop the funder from collecting. If it’s a secured loan, then the funder only has a lien, the automatic stay applies, and the funder is competing with other secured creditors. Oh, and it can come under scrutiny of usury laws. A contract that reads like a loan is a contract the funder would rather not defend, and that is worth knowing before you pick up the phone.
A True Sale, or a Secured Loan
The courts look at the whole picture, not just what the parties say they intended. No one factor wins by itself, and the facts are very specific to each case. In Shoot the Moon, a court found that eighteen merchant agreements with CapCall were actually secured loans that broke state usury rules. In R&J Pizza, the court looked at the same kinds of factors but concluded that the agreements with Merchant Cash & Capital were bona fide sales. Same factors, different outcome. The differences between those two sets of contracts are a good map of what to look for in yours.
So what does the contract say about this? Is there any boilerplate language about a true sale? Is there something about the advance not being a loan? Many do. The CapCall contracts spent pages saying “this is a sale of receipts at fair market value, not a loan.” The court said that doesn’t actually make it a sale, and called those paragraphs self-serving and conclusory. When the parties call the deal a true sale, or a secured loan, that designation is not binding. The agreement can be a loan even if it says it is not. Still, the wording counts for something. The R&J Pizza agreements, on the other hand, kept calling it a sale and the parties seller and buyer, and didn’t give the funder any security interest.
That last point leads to the clause that probably matters most. Next, find the grant of a security interest. Then ask, “why?” CapCall’s agreements had giant “I own everything” clauses, giving it a security interest in all payments and general intangibles and even all the proceeds. The financing statements also covered the restaurants’ inventory, equipment and service marks. The court said if you’re a true purchaser, you should only have a protective security interest in the accounts you actually bought. If your agreement reaches past the receivables to your equipment, inventory or trademarks, it is written like a loan.
Then pull the UCC financing statement the funder filed against your business. CapCall even listed the company as a debtor rather than a seller on its UCC financing statements, even though the form has a seller/buyer checkbox. That’s an important detail. In R&J Pizza, the funder’s filing described the deal as a purchase and sale.
When the lender has a big personal guarantee, powers of attorney, and access to every bank account, it shows the transaction is more like a loan. In Shoot the Moon, CapCall had a broad personal guarantee of performance and payment. They also had a broad power of attorney and the right to take money from any of the company’s bank accounts. All of those protections, and the risk being placed on the company, made the court say “debtor-creditor.” R&J Pizza was the opposite. The lender can’t go after the debtor if it can’t collect, the debtor can’t buy it back, and the principal’s guarantee only covers lies, not credit risk. So read your guarantee for what it actually covers, and check whether the funder can debit any account you own or only the one your sales land in. Repurchase rights are weighed too, but no single one decides things. In Shoot the Moon, not having a repurchase clause helped the funder’s case, but it wasn’t enough to beat all the other factors.
A clean contract, on the other hand, can hold up even against an owner who tries to work around it. In R&J Pizza, the funder bought a slice of future card sales at a discount. No interest could be charged, no matter how long it took the funder to collect. After R&J filed for bankruptcy, they hired a different processor without telling the funder. Despite that, the court said the deals were true sales and R&J didn’t own any of the purchased receivables anymore. Tough break.
How You and the Funder Have Been Dealing
The paper is not the whole record, either. Another factor courts look at is how you and the funder have been dealing with each other over time. In Shoot the Moon, the funder and the company were corresponding by referring to loans, terms and balances. And the funder was rolling over the funds from one transaction into the next, and knew that the company commingled the funds. That only works in a loan because if it were a sale, the funder would have to keep buying and selling the next batch of receivables. In R&J Pizza, the merchant used a single, dedicated card processor and kept no right to collect or commingle the card receivables. Keep the history of communications between the funder and the owner, and know how your money actually moved.
Before You Settle
It’s never black and white. There’s rarely a situation where everything pulls in the same direction. So before you settle, look at everything in the contract - the description of the deal, the financing statement, the guarantee, the power of attorney, how payments are taken out, and how you talked with the funder. Those are the clauses that tell you how strong the funder’s position really is, and how much room you have to negotiate.
