Your clients haven’t paid their invoices yet, but the merchant cash advance you took out is still demanding its money. What can you do? So the days keep rolling. The payments continue to hit your checking account even as your accounts receivable pile up. Your cash flow gets tight. Maybe even desperate.
What you need to know is that your recourse is probably in a contract provision that you signed (and didn’t read). A merchant cash advance isn’t a loan - it’s a purchase of future receivables. That means you’re selling a portion of your incoming revenue to get cash upfront. Say an MCA company buys $50,000 worth of your future receivables and funds you $37,500 for them. There are no monthly payments, just a daily or weekly percentage of your earnings that gets applied. (Some contracts use a fixed daily amount instead, estimated to match that percentage.) In theory, that is good news when clients pay late. And if they’re not paying you, they’re not paying the MCA company either. The reason they buy receivables is so they collect when you do. This means that your MCA company actually collects less money under the contract in the event of a downturn.
But a fixed debit does not shrink on its own because an invoice is sitting unpaid. That type of fixed payment schedule can seriously magnify the stress of a sudden cash crunch. That’s when you must carefully review your contract and see what recourse you have.
Without a Loan, There’s No Usury
The reason the contract has to bend is legal. An advance becomes a loan when it becomes unconditionally repayable. That means if the contract says that repayment is contingent upon the merchant receiving payments from their customers, it’s not a loan. And without a loan, there’s no usury. The flip side is just as important. If the MCA company still expects you to pay even if the business failed, it was a loan, not a purchase of future receivables. And then it would be subject to usury laws. So an MCA buys your receivables only to the extent your business actually generates them, and in theory the funder takes the loss when they never arrive.
The Reconciliation Clause
The provision that does this is the reconciliation clause, also called a re-adjustment, true-up or look back clause. Once you notify the funder that your daily or weekly revenues have declined, it is contractually obligated to adjust the payment downward to track them at the percentage in the contract. Reconciliation clauses in MCA contracts vary. Some say there is no payment schedule or deadline at all and that going out of business is not, by itself, a breach; others let the funder adjust remittances after a look back period. While you wait on your clients, you will want to invoke the clause to have your payments adjusted downward so that they “reconcile” with your business’ actual revenues. This clause allows you to tell the MCA company that they aren’t collecting the amount they expected - because you aren’t collecting it. If your clients aren’t paying you, then your MCA payments should come down too. It’s a double-edged sword: Your receivables may not be paying out, but at least your MCA payments are adjusting downward. In the meantime, that gives you more breathing room and preserves your working capital.
This sounds great on the surface. But, there’s a catch. When a company finds itself in financial difficulties, it calls the MCA company to say revenues are down. The funder may even say that a lower payment can be considered. What happens in most cases is that the MCA company never requests an accounting of the merchant’s actual revenues. Think about it - when MCA buyers adjust the payment amount, how did they get the new daily payment figure? How did they know what it should be?
Court rulings show why this matters. In TVT Capital v. Epazz, a federal judge in the Southern District of New York held that the agreement was not a loan. TVT was entitled to 15% of Epazz’s daily receivables, and if Epazz’s sales declined or stopped, the purchased amount might never be paid in full. Because of reconciliation language like this, courts have consistently found that MCAs are not usurious loans. But Epazz never alleged that TVT had denied a request to reconcile the payments. That is the key.
Request a Reconciliation
If you aren’t receiving money from your clients, the MCA company’s mandate is to adjust the payment. If you set and forget it, that might just not happen. So if your mca contract has a reconciliation clause and revenues have gone down, you can write your mca firm and ask for it to be adjusted. Maybe they’ll do it. But it’s a good idea to at least ask. And get the funder to agree to your request by email so you will have documentation. Better still, draft a change in circumstances letter to notify your MCA provider of reduced revenues and request a reconciliation, then submit your current financial statements to the mca company to request they make the necessary adjustment. If the funder makes a promise, it should be reduced to writing. Skipping this step badly weakens your legal position.
When a funder declines to make an adjustment, the business’s cash flow situation goes down the rathole in double time. But a refusal also changes your legal footing. If they refuse to look at your current financials and determine a lower daily or weekly debit amount to correspond to your actual percentages of receivables, it may be reasonable to assume that the payment terms were never conditional on receivables, and that you have a usurious loan. If so, it may be unenforceable too.
That’s why it’s a good idea to take a close look at the contract. Courts treat certain terms as signs of a real purchase:
- if receivables decline because of adverse conditions such as a lost location, a natural disaster or a pandemic, the funder suffers the loss;
- bankruptcy is not a default; and
- the owner guarantees the business will not breach its covenants but does not unconditionally guarantee repayment.
Read your contract and understand it. And keep your eyes open to what it means. There’s an agreement term that can save the day when clients fail to pay and your accounting is in crisis mode. Act before you run out of days, and you may be able to keep your business afloat. Gather your most recent financial records, contact your funder, and request a look back or reconciliation before you default. If the funder will not adjust, you may have a strong defense, and that is worth discussing with an attorney and with a debt settlement firm before the next debit hits.
