You run a security guard company. You’re stuck with a Merchant Cash Advance (MCA), and the funder pulls money out of your bank account every day. That same account covers your guards’ paychecks and your client contracts. Can you get MCA debt relief without losing both contracts and payroll? The honest answer? It depends. There’s no guarantee, but there are ways.
A merchant cash advance (MCA) is when a funding company buys your company’s future accounts receivable in exchange for a lump sum. The business owner can use that lump sum like a short-term loan, but legally it may not be considered one. It’s considered a sale. MCAs are to businesses like payday loans are to consumers, a small amount of cash advanced against future earnings. A payday loan is repaid with the next paycheck, while an MCA is repaid through daily withdrawals from the merchant’s bank account.
For some businesses, that daily structure is hard to keep up with. Contractors and other service providers rely on periodic payments, and depending on the job or the client, it can take 30 to 60 days from when the service is rendered until the funds land in the bank. The MCA funder takes his money out every day. Without daily income, daily withdrawals can quickly put even a successful small business under severe financial strain.
If you’re a security guard firm, your clients may pay you periodically like contractors, resulting in 30-60 days in receivables. But you still have to pay your guards. And the MCA debit comes out of your checking account daily. That’s how firms with good contracts end up choosing between the funder and the payroll.
And skipping the funder is not a safe way out. In most cases, if the merchant does not keep enough cash in the account to cover the funder’s payment, they are automatically in default and required to repay the whole debt immediately. Funders have little sympathy even if the business has generated enough future receivables to pay off the debt. The day you miss a payment is the day you default.
Impact of the Dodd-Frank Act
Why do so many owners end up in these deals at all? After the 2008 recession Congress passed the Dodd-Frank Act in 2010 to prevent risky lending and established the Consumer Financial Protection Bureau. The reforms did real good. Yet, as a ripple effect of these improvements, a new wave of exploitation has emerged. Small businesses don’t enjoy the same privileges large corporations do when it comes to accessing commercial and industrial (C&I) loans from banks.
Data on the impact of the Dodd-Frank Act on small business lending was released in a 2018 working paper by Michael D. Bord and John V. Duca, of the National Bureau of Economic Research, The Impact of the Dodd-Frank Act on Small Businesses. The authors found that compliance costs reduced banks’ incentive to make very modest loans. As a result, the share of small loans in commercial and industrial lending at large banks fell 9 percentage points since 2010, and the decline was twice as large at small banks. Almost all of that drop is statistically attributed to the change in regulation.
The need for short-term debt among small businesses didn’t go away when bank access did. Even Amazon and Microsoft use short-term debt. Owners who are underserved and sometimes desperate go to alternative funders who are not regulated by Dodd-Frank. Scarcity coupled with legal loopholes led to unscrupulous lenders and the merchant cash advance.
CapCall LLC V. Foster
In September 2021, the U.S. Bankruptcy Court in Montana ruled in CapCall LLC v. Foster (In re Shoot the Moon LLC). CapCall, a New York-based MCA lender, petitioned the court for an order to determine that it owned $228,449.93 of segregated funds in the bankruptcy estate of Shoot the Moon, LLC. If the court agreed, CapCall would get paid ahead of other creditors, which mattered because the proceeds from the sale of the business assets were a lot less than what the senior secured creditors were owed.
Here’s the question: Were the transactions sales or loans? CapCall said sales; Foster said loans. If they were sales, CapCall owned the receivables, and they got paid first. If they were loans, CapCall held only a security interest, which is junior to other creditors’ liens. Then, under section 506(d) of the Bankruptcy Code, if the senior lienholders’ claims exceed the collateral’s value, the junior creditor has an unsecured claim and no enforceable lien, so CapCall gets zero.
There’s a saying: If something looks like a duck, swims like a duck and quacks like a duck, it’s probably a duck. Judge Whitman L. Holt compared how CapCall labeled the deal on paper with how it actually worked in the real world, and he decided it was too much like a loan to be considered a true sale. He also ruled CapCall violated Montana’s usury laws and had no ownership over the bankruptcy estate.
What did the ruling mean? One case won’t create wholesale change in the MCA industry, but it is the first legal victory for victims of MCAs. It is a crack in the traditional way MCAs are viewed under law. It’s an area to watch. How an MCA is classified, sale or loan, can be a very important thing for an owner deep in this debt.
Delancey Street
We’re Delancey Street, a business debt settlement company located in New York City. Our debt settlement firm is attorney-founded, started by debt relief professionals and former merchant cash advance industry executives. We help businesses with MCA debt, including stacked advances. Our senior advisors negotiate with funders for less than the full balance due. We do not try to sell you another loan. We are not a law firm, though. When the right answer is litigation or bankruptcy, we recommend a vetted independent attorney, like bankruptcy counsel for Subchapter V. Our fee is one percentage of the total enrolled debt, quoted in writing before we start. First consultation is free and confidential. We tell you right away if your case can’t be won, or if there’s a cheaper option.
Nobody can promise that your MCA debt relief can keep your guard contracts and payroll intact. But with daily debits, the day you miss a payment is the day you default, so waiting is the riskiest choice. The sale-versus-loan question shows MCA debt is not always what the contract says it is. Talk to someone before the account runs dry.
