It can be scary trying to deal with an MCA lender who refuses to lower your payments. And justifiably so! Your cash flow is down, but the contract still demands daily pulls that could hurt you if you cannot afford them. But a refusal is rarely the last word. If your funder refuses to lower your payments, then you can negotiate. You can do it directly, and you likely have more leverage than you think. Read on to find out your options.
How did it get this bad? For most owners, the story goes like this. The original funder continues to take its debits, revenues begin to fall, and the owner tries to borrow again, taking a second advance from another funder, which always ends up as a desperate attempt to cover the old one. This is called stacking. It almost never works, and pretty soon the business is on life support. Every new advance increases the amount owed while stacking drains cash flow, and suddenly you’re staring down a stack of debits that the business just can’t afford.
Merchant Cash Advance
A Merchant Cash Advance is actually a purchase of future receivables. The business essentially sells some of its future sales to the funder to get upfront cash. In buying those receivables, the funder also took on a risk: if you have a bad month and don’t collect as much credit card income, the funder won’t be repaid as much as expected. That risk is the basis of your right to a reconciliation, also called a true-up.
Say your bank statements showed $100,000 a month in revenue when the advance was funded, and the agreement gives the funder 10% of future revenue. It would seem that you would need to pay $10,000/month until you are paid off. Now suppose that two or three months in, with no default, revenue has fallen to an average of $60,000 a month. Having executed the funding agreement based on a high average of $100,000 a month, you are entitled to a reduction in payments to match the lower average of $60,000. A genuine purchaser of receivables will drop the payment to $6,000. If the lender refuses to lower your repayment rate, you may have a legal claim against the funder, and they are likely not a true receivables funder.
Call the Funder
We tell people to get on the phone, call the funder and explain the issue. Do not just sit and stew. Ideally, do it before you default. An MCA funder wants to get in and out of deals quickly, because the faster it gets its capital back, the faster it can enter the next one. Much of that money belongs to investors or the funder’s owners themselves, so any default has a very personal impact, and the funder panics when a merchant suddenly goes quiet. But if the merchant communicates that they need some relief because of the current business situation, this can change the funder’s attitude. That contact means the funder sees the merchant as attempting to repay the advance. So it is understandable that the primary concern for an MCA funder is protecting their investment, in its entirety. Avoiding default is in the funder’s interest, too. So there’s a legitimate incentive to negotiate.
A funder that is not assuming the worst is less likely to put a UCC lien on your business or file a lawsuit against you. Very often the file gets moved out of the legal department and handed to a negotiator or collector. Most importantly, the funder can make a deal, and a deal with a friend is always better than a deal with an enemy.
Stipulation of Settlement
If a true-up is off the table, the goal is a settlement, usually written up in a document called a Stipulation of Settlement. You can get there through negotiation, mediation, arbitration or litigation, or some mix of them. There are three common structures. If you are unable to negotiate a lower payment amount with a merchant cash advance lender, you can explore other options such as a consolidation loan. Consolidation loans, such as an SBA loan or a loan from an FDIC bank, allow businesses to pay off multiple funding positions at once, consolidating them into a single loan. You can always request a lower payment and more time to pay. Strictly speaking, a legal MCA isn’t supposed to have a specific number of days to pay or a hard schedule, but getting an extension stops the daily ACH debits and caps one final payout that won’t continue to inflate with legal fees and interest. Once it hits that amount, the agreement is satisfied. The third is to offer a settlement in one lump sum, if you have come into the funds, as a full and final payoff.
Whichever route you take, make the settlement comprehensive, so it covers every claim the funder has made against you and the business, and have an MCA debt defense attorney review the Stipulation of Settlement so you don’t agree to anything you don’t want to agree to. You don’t have to hire a lawyer to negotiate with an MCA lender. But a lawyer who specializes in MCA debt relief has negotiated with these funders before, often knows the legal department by name, and can point to prior cases. If you are being sued for defaulting, it is highly recommended that you seek legal counsel. In New York, a business owner can’t represent the company in court—the company needs its own lawyer.
Documented communication is key when dealing with loan repayment issues. If you communicate via email, make sure to mark it as urgent. When speaking with someone over the phone, it’s crucial to send a follow-up email that outlines the conversation that took place. Having everything written down is essential. In court, he said, she said will lose you every time. An email will not. Good records also head off miscommunications and defaults, and they will create an important paper trail that can help you throughout the whole process.
MCA lawsuits should not be taken lightly but they are not the end of the world either. Court is stressful, costly and slow, so try negotiation first. When the funder says no, do not go quiet. Know your rights, ask for a true-up if your revenue has fallen, and if that fails, push for a settlement.
