Short answer: sooner than most owners think. The right time to bring in a third party like a merchant cash advance loan restructuring attorney is while you still have room to negotiate with your funder or lender. But if you’re starting to lose sleep, or if you’re days behind on payments, or if the daily debits are ruining your cash flow, then you’re already in serious trouble and should definitely get help as soon as possible.
To see why waiting hurts, look at how these deals work. A merchant cash advance, traditionally speaking, is basically an advanced purchase of a business’s credit card sales. In exchange for an immediate lump sum, the business agrees to forfeit a percentage of their card sales until the advance plus any fees is collected. Daily/weekly deductions are made from credit card transactions based on an agreed upon holdback percentage, usually between 10% and 20%. The hassle is in the daily withdrawals and the impact on cash flow, since any business relying on the MCA for working capital will need some extra reserves to keep the lights on. Which is why when the company hits a rough patch in the sales department the business is in big trouble.
And the speed with which these contracts are enacted by many businesses is nothing short of horrifying. The faster you take it, the more likely it is that the business is desperately in need of the funds. Approval and funding often take just 24 to 48 hours, and few owners stop to price what they are buying. On top of that, these advances are very expensive; underwriting, application and administrative fees can drive the effective APR to more than 350%, making MCAs some of the most costly forms of financing on the market.
Because they are generally not treated as loans, state or federal usury and lending laws don’t apply, which means there are no applicable interest rate caps or other consumer protections. They also don’t legally fit in any well-defined category of financing, so MCAs simply don’t come with the same legal protections that other products like loans or credit cards do. With no industry-wide regulation, MCA funders can set up deals pretty much however they like. That picture is shifting. The Uniform Commercial Code and some state transparency laws already apply, recent federal rulings suggest an MCA may be classified as a loan under certain conditions, which would bring anti-usury laws into play, and the Consumer Financial Protection Bureau has classified these advances as credit. So if you think your MCA paperwork is airtight, consider how it would stand up if a judge called it a loan.
Before You Sign
That is the first moment to bring in a lawyer: before you sign. The onus is on the business to read the fine print and make sure they understand the product and the agreement. Watch for daily or weekly payments that are excessively high, a contract the funder never countersigned, a demand for your business bank account passwords, and clauses that allow your assets to be seized if repayment terms are not met. Of course, every contract is different and offers varying terms and leniency, and you’ll want to have a professional look them over so you know how bad the deal is. As always, going for the short-term, easy money now could lead you into a financial drought in the near future. But every business has its “point of no return,” the last good time to say no.
When Sales Start to Slip
The second moment comes when sales start to slip. Plenty of owners go quiet at this stage and hope the funder won’t notice. That is a mistake. Telling the funder about a decline in revenue may help you negotiate more favorable payment terms. Silence, by contrast, can weaken your legal position and complicate any later request for a payment adjustment, and some MCA contracts specifically let you ask for a change to the schedule when revenues fall. So communicate the change. Better yet, don’t do it alone. What you need is an attorney - someone who understands these types of deals - who can contact the funder on your behalf and assess your situation. A good restructuring lawyer will go to bat for you with the funder and try to work out new terms that account for the drop. If the funder ignores your outreach or your payments continue to fall, you’re going to need to speak with your lawyer and ask for advice immediately. Once the payment problems begin, everything else breaks down.
The Funder Begins to Take Aggressive Action
The third moment leaves no room for waiting. If the funder is harassing you, if you are in a dispute over the contract, if you have been sued or your accounts are being garnished, or if the funder is attempting to come after your business assets, it’s time to seek legal assistance. Waiting to see if the legal hit will slow down or stop just means you could lose more money. If you find yourself in this situation, immediately retain a qualified MCA restructuring lawyer who can protect your interests. Time is your enemy here. Your lawyer will discuss your rights and make sure you handle the situation appropriately to minimize losses. At the very least you should know your rights, and it is hard to protect your rights if you don’t know what those rights are.
So, back to the question in the title. The first right time to hire an attorney is before you sign your contract; the second, when you notice a drop in revenue; the third, immediately after the funder begins to take aggressive action. The first is prevention; the second is damage control; the third, rectification. If you feel comfortable with the terms, and if the business can afford the daily or weekly debits, and if you are making the payments on time, then… it’s too early for you to start fretting. But if you are starting to struggle, then my advice is: get into conversation with us or someone like us as soon as possible.
