Settling an MCA can get tricky depending on the nature of your deal, your stage of default, and your lender’s attitude. Your deal was “syndicated,” you’re told. Don’t worry about all the jargon. Whether or not that’s happened, settling means negotiating with your creditors to get your MCA, and any other balances you owe them, reduced to an amount you can pay - less than the total amount. No matter how many people or entities have a piece of your deal, you’re settling with your creditors. The three factors that determine how a settlement will play out are whether you’ve defaulted, whether you’ve been sued, and whether you have a lawyer. In this post, we’ll break down what happens when you default, your options before default, and the settlement process.
One of the first things that often happens when you stop paying an MCA is the funder files a lawsuit. They will typically sue you on the debt, meaning they are asking a judge for an order to get a money judgment against your business and against you personally. The funder will file a summons and a complaint (the document laying out their claim), and you will be given 20 or 30 days to respond depending on whether you are in or outside of the state in which the lawsuit was filed. If you miss this deadline, a default judgment can be entered against you almost immediately. Ignoring a lawsuit is a bad idea. Once you have a judgment, you can no longer dispute the underlying debt. The funder can then seize your assets, levy your bank accounts, and garnish your wages.
More aggressive funders will attempt to freeze your personal and business bank accounts as soon as they are able to after the default. They will reach out to your vendors, brokers, merchant processors, and will falsely tell them that they have a superior UCC lien and that the processor should make payments directly to them. They might also mess with your payroll company. This can devastate your business and result in the permanent closure of your business. There are businesses that fall apart because a funder threatens their vendor.
Before you consider defaulting on your debt, you might want to explore other options by starting with your books. Look inside your own business for ways to ease financial pressure. You will likely find simple ways to tighten expenses within the business itself. Review your monthly spend and trim any unnecessary costs, you could pay to rent equipment, rather than buying it outright. But is it worth sending your work abroad to lower labor costs? Can you swap your costly phone system for a cheaper VOIP one? Carefully evaluate the cost versus benefit of each expense and expense item, and then cut what you can. Put as much money as you can toward paying the existing debt, beginning with the highest interest loans first.
Before you default, spend a day looking into alternative financing. Look for a deal with better terms than you have now. Some lenders consolidate MCAs over a much longer term. They will usually charge an interest rate that is still well above what most states allow for a regular loan, but it can take your daily payments down. See if you qualify for an SBA loan (these are usually pretty fair with regards to rates and terms). A factoring company might be able to replace your MCAs. It’s also possible to get another MCA with better terms to pay off the other MCAs. We don’t recommend this.
How are things going with your suppliers? What about your brokers? If you’re using brokers, what are your terms with them? Call up and see if you can cut a new deal. Cutting costs will also help you pay what you owe. If you have cut all the costs and you still can’t afford to pay, it’s time to bring in a reputable organization to help. There are various types of restructuring programs.
Consolidation is similar to consolidating personal loans. If you consolidate MCAs, the goal is to take out a loan and use it to pay all your advances. In theory, the new loan lowers your rate or extends your term, which lowers your daily, weekly, or monthly payments. In reality, junk fees and hidden fees often mean it really just appears you’re getting help, when you’re left with the same or a similar debt.
Reverse consolidation is when a company gives you a loan to cover the daily payments to your MCAs. You pay them an average of 20-25% less than you’d be paying your funders, so you have more cash flow, and pay them until you pay off the MCAs. They extend your term and you pay until you cover their fee, so the debt ends up costing you more.
Settlement is negotiating your debt down to less than you owe with your creditors; when it’s done right it can work very well. One thing you need to know if you default on debt: prepare to get sued. A common story involves people whose settlement or debt consolidation company told them not to contact their creditors and then did practically nothing else; that’s a big mistake. Those people fall behind, and they ignore every phone call they get, just like they were told. Then they get sued, the business and the owner personally. Now they have to answer the suit in court, but that takes a lawyer, and the company they’re working with doesn’t have lawyers on its staff, so now they have to go find a law firm to represent them, which is what should have happened from the start.
A person can appear in court without a lawyer (a person appearing on their own is called “pro se”). But a business entity can’t speak for itself in court. In other words, if your business wants to fight a lawsuit, you’ve got to hire a lawyer. And if you’re in the process of settling the debt with anyone who’s not a law firm, make sure to have a lawyer involved before you get a summons.
Bottom line: whether or not this has gotten syndicated, the clock starts ticking with the default. Act early, reduce costs, consider your options, and get the right help.
