It is very common to believe that something needs to be done immediately when dealing with a merchant cash advance (or MCA) funder who is aggressively pulling funds from a business’ bank account. For most owners, the next thought is a lawyer, and the question is whether an attorney can make the daily ACH debits stop. Kevin Gilbert, EVP Credit Administration at AR Funding, says he’s often asked if merchant cash advances can help free up business cash during challenging times, and his response is always a resounding “no.” One of his firm’s clients shows why, and shows what happened when that owner tried to stop the withdrawals himself.
Gilbert’s client ran a Texas company that delivers and assembles furniture and equipment. The pandemic meant business was exploding with people trying to set up home offices. The owner started using invoice factoring in 2021 and for a while it gave him room to grow, but his clients constantly delayed their invoices for approval and the factoring company required proof of deliveries before he could get advance funds. So he took an MCA because he wanted cash now, without the hassle of waiting for his invoices to be approved. After 48 hours he had his money and paid a 35% factor rate.
An MCA is where you get a sum of money today in exchange for a portion of your projected sales down the road. It’s not the sales you are doing today, it’s what you’ll be doing tomorrow. Gilbert says the appeal of MCAs is the fact that they are easily accessible. There are no stringent credit requirements or collateral involved in most MCA transactions. A quick phone call will do. Owners say yes for a simple reason. They need cash and they need it now. It is not cheap but the application process is a breeze.
After a few months, the lure of the cash advances wore off. The MCA company was taking a sizeable chunk out of his bank account every month, even during slow sales months. He had signed the contract, but he just wasn’t aware of how much money was being taken out of his account. After just six months he couldn’t keep up with the payments, so the funder began pulling directly from his business bank account every day. His business was generating roughly $100,000 in sales per month, but the daily debits from the funder were too much. He shut down his bank account to prevent further withdrawals.
What was supposed to be a simple account closure turned into a nightmare. In response, the MCA company sued the owner and demanded full payment of a year’s worth of fees. They wrote legal letters to the people collecting money on behalf of the owner, telling them to start sending the money directly to the MCA company. It eventually cut off every source of working capital. It took a month to secure the funds to pay off the contract. The business was nearly lost.
MCA Contracts Are a Bit of a Mess
Gilbert wasn’t surprised. MCA contracts are a bit of a mess. They are full of hidden and unclear fees and fines. When AR Funding reviewed this client’s contract, it found 35% coming out of his sales, plus fees and penalties. Even with decades in finance, Gilbert says he has trouble following the terms. When the owner wakes up, it’s too late. The owner can’t afford to remain, and pays a severe penalty to exit. MCAs are not governed by the Truth in Lending Act, a law designed to protect consumers against misleading and unfair lending. If you are used to being protected under credit cards, you’ll be shocked.
So, can a lawyer stop the debits? Sometimes owners who have daily debits under an MCA decide they want to make one move and have the debits stop. In this case, the move the owner made was closing his bank account. It didn’t work. The funder sued and chased funds owed to him by other firms. Nothing in Gilbert’s account shows a lawyer switching the withdrawals off once they had started; what finally ended them was paying off the contract. The takeaway from Gilbert’s case is this: get legal advice before signing. The contract is really complex and filled with all kinds of hidden costs and penalties. Once you sign, to get out of the contract you have to pay a huge penalty. That’s why it’s best to have a lawyer read the contract before you sign.
If a funder has already filed suit, as this one did, you may need a lawyer of your own. We’re not a law firm. If your situation requires litigation or bankruptcy, we connect you to an independent attorney who we know and trust. You’ll form an attorney-client relationship with that attorney.
If you are not there yet, the choice in front of you is different. Our senior business debt advisors negotiate with MCA funders and lenders on your behalf to accept a sum less than the total amount owed. We do not offer a new loan.
And if you have not signed yet, Gilbert’s advice is worth slowing down for. Don’t sign anything unless you really understand the contract. These deals are complicated, and the fine print is loaded with fees and penalties. Ask for legal advice before you sign. Take a step back. An MCA is often a reaction to a time-sensitive cash crunch. But don’t rush into this deal just yet. Try to find another funding source, like invoice factoring, inventory financing, or purchase order financing. If you really have to take one, recognize that you’ll probably have high factor rates and fees, and plan accordingly. In Gilbert’s words, MCAs should be a last resort.
If the debits are already running and you want to know where you stand, call us. Your first consultation is free and confidential. If we don’t think you can win your case, or we can find a cheaper alternative, we will tell you right on the phone.
