Most small business owners know that cash is king. Sooner or later, something happens that cuts into sales or increases expenses. When a bank isn’t an option, a merchant cash advance often is, and as MCAs have spread, so have the companies offering to negotiate MCA terms for you. So can MCA debt assistance services actually keep you from defaulting? They can, in the right circumstances. They can also lead to you losing more money. If you are weighing one, understanding how MCAs work is a good place to start.
A Purchase of the Merchant’s Future Receivables
An MCA allows a business to receive a lump sum of cash in exchange for a set amount of its future receivables. The merchant cash advance is not a loan, but rather a purchase of the merchant’s future receivables. Funders usually decide how much you can get by looking at how much your company took in over the last few months, based on its bank statements. It is important to note that an MCA is often easier to get than a business loan. They are a common way for small businesses to get funding when they don’t qualify for traditional loans. That includes businesses in industries banks are hesitant to lend to, such as cannabis, and contractors like plumbers, electricians and HVAC outfits that need money quickly to finish a project. The market is competitive, and merchants can get a MCA in as little as 24 hours.
Companies typically pay the MCA back by giving a portion of their daily and weekly receipts to the funder. The risk the funder carries is that if the business fails, there’s not a thing the provider can do to get the money back. And for an MCA agreement to be legal and enforceable, filing for bankruptcy cannot count as an act of default under it.
When a business has more than one MCA at the same time, the funders run up against each other for access to the company’s cash flow. Advances like these are called “stacked,” and to a funder stacking is a red flag that a business is in financial distress. Many businesses are facing this situation, and as they have become more common, the industry of debt assistance has taken root to help them. Some call themselves “debt consolidation” services, others “business debt experts,” and many suggest you can reduce or even eliminate your MCA payments. They say they will save you money or get you out of debt, but you need to be careful and think through what these promises really mean, as they can come at a cost.
Debt Consolidation Service
In most cases the arrangement works like this. Instead of paying the MCA, you pay someone else - the merchant cash advance debt consolidation company. The payment is usually a smaller monthly one. In the meantime, the MCA payments you were making are now withheld and given to the debt assistance company. You still owe the debt, but now you’re paying less and laying down more risk. Put plainly, you are breaching the agreement, and hoping that the company can negotiate a better deal.
The debt relief company then holds onto the money, usually in something like an escrow account, and after reaching a certain amount, negotiates with the provider. But it means you aren’t paying your agreement with the MCA provider and exposing yourself to default. And there’s no guarantee the company will be able to make a deal. If the funder agrees to take less than it was owed, things generally work out for everyone. The goal for everyone involved is to find a payment arrangement that works for the business.
The problem comes when the funder refuses to negotiate. When that happens, they sue to collect the debt and you are in legal trouble. Your original agreement is still in place and can be enforced. The suit is for breach of contract, and look at where it leaves you: not only has the business defaulted on its agreement with the funder, but it has been paying a lower monthly fee to a debt consolidation service. For a business that is still short on cash, that can mean paying twice: first the lower payment to the debt assistance company, and then the original agreement. If the funder is the winning party in the lawsuit, it will get what it is owed under the MCA contract.
To deal with this, some debt relief companies now offer third-party lawyers to defend you in court. The trouble is that these attorneys often file the same boilerplate pleadings and discovery responses in every case, without much regard for whether they actually apply to your situation. Defenses need to be individualized. Boilerplate defenses usually fail, and when they do, the merchant can be held liable for everything that was owed in the original agreement plus attorney’s fees and costs. That typically means the full amount of future receivables, along with various default and NSF fees. This risk means that debt relief services can actually put businesses in a worse position than before.
Before you sign with a debt relief company, ask some hard questions. First, find out what the process is and how they actually try to settle or reduce the payment. Look for how they spend the money they take from you, whether in an escrow account or somewhere else. Second, understand the risks of default. How will they protect you if the funder decides to sue? Do they have legal representation for you? How are those attorneys going to defend you, and have they had success defending people in similar situations? These are all fair questions you should ask before taking on debt relief. Ask, too: how much money will I owe the funder if we fail to negotiate a settlement? If you get vague answers, or someone who wants to sign a contract right away, run. Finally, know your own finances. Do not sign a contract if you cannot keep up with the payments. You must be disciplined and ensure that the monthly payment is something your business can actually afford. Just because you can stop paying the MCA to its provider does not mean the debt is gone. You are still liable for it, and if the funder sues, you could face legal action for all the amounts due.
So, can MCA debt assistance actually help you avoid default? It can. When a funder is willing to settle, a business can come out with an obligation it can actually carry. But if you are not careful, a service that promises to save you money could end up costing you a lot more. Because the usual approach starts with you stopping payments to the funder, it means you may actually be increasing the risk of default and owing more money in the end. What matters is not the name of the company offering the assistance, but understanding what it actually costs you. These arrangements are risky, and you can end up paying more money while losing time and confidence in your business. Most importantly, know the terms of your MCA agreement and your financial situation. Talk to experienced legal counsel before you sign anything. You need to weigh the risks and understand the process before agreeing to any payment arrangements. But by asking questions, understanding the risks, and knowing your own finances, you can stay ahead of the game and minimize the risks you face.
