Thank you for visiting Delancey Street. Our goal in this article is to give you the most complete, comprehensive guide on merchant cash advance debt relief.
At Delancey Street, we spend most of our time on the phone with business owners whose daily and weekly merchant cash advance payments have outpaced their revenue. These business owners are now struggling and looking for a solution, a permanent solution. The panic is real, but the problem is mechanical. It’s just a math equation: money in versus money out.
Now, let’s talk about what an MCA is. It’s a type of contract with specific pressure points due to the way in which it’s structured. And the relief comes from understanding those pressure points rather than hoping the funder becomes nice to you one day. This guide will explain how the mechanisms work, what leverage you have, and where the limits are.
What an MCA really is
First, let’s talk about what an MCA really is. An MCA is written as a purchase of future receivables. That’s the technical definition. It’s not a loan. That drafting choice is what sets the entire stage.
If a transaction is a true sale, the funder is taking real risk. There are traditional usury caps, which are generally not applied the way they would to a loan.
New York courts have developed a practical test which looks at whether the agreement contains a reconciliation privilege, whether there is a finite repayment term, and what happens if the merchant fails to repay it due to going out of business. That framework is a court interpretation. It’s not a statute, and it varies by state and by judge. There is some discretion on a case-by-case basis depending on your situation if this goes to court.
How the broker framed it as a loan
Now, let’s zoom out real quick. When you were introduced to an MCA, it’s likely the broker framed it as a loan. They usually use the term MCA loan, not MCA. Now, an MCA in its truest form is purchasing your receivables. If the business goes out of commission, you are not required to repay it. They’re essentially buying your future receivables, period.
The reconciliation clause in your MCA agreement
Almost every single MCA agreement is supposed to have a reconciliation clause. The reconciliation clause allows a business owner to ask the lender to adjust the fixed daily or weekly debits so it matches the agreed percentage of actual receipts. It exists because without it, the funder collects a fixed sum regardless of how your business is doing, which looks exactly like a loan.
How to request reconciliation in writing
For a struggling business, the reconciliation clause has an immediate practical consequence. If your business is struggling to keep up with the daily and weekly payments, you can request reconciliation in writing. You’ll be required to submit bank statements and processing reports, and you’ll have to follow the exact notice procedure that was written in your MCA contract when you signed it.
If the funder grants this MCA reconciliation, your daily or weekly debits will drop. If the funder ignores a properly made request, then that silence becomes evidence that they are not actually honoring the reconciliation clause, that they are in violation of their agreement, and in practical terms, the lender has defaulted on the MCA agreement. This also allows you to then try to reclassify this as a usurious loan in court if that day ever arrives.
At Delancey Street, we’ve actually announced a pre-default reconciliation program that was built on this very idea.
MCA disclosure laws in California and New York
Now, as we talk about MCA debt relief, there’s disclosure laws that have come into force. For example, two large states now force MCA funders to show their arithmetic before funding.
For example, in California, there’s regulations that cover sales-based financing, which requires lenders to disclose the funding provided, how much finance charges they’ve applied, the total payment amount, and an annual percentage rate. This was effective as of December 9th, 2022.
New York also created a similar commercial finance disclosure law, which took effect in 2023 and covers financings of $2.5 million or less.
These laws don’t cap the rates, and they don’t cancel the deals. What they do is create a paper record of what was promised. When we review a file at Delancey Street, we look at missing or inconsistent disclosure as a possible defense. This is a negotiating tactic. It tells a funder the file will be scrutinized if it ever reaches a judge, and this is what moves the settlement numbers in your favor when you’re looking at MCA debt relief.
What federal regulators have done
As we look at MCA debt relief, we also have to discuss what federal regulators have done. In the past, the FTC has obtained orders permanently banning MCA lenders and their principals from the MCA industry, with payments totaling in the millions. This is due to misrepresented terms and abusive collection conduct.
The relief paths in the order they get tested
Now, let’s talk about the relief paths in the order they get tested.
Modification is the first path
The first thing that comes to mind is modification. This is the cheapest and least destructive. Usually it means reconciliation, a temporary reduction, or a new payment schedule while the account is still current. For legal purposes, current really means you haven’t defaulted yet.
Funders sometimes agree because a performing merchant is worth more to them than someone who has defaulted. The tradeoff is that a modification usually extends the term, but it rarely reduces the total obligation. It’s buying you time without curing the actual issue at hand, which is the advance was too large to begin with, and your business does not have the margins to actually afford to repay it.
Settlement is the second pathway
Settlement is the second pathway, and normally it changes the relationship. When you’re negotiating a reduced lump sum or a structured payoff, it typically occurs because there’s a missed payment or a stopped payment, which means you are essentially accepting default. The consequences of defaulting are acceleration of the entire debt, collection calls, litigation, and pressure on whoever personally guaranteed the MCA.
The realistic question when contemplating default is not whether the default will hurt your business, but rather will the business generate more free cash flow by stopping the unsustainable daily and weekly debits.
Refinancing or consolidation is the third path
Refinancing or consolidation is the third path, and it’s the most misunderstood and misused. Often MCA brokers will call you and say they’re willing to refinance or consolidate your MCA debt, but usually this means replacing several advances with one larger advance and only extends the term temporarily.
The only time you should consider refinancing or consolidation, in our opinion, is if the new cost of the debt is genuinely lower and the old positions are actually paid off and their liens are released. Typically speaking, with MCAs, we rarely see this occur. Rolling the stacked advances into a new advance at a higher factor rate is not relief. In our opinion, it’s just deferring the debt.
The liens, the guarantees, and potential bankruptcy
Now, another factor to consider when contemplating MCA debt relief and settlement is the liens, the guarantees, and potential bankruptcy.
UCC-1 filings
Most MCAs are secured by UCC-1 filing, and stacked advances mean that there are several blanket filings claiming the same receivables. As every single MCA lender is going to file a UCC-1 filing. Typically, these UCC-1 filings will hinder your opportunity to get financing from other traditional lenders like an SBA or a term loan because of the priority of filings.
Personal guarantees
Another factor to consider when contemplating MCA debt relief is the personal guarantees that sit alongside these filings. When we’re talking about business debt settlement and MCA settlement, usually there’s two issues at once: the personal guarantee and the UCC filing.
Confession of judgment filings
Another item that comes into play is the confession of judgment practice, which has narrowed since New York restricted out-of-state filings. Unfortunately, though, many MCA lenders have resorted to switching states and have found other states that are willing to honor these confession of judgment filings.
Bankruptcy and Subchapter 5
Another backstop that you can possibly consider is bankruptcy. Subchapter 5 is the usual vehicle because it lets you keep equity while reorganizing the debt. The one issue is eligibility. The debt limit has reverted. And it determines who qualifies. Funders, for all practical purposes, are typically treated as creditors, despite the fact they bought your receivables, not issued you a loan.
Facts that change the outcome
There’s a few facts that really change the outcome when contemplating business debt relief.
- First, how much margin the business produces after the daily debits stop
- whether the reconciliation language is mandatory or discretionary
- whether the funder honored a documented reconciliation request
- and where the case could be potentially litigated
If you have weak documentation of a reconciliation request and you have thin margins, then it’s likely that early settlement will be the best option. If you have a clean reconciliation documented record and you have a real business with real revenue, then it gives you a stronger negotiating position.
MCA relief is a strategic choice
MCA relief is a strategic choice. Typically the first lever is going to be the reconciliation mechanism because it’s contractual rather than adversarial. Each contract has different disclosure statutes, and the recharacterization doctrine is what’s going to give you leverage.
Enforcement history has shown that regulators are policing conduct, but they’re not actually policing the pricing of these debts or whether they are legal or not. This decision matters when you’re choosing to stop a daily debit that the business cannot support, and that decision should be made against a cash flow model, the different leans on your business, and the exposure that you have from the personal guarantee.
