A merchant cash advance is often the last resort for a small business when an SBA loan or any other business loan is out of reach. MCAs are known for their quick approval process and minimal paperwork, making them an attractive option for businesses that need fast cash. Then the daily debits started, and you quickly realized things weren’t going to plan. It can be a slippery slope into a debt spiral. So, what should you prepare before meeting with an MCA lawyer?
Before seeking legal help, it’s imperative to conduct a thorough assessment of your MCA debt. This involves a detailed examination of your outstanding balances, repayment terms, and any additional fees associated with the MCA agreement. Doing this helps you understand the total amount owed.
The single most important thing to bring is the agreement itself, every page, including any addendum you signed later. These contracts are complex, and legal help is crucial. They are not standardized, and the rules for default can change from contract to contract and they can be quite different. Gather all relevant documentation related to your MCA, including the original contract, any amendments, and communication records with the MCA provider. These documents are essential for the lawyer to analyze your case and provide the best possible legal advice. Additionally, gather any documents related to payments made under the MCA terms. This includes bank statements, payment receipts, or records of debits taken from your business’s account. By doing this, you will have a clear picture of your financial situation regarding the MCA. This information is vital in preparing for a productive meeting with an MCA lawyer. If you’ve received a letter from a collections agency, bring that as well.
Next, find out exactly what you signed besides the agreement. Did you sign a personal guaranty? Did you sign a confession of judgment? If you did, bring that along to the meeting. The collector may go after your business assets and, if you signed a personal guarantee, your personal assets as well. If you signed a confession of judgment, it can get a judgment against you without you ever knowing. New York recently made it illegal to use confessions of judgment against out-of-state borrowers. If you are not familiar with these terms, don’t worry. Your MCA lawyer will know what they are, and you can ask your lawyer to explain them to you. The advance company will want to attach your business’ bank accounts to get paid, so it’s important for the lawyer to know who the account is in, how many there are, and how much control you have over them.
It also helps to do the math before the meeting. If you work out what the advance really costs you as an interest rate, you may find numbers that really surprise you. Many of these transactions cost more than 100% interest, and a good MCA attorney is essential here as the fees are usually disguised and it takes some work to really uncover how costly this money really was.
Those numbers matter because of usury. Charging interest over 25% means a New York loan is criminal usury. If you can prove that, the whole deal falls apart and you owe nothing in interest or principal. The question the MCA lawyer needs to explore is whether that defense makes sense or even possible. But many NY courts say a merchant cash advance is just a purchase of future receivables, not a loan, so usury doesn’t apply. What decides it is whether repayment is absolute or contingent. Does the funder carry the risk that your business goes down and there is nothing to collect, or does the business still have to pay back its advance even if its revenues vanish?
Here are the three factors a court has listed that should be included in an MCA contract to prevent it from being deemed a usurious loan:
- there is a reconciliation provision that allows the merchant to adjust fixed daily ACH payments to its actual daily receipts (yep),
- there is an indefinite contract term (yep), and
- the MCA provider has recourse in the event of the merchant’s bankruptcy (nope).
In other words, the answers you want are yes, yes and no. Mark each one in your own contract before the meeting. Smart funders now draft their agreements with all three in place, but not every funder is skilled, and other protections they add for themselves can convince a court the deal is really a loan. That is why every agreement has to be analyzed.
Even a reconciliation clause that exists on paper may not count. In McNider Marine, LLC v. Yellowstone Capital, LLC, the merchant could ask for reconciliation only within five business days after the end of a calendar month. It defaulted on December 16, 2016. Yellowstone filed for a judgment by confession on December 22, 2016 and obtained it on December 28, 2016. The court found the reconciliation provisions illusory and held that the agreement was a loan with a criminally usurious interest rate in excess of 285%. So if you ever asked your funder to reconcile, bring the request and the answer. Understanding the details of your MCA deal is crucial to navigating the legal process effectively. Without a comprehensive understanding of the terms, you may inadvertently agree to unfavorable conditions or fail to identify potential legal issues in your contract.
Finally, write down how the funder and its collectors have treated you since things went wrong. Predatory lenders may attempt to pressure merchants and their customers into paying the lenders directly, despite the fact that they may not have properly entered the judgment in the merchant’s home state, and therefore, have no right to demand the direct payment. Lenders may also attempt to enforce an agreement beyond its terms, and freeze the business. If you know that this has happened, bring evidence of that too. Reviewing these documents will help you understand the extent of your obligations and any actions taken by the funder.
None of this means you should work out the answer on your own. Bring a list of questions you have about your situation and what you are hoping to resolve. Having clear and focused questions will ensure that you cover all the necessary aspects during your meeting with an MCA lawyer and help you get the most out of the consultation. Be prepared to clearly and concisely communicate your financial situation and the circumstances surrounding your MCA debt. Explain how the MCA was used, your repayment capacity, and any other relevant factors that might impact the legal resolution of your debt. Remember, the goal is not just to assemble documents, but to gain a comprehensive understanding of your MCA debt. This knowledge is key when discussing your case with an MCA lawyer. The more detailed and thorough your understanding of your debt situation is, the better equipped you and your lawyer will be to strategize and negotiate a favorable resolution to your MCA debt. The better prepared you are, the more effective you’ll be with your lawyer’s time.
