Are you currently facing a situation where your bank account is being completely depleted because of daily debits and your business is losing money? If the debits belong to a merchant cash advance, you are not imagining the connection. Overdrafts can happen pretty easily. Basically you have two payments in the pipeline: the deposits from your customers, and the regular debits from your cash advance contract. One flows into your account, and the other flows out. If your creditors can preauthorize withdrawals directly from your account, then your cash flow is out of your hands.
MCA payments are a daily debit. That means they’re automatically pulled from the account. So why do cash advance payments cause overdrafts? There are a couple reasons, really. First, your deposits may not have enough money in them to cover the withdrawal. Second, the money might be there, but may have been earmarked for other bills or expenses. Maybe it’s a payroll, or a rent payment. The debit comes out anyway.
Here is what that looks like in real numbers. Doug and Janelle Duncan ran a Re/Max real estate agency in Florida. They took an advance of $36,762. They paid it back in $800 a day debits out of their checking account, beginning the day after they received the money. Over about three months, those debits were set to add up to $59,960. The annualized interest rate was more than 350 percent. $800 a day, every day. Simple math shows the awful truth: while you’re getting paid for the day, the MCA is getting paid first. And that deposit might not be enough. That’s a lot of money coming out of that business account, which you know as a business owner (and especially a small business owner) comes in and goes out pretty quickly.
When the debits start bouncing, a lot of owners take a second advance from a different company to cover the shortfall. But that is not a fix, and it makes the problem worse. Sooner or later, both MCAs will start to bounce, causing further hardship. Then they take a third. And a fourth. And so on. It’s an airtight trap, it’s a vicious cycle, and it’s an awful thing to watch. Plumbing owner Jerry Bush of Roanoke, Va., signed for at least six cash advances, one after another, until the payments mounted to $18,000 a day. One lender advanced Bush about $250,000. He paid back more than $600,000.
You might wonder why nobody steps in. Rather than frame the transaction as a loan, merchant cash advance companies have called their products “cash advances” and distanced them from usury and money-lending laws. The fact that the transactions involve businesses, not individuals, provides cover from consumer protection laws. And because no state or federal agency has tried to regulate the industry, merchant cash advance lenders are free to make bad deals and collect at will.
Confession of Judgment
While the debits and bounced checks might be a nuisance, and an inconvenience, they are the least of your worries. Before giving the borrower the money, the lender makes the borrower sign a confession of judgment. A confession of judgment means you have previously agreed to give the lender your permission to enter a judgment against you without a hearing. So instead of appearing in court to dispute the claim, you give your blanket permission to your creditor in advance and can be slapped with a judgment at any time. Is that what you signed? Unfortunately, if you took an MCA it is likely. The MCA companies feel most comfortable with New York courts, and so they get borrowers to agree to let them file there. Confessions were banned for consumer loans in 1985 but New York still allows them for business loans. Don’t be surprised if when you stop payments, the cash advance provider immediately executes on the COJ without warning. And if you have stacked several advances, another confession of judgment might be signed and locked away for each one.
The Duncans’ case shows how little it takes. The Duncans’ bank records show their lender continued collecting payments, even after going to court. And the lender’s sworn affidavit said the Duncans had stopped making payments, and it inflated what they owed. The lender later claimed the couple had blocked one payment and never made it up; the Duncans say any block must have been a computer error. In a secret filing in a county clerk’s office in Goshen, N.Y., about 1,000 miles from their home, the lender used their confession to ask for a judgment. A clerk went on to approve a civil judgment less than a day after the lender’s lawyer asked for it, without any proof, and without a judge or an opportunity for the Duncans to defend themselves.
That was on a Friday. The following Monday, the Duncans discovered they couldn’t access their business bank accounts. A New York City marshal had sent a notice to their bank with a demand to turn over their money. Within three days, the bank seized $52,886.93 and issued a check to the marshal. Most of that was rent money they were holding for landlords. It wasn’t their own money. The lender also added $9,990 in legal fees. In the Land of the Free, it takes three people who you’ve never met to take your money - and all you had to do was make your payments.
Once a business owner receives a judgment against them, there’s almost no way back. Very few lawyers would even take the case because the money is already gone. The process can take months. The Duncans’ own lawyer figured it would cost about $5,000 just to hire someone to go to New York, and told them not to bother. To stay afloat, they took another, larger cash advance from a different company. But the daily payments were too much; they soon were short of cash again. Their agency went bankrupt.
Make Sure You Understand What You Owe
So what should you do if daily debits are overdrawing your account right now? The short answer: don’t panic. Make sure you understand what you owe. Go to your bank and pull the details of the funds being pulled from your account. Read your contract. What happens if you default? Find out whether you signed a confession, because if you did, simply blocking the debits can hand the lender the excuse it needs. If you are in financial trouble, do not open any new MCAs to pay off the existing MCAs. Failing to get current, or being unable to, is a signal that your financing with the MCA is unsustainable. It is still likely in your best interest to negotiate. The time to do it is while your accounts are still yours, before a lender walks into a clerk’s office with your signature. Your business is worth too much.
