Many small-business owners end up considering an MCA settlement only after they’re already struggling. Daily or weekly ACH withdrawals can dry out your business account very quickly. An MCA settlement agreement is an actual contract with the funder that clears up the debt, either for a lower amount or by restructuring it into a payment you can actually manage. Reaching a settlement allows you to get back to building your business. Here is how these agreements work and what a good one should contain.
Reading the Entire Merchant Cash Advance Agreement
There is no substitute for reading the entire Merchant Cash Advance agreement in an effort to find a way to negotiate the best deal. There are a lot of agreements that may look like a Merchant Cash Advance in name only, but in fact, contain a lot of the terms and conditions of a loan. Clauses like that give a merchant leverage, and knowledge of those issues can help you pry loose a much better deal. You can use that information, along with the specific circumstances of your case. No two situations are alike. There is no magic number. A settlement plan should be built around your own facts so that every decision you make is grounded in reality and focused on the goals that matter to you. The settlement total should be based on what you can actually pay. I know this seems obvious, but in order for it to be a good deal for the funder, the total you agree to pay also has to be realistic for you.
You can also push to get fees and costs out of the deal. Things like legal fees, stacking penalties, and default fees. Removing them is only part of the goal of the negotiation. The larger aim is to pay the least amount of money over the longest period of time, and that requires extensive negotiations and careful planning.
Settlements are built on proof. Don’t take a merchant cash advance company’s word about how much they have debited from your account. Get an official accounting from the funder and compare it to your own records, both to be sure they’ve correctly accounted for all the debits and credits they’ve sent and to ensure there were no unauthorized debits. Go through it line by line: you are looking to ensure that every payment you made is accounted for. And if you don’t get an official accounting, how will you know what you really owe?
A Settlement Converts an MCA into a Term Loan
A settlement converts an MCA into a term loan. A settlement figure is agreed upon, then divided equally by the number of months you agree to pay to come up with the payment that you can make, and that you can afford. This is fundamentally how a term loan works. Once it’s set up this way, there are no more daily withdrawals. If you honor the settlement the funder will drop its enforcement actions and put any lawsuit on hold. For a business owner who has been under the intense financial stress of a merchant cash advance funding deal, that’s a welcome relief. Settling MCA debts can be a balancing act. You don’t want to agree to payments you can’t make and wind up in court. Avoid the risk by negotiating terms that you can meet and follow them precisely.
Let’s say you’ve got a funder giving you $100 in exchange for a payback amount (also known as the purchased amount) of $150. And say you can’t handle a $10-a-day ACH pull. So you negotiate with the funder. Maybe you even have to litigate, if things go that far. The goal is to get the payback amount lowered and extended over, let’s say, a 10- to 24-month period. When you’re a funder it’s not about how you can get the most from the deal, but how to ensure you get paid back at all. The funder wants to get at least its $100. So let’s say you reach a full and final settlement at $100, payable over 12 months, with no daily ACH pulls. In other words, if you make your payments in full and on time, the funder has no right to legally collect.
If, for example, the funder has put a UCC lien restraint on your accounts with one of your vendors, clients, payment processors, or bank accounts, the settlement should include removal of that lien. Money that is already frozen needs its own fix. Say $50 is on hold. Then the funder and the merchant should agree to split the frozen funds by filing a conditional release, which they should do at the same time as signing an all-encompassing settlement agreement. In practice, a conditional release means that the money held is released from the lien restraint, and the merchant gets its share back.
If You Have Been Sued by an MCA Funder
If you have been sued by an MCA funder all is not lost. An attorney can respond to the lawsuit and also file counterclaims and affirmative defenses against it — almost a counter lawsuit — challenging any improprieties or illegalities and attempting to recharacterize the “MCA” as a loan in disguise. Once a merchant has responded to the complaint the case has only just begun, and a settlement can still be reached from there.
Some MCA agreements also come with a mandatory arbitration clause, so instead of dealing with the stress of the court system, your dispute is settled through arbitration (or mediation). Arbitration is still a formal proceeding, though, and you should be represented in it from start to finish.
Finally, remember whose settlement it is. Nobody can take a settlement on your behalf without your permission, so you’re always in full control of your payments and your business. Take that seriously, because a settlement will affect your income and your family’s financial wellbeing for a long time. It’s important to understand the process so that you can make informed choices about your finances. It can be beneficial to have legal counsel review the agreement before signing. Read every line, ask every question you have, and do not sign until you can see your path to relief clearly.
