If your business is drowning in merchant cash advances, you’ve probably already been contacted by a settlement firm. Is a settlement firm really worth what it charges? The honest answer is maybe, and here’s why. There are four basic options: try to negotiate a settlement with the MCA company (or its collectors) yourself, hire an attorney or a settlement firm, turn to a consulting firm, or do nothing. Can you do this yourself? Yes. But it’s often much faster and easier to pay a group to do it for you. The trouble is that there are a huge number of settlement companies that are (for lack of a better term) unsavory. Some of them are, at best, plain junk. Owners facing lawsuits, collectors and frozen accounts are scared. And scared people sign bad deals.
Before You Sign
Some settlement companies charge a retainer of 10% to 25% of the amount you enroll, and attorneys usually ask for $5,000 to $8,000. Ask what the retainer covers. Some firms bill legal costs separately as “network fees,” so the retainer doesn’t even go to an attorney. A firm that wants a quarter of your enrolled debt up front is telling you that there is a substantial profit to be made by your enrollment. Another important consideration is who will perform the services. Before you sign, make sure you know who is actually performing the services, and how they perform them.
Be even more careful if the firm tells you to stop paying. If you are current on your advances and a settlement company advises you to default, you may be putting your business at risk for good. Advising a business in good standing to stop paying a creditor is tortious interference. A willful default can trigger a lawsuit, a judgment or frozen assets, and it will not get you a better result. So we recommend you ignore the advice and continue paying until you resolve your difficulties. In general, the more a company tells you to “stop paying,” the less ethical it is. A good rule of thumb is never let the settlement company dictate when you should pay or not pay.
Then there is the promised discount. You will hear that a firm saves clients 60% to 85% of what they owe, often before anyone has seen your file. Discounted settlements do happen, but that number doesn’t mean much. Most MCA companies would prefer to take the case to a judge and get a judgment than to accept a tiny percentage of the balance. An 85% reduction is rare. The redacted settlement letters you see posted online mean nothing; there’s no indication they’re real, and posting them can violate confidentiality agreements and harm your good faith with creditors. In the worst case, you pay the firm up front and the firm fails to settle your debt. This is the stuff of horror stories. The firm should be solving your problem, not creating one.
A quote is only as good as the homework behind it. Before a firm tells you what your program will cost, it should review all your agreements and contact each creditor to confirm what you actually owe. Only then can the firm honestly estimate your cost. If they don’t, they aren’t worth your time. When a company calculates the offer based on your own estimate rather than reaching out to the creditors, the resulting quote is too low, the settlement account gets depleted during the process, and the program payments become unaffordable. If the settlement company does not do their homework before they give you a quote, then what is the chance that they will be able to do their job once they have the money?
Read the Fine Print
Read the contract for timing, too. Sometimes you’ll see agreements that say the company won’t start making settlement offers until your settlement fund is bigger than 20% of each debt. If that clause exists, you may have to pay the settlement firm even while they do nothing. In essence, you are financing the settlement company while it does nothing. In the meantime, the MCA companies can wield UCC filings and other methods to pressurize you. A UCC filing is filed with your state’s Secretary of State and attaches the MCA company as a secured lien holder on your receivables, allowing it to seize the funds if you do not repay. If your firm never discusses UCC filings, it isn’t doing its job.
One firm boasts that it has more than 500 local attorneys to file all the legal papers. A network lawyer like this is usually paid about $100 a month while a decent lawyer costs $400 to $500 an hour. No attorney mounts a serious defense for $100 a month. A network attorney may file an answer if sued, but that won’t do much good if the MCA company moves for summary judgment or you really need a negotiator. The best result is not being sued in the first place.
Some contracts include a minimum performance standard: If they don’t make good on a guaranteed amount, they offer a refund, or the chance to jump to a cheaper program. Read the fine print, because many of these clauses specify that the guarantee doesn’t apply as soon as one of your creditors files a lawsuit against you. What’s the worst thing that can happen? You hire a firm, and your creditor sues you. All of a sudden, the firm doesn’t have to do anything. The company could fail to perform, you could be sued, and then you’d be stuck with the firm. The biggest concern is that they will simply hold your money, and not do anything other than collect it. Some firms take on clients and then hand all the work back to them, leaving the business exposed to UCC freezes and lawsuits.
Lawsuits against settlement companies rarely pop up when you google them, so search court records through Trellis, the NY court system, or LexisNexis. MCA funders have taken settlement firms such as MCA Resolve and Corporate Client Services to court over their practices. It is up to you to find out who’s involved in a lawsuit, whether a lawsuit is still pending, and how many lawsuits were filed against a company. If there is a pattern, that is a good reason not to use the company. Ultimately, a settlement firm is only as good as its name and performance record. Whatever you’re promised, make sure to get it in writing.
You May Not Need a Settlement Company at All
So where does that leave you? If you are still on track with your advances, you may not need a settlement company at all. Call the MCA company and ask for reduced payments or a reconciliation because some funders’ agreements have remedies for merchants who are having a hard time paying. The best settlement outcome for anyone in good standing is not to enter the program at all. If you have stacked multiple advances and can’t afford to repay them, you may be facing UCC freezes and lawsuits, and that’s when the right firm can earn their money. In short, a settlement firm may be worth its weight in gold, or it may be bad news. It’s up to you to know the difference. Use the warning signs above as a checklist as you review your settlement agreement, because choosing the wrong firm means signing away your money while they sell you an illusion.
