At Delancey Street, we’re a business debt settlement company, and “should I tell my MCA funder I can’t pay?” is one of the questions we hear most often from owners who are falling behind. This is the one conversation that many business owners dread. It’s hard to swallow pride, and it’s difficult to admit defeat or even that you have a debt or a problem. Still, the honest answer is usually yes. The important thing is how you respond to falling behind. Staying quiet and pretending that there’s nothing wrong won’t stop what comes next, and to see why, it helps to understand what you signed and what the funder can do once the payments stop.
A merchant cash advance works differently from a loan. The money you get upfront is based on your future sales, and you pay it back out of those future sales. There are two common ways the money comes back to the funder. With fixed withdrawals, the funder takes a fixed amount out of your account every day or week (sometimes monthly). With percentage-based withdrawals, the funder takes a fixed percentage of every card sale. As you sell products and receive payment by credit card or debit card, you pay the funds back automatically. Instead of an interest rate, the merchant typically pays a fee determined by something called a factor rate. And they have to repay that original advance plus the fee - often within 12 to 18 months - to consider the advance fully paid. Even though a factor rate looks like an interest rate, it isn’t.
The Consequences of Making No Payments
What are the consequences of making no payments? That’s easy - they go after you. But the order matters. Typically, when you get behind, the funder will first try to talk it out, through collection and negotiation. A lawsuit tends to come into play when collection and negotiations fail to yield results. The good news is that litigation is often the last resort. Collection has rules of its own, too: whoever is collecting has to follow federal laws for contacting you and collecting the debt.
Here’s where the confession of judgment comes in. MCA providers commonly add one to their agreements. By signing it, you have waived your right to respond and put up a defense. It is a document whereby you agree to waive your rights to contest a judgment and consent to a future judgment being entered against you. In the case of a confession of judgment, the merchant has already admitted liability and the damages, so the funder often can bypass the actual litigation and simply present the confession to a court and obtain a judgment without the merchant’s presence. A cognovit note can do the same job.
Funders have other tools too. In a lot of cases, the funder has or can get a lien, a legal right to some of the merchant’s assets to secure the money lent, which may help ensure that the merchant cannot sell off the inventory the advance was for without paying them. A garnishment is a court order that withdraws a fixed amount or percentage from an account over time and is often placed on business accounts and/or payment systems by funders. Underneath all of it, an MCA claim is often a breach of contract lawsuit, because in the case of an MCA, you’re dealing with a business contract involving advances against future receivables. The rules of the Uniform Commercial Code can come into it as well, which is why, just like you wouldn’t go to a critical health emergency without a doctor, you shouldn’t go to a small business emergency without an attorney well versed in cash advance law and the UCC.
Talk About It
So should you tell them? There is nothing to be gained by being quiet and hoping nothing happens. And going silent won’t solve the problem. If you’re having trouble paying, now’s the time to communicate, while the funder is still in the collection and negotiation stage rather than the court stage. So talk about it. And it’s even better if you can resolve the negotiation before it gets ugly.
But first, remember to ”look before you leap” by thinking through a few things. First, look at your paperwork and figure out what you signed and what the deal is. Check whether there’s a confession of judgment in it, because that changes how quickly things can move. Next, pull up your current revenue so you know where you stand. Run your numbers, compare them to your projections, and get a clear sense of your cash flow. If you know what you owe, then you can do damage control. Don’t go into that conversation panicked. Do you have a plan for a workout and a repayment schedule? Then tell them it’s unlikely that you’re going to make the payments next month, and see what they want to do. So, should you tell your MCA funder you can’t pay? Yes, but not until you have your plan.
Someone who knows the process can help you make it. If you’re overwhelmed by the thought of calling your funder, we are here to help. Our senior advisors negotiate with funders and lenders for less than the full balance owed, and we don’t sell you another loan. We speak directly with the funder to understand what we’re dealing with. Once we understand the funder’s expectations, we start negotiating. This can help make that conversation less daunting and more productive. We’re not a law firm, so when a lawsuit or bankruptcy is the right call, we refer you to an independent attorney. A first consultation is free and confidential, and if a cheaper option exists, we’ll tell you on the first call. Get in touch and let’s talk through your next steps.
