If you’re running a small business, you probably understand the drill. You get a merchant cash advance, then there’s a continual drain of daily payments leaving your bank, running out of cash and then you have to do it all over again taking a second advance from a different company just to pay the first one. This is stacking. In a word, stacking is a disaster waiting to happen. The reality is that whenever you begin juggling multiple MCA advances, you increase the risk that your business will eventually collapse under their weight. So what are you supposed to do? How can you get out from under a massive load of stacked MCA debt?
Before we get to the options, it helps to be honest about what you signed. It’s a high-interest cash advance contract you signed. These advances have very high rates. You could be looking at a triple-digit APR. Some have run past 400 percent a year, and repayments are daily instead of monthly. That adds up quickly. Now you have one MCA, but you need more money because you’re strapped for cash, and the next funder is happy to oblige.
A Florida Couple
Here is how fast it happens. A Florida couple owned a real estate agency. They took a $36,762 merchant cash advance, with $800 debited from their bank account every business day, beginning the day after they received the money. Over about three months they would pay back $59,960, an annualized rate of more than 350 percent. On paper that may not sound terrible, but here is the punchline. They were making their payments on schedule. One Monday they found that they couldn’t get into their bank accounts. Several days later they found that $52,886.93 was gone from one of their accounts.
A lender handed in a confession of judgment in a county clerk’s office in upstate New York, claiming — falsely, in fact — that the couple had stopped making payments. Their bank records show the lender continued to receive $800 a day even after the court proceeding. The sworn statement also exaggerated the size of the debt. The clerk approved the judgment less than a day after it was requested; no proof was demanded; no judge was involved; and the couple had no chance to present their side of the story. The money went to a New York City marshal, and most of it was rent the couple was holding for landlords.
To stay afloat, they took another, larger advance from a different company. Now you have two cash advances to pay back, which means more of your revenue is debited daily, making you more strapped for cash. The daily payments on the new advance were more than they could handle, they were soon short again, employees left, and the agency went bankrupt. There’s some underlying truth here about how business owners almost always stumble into the same traps. These are not uncommon scenarios.
The piece of paper that made the freeze possible is called a confession of judgment, and if you have stacked advances, you may well have signed more than one. By signing, you give up your right to defend yourself if the funder takes you to court. When you sign the confession of judgment you are basically giving yourself away to the funder. You will lose any argument you would normally present in a legal proceeding. You have no right to a hearing with a judge or jury. New York courts will take these confessions from anywhere, which is why the contracts let funders file there, and cash advance companies have secured more than 25,000 judgments in the state since 2012.
Your Options
So what are your options? The first one most owners reach for is another advance. Another cash advance is just a further attempt to delay the inevitable. You are just digging your hole deeper. Take a plumbing contractor in Virginia. He had signed confessions for at least six cash advances, one after another. His payments rose to $18,000 a day, and one lender advanced him some $250,000 in all, but he repaid that lender more than $600,000. Don’t take another advance to try to get yourself out of debt. You are going to end up in the same situation. You’re going to end up with yet another MCA to pay off.
The second option is to fight the judgment in court. If you want to challenge the judgment, you will need lawyers. Once a confession judgment is signed by the clerk it is almost impossible to overturn. Borrowers rarely try. Few lawyers will take a client whose money is already gone. And getting a ruling can take months, too long to save a desperate business. The couple’s lawyer found that borrowers who tried had almost always failed. New York judges have said the debtors had waived their rights when they signed. It would cost about $5,000 for a lawyer to travel to the county. He told them not to bother. Hiring lawyers and going to court can be expensive, and the odds are poor.
The third option is to go to your bank. Who’s going to help you out? The bank probably is not going to do anything. The couple’s lawyer informed the bank that one of the couple’s frozen accounts held money that belonged to their landlords, not the couple. A banker at the local branch wanted to help, but higher-ups overruled him, and the account stayed frozen. The call will get transferred up the chain, and it will be the same story. New York City marshals can demand money from out-of-state banks if the bank has an office in the city. A few big banks refuse. Most hand over their customers’ money.
The fourth option is to stop paying and close the doors. Remember, when you signed the confession of judgment you forfeited your right to contest. The judgment will still come. As for the Virginia contractor, in August he closed down the business, laid off 20 employees and stopped paying. The other lenders then pounced on him over their confessions, seizing his accounts and one even taking his father’s retirement money. This is not a pretty scenario.
So is there anything you can actually do? Start by refusing to make it worse. There is always an immediate option for another MCA, but if you take it, you will just get yourself further into debt. Don’t make it worse. Do not sign another confession of judgment. Keep every bank statement; that is how the Florida couple could show the funder was still collecting after it swore they had stopped. Then pull the papers the funder actually filed. Does what the funder filed match what you signed? In the couple’s case, the first two pages of each confession had been swapped out after signing to fix a drafting error that might have protected their business. A Georgia contractor showed a court that a confession used against him was a complete fabrication, and the funder backed off. Evidence like that will not always save you, but it is the closest thing to leverage you have.
If you have not signed yet, read every page, and make damn sure you don’t sign anything without getting a good attorney to review it. The Florida couple signed without one. Confessions of judgment are not even enforceable in Florida, where they signed, but the contract let the funder file in New York.
There is no oversight of MCAs. No state or federal agency has tried to police the industry. The paperwork sidesteps usury laws and state licensing by using the word “advance” rather than “loan” to describe the transactions, and the customers are businesses rather than individuals, so the usual consumer protection laws do not apply. It remains one of the most disheartening areas of the small business landscape. For small business owners like yourselves, it can be a daunting task to remove a mountain of stacked MCA debt. Once a confession is on file, another advance, a court fight, a call to the bank and walking away all tend to fail. What helps is stopping the stack, keeping your records, checking every document, and getting advice before the next signature, not after the freeze. Whatever you choose to do, now you know.
