If your business has fallen behind on a merchant cash advance, you probably want to know one thing: what can the funder actually take? At Delancey Street, a business debt settlement company that negotiates with MCA funders on behalf of business owners, we want you to have a straight answer. We’re going to talk about what the funders can do, but first a quick refresher: What is a Merchant Cash Advance?
To get an MCA, a funder gives you money today in exchange for a percentage of your future sales or accounts receivable. The contract is written as a purchase of accounts receivable, not a loan, because a loan at this cost would violate the state’s usury laws. The payment is very often weekly or even daily. Most owners who take one are already under pressure, and while an advance can help in the short term, the cost is high, and repayment is often difficult. So if the Merchant Cash Advance is really a purchase, and not a loan, what can the MCA company do if the merchant defaults?
An MCA Company May Go After Your Receivables
After default, the MCA funder may already hold a lien on your receivables. Remember, they bought future receivables. It will try to collect by taking the money from your bank or merchant processing account. By having this access, the funder is privy to incoming payments and the cash flows of the merchant.
If you fail to make your payments, they can start contacting your customers so your receivables are redirected to the funder. In other words, your customers will know that you are in debt. No owner wants that, and it puts the business under even more strain on top of the payments it already owes.
Most MCA companies are incorporated in states with constitutionally questionable laws that allow them to get a judgment against you without ever having served the lawsuit. The result is that the funder can get a judgment against you even though you never saw it coming, and without ever informing you or giving you an opportunity to defend yourself. To us that looks like a plain violation of due process, but owners need to know it can happen. So, if you haven’t received any judicial writs, this doesn’t mean the funder has thrown in the towel.
But the most important thing to remember is that nearly all cash advances are guaranteed by their owner. So you’re still on the hook. Even if your business files for bankruptcy.
So, to answer the question directly: after a default, an MCA company may go after your receivables, the money moving through your bank and merchant processing accounts, the payments your customers owe you, and, through the personal guarantee, you. The situation is stressful, but there’s a way to de-escalate it.
Settle for Around 50% of What Is Owed
It’s usually recommended that you first stop paying the funder and save that money until you can come to them with a lump sum to settle for. If you can save half of what you owe, odds are the funding company will settle for that amount after you’ve failed to pay for a few months. To do this, you will very likely need to start a new merchant processing account and bank account, so that you are receiving your receivables without the funder being able to take them. Be aware that stopping payments is exactly what can set off the collection steps described above, which is why the new accounts matter. Now you take that money and put it in savings. Every day. Every week. Every month. And soon, you’ve built up a cash reserve. That’s the hardest step. You need discipline. Think of it as a proposal: “We have X amount in savings. We will pay X amount to settle the entire debt.” Generally these debts settle for around 50% of what is owed. By no longer paying all of these crazy, frequent payments and settling for a portion of what is owed, a business that was drowning can often get its footing back. That is the work we do at Delancey Street: our senior advisors negotiate with funders for less than the full balance, and we do not sell you another loan.
Personal Bankruptcy
Business bankruptcy is usually not recommended because there are significant fees, and most MCAs are personally guaranteed. In this case, the owner is still liable even if the company files for bankruptcy. Some attorneys will advise you to file for personal bankruptcy if you can’t afford to settle. You can often keep running the business as a sole proprietor after dissolution of your LLC or corporation. The tools of the trade exemption in Colorado, for instance, allows you to protect up to $60,000 of business assets. It can give a lot of businesses a “second life.” Delancey Street is not a law firm. When bankruptcy is the better option, we refer the owner to an independent attorney.
While every situation is unique and requires careful evaluation, you do not have to sort it out alone. If you are struggling with MCA debt or considering bankruptcy, a first consultation with us is free and confidential, and if a cheaper option exists, we will tell you on that first call.
