Owners ask us some version of this all the time: what happens if my MCA ACH bounces three times? There is no set number of free misses, and in reported cases, a single missed payment was enough for the funder to declare default. The stories below are all borrowed from lawsuits and interviews involving borrowers of one Philadelphia cash-advance funder, Par Funding. It is an extreme case and not every funder behaves this way, but it shows what can happen once a funder decides you are behind.
This is one of the many ways a default can turn out. A small transportation business borrowed about $50,000 from a cash-advance lender in 2019. The lender announced that they were late on payments and were now in default. It froze $29,000 in the partner’s business bank account and started withdrawing $200 to $300 daily from the owner’s own accounts, without his knowledge.
Confession of Judgment
Some MCA contracts require the business owner to sign a confession of judgment up front. It means the owner agrees in advance that if a dispute arises, the owner gives up the right to defend him or herself in court. The lender can then get a court order to garnish the owner’s bank accounts without the owner’s authorization. New York and New Jersey have banned them, but they are still legal in Pennsylvania, and you may have signed one when you took the advance.
It feels like a slap when you are still making payments but your funder sues you anyway. This travel agency owner had a $150,000 loan and was paying roughly $10,000 a week until the pandemic began. She reached out and asked for flexibility. The funder agreed to let her pay as little as $100 a week, and she kept paying it. Weeks later, the funder still sued her, saying that she had defaulted. In addition, it emailed and texted her clients and vendors telling them that she defaulted, and that if any money was owed to her, it should be paid to the funder instead. This lady said that it was embarrassing. Because of the confession of judgment she had signed, the funder was also able to get a court order to garnish her bank accounts without her authorization.
How big can a garnishment get? This one owner missed one payment on $870,000 in loans. The funder froze his accounts, sent hundreds of emails to his personal contacts, sued, and got court orders allowing it to garnish more than $81,000 a day. Or take this construction contractor: He said the funder refused to recognize any hardship and kept charging his account well into the negative, then began garnishing his personal account and his wife’s, taking more than $34,000 in nine days and triggering 18 overdraft fees.
But default does not have to be a fatal wound. The owner of the travel agency countersued the funder, even though she signed away her right to sue. An arbitrator determined that the confession of judgment she signed was not issued in good faith. It was ruled that she had not defaulted, and the liens the funder had put on her accounts were reversed. Her interest rate was determined to be 257% annually.
If you are asking why this can happen, we get it. MCA funders argue they are not making loans but buying advances on future sales. This legal fiction has so far stood up in court. That allows them to avoid interest rate caps. Par Funding charged rates that averaged 50%, and sometimes reached 400% or 875%. Critics say some of these deals are designed to fail, so the funder profits more from a default than from on-time payment. Lawsuits come fast and in volume. Par Funding has flooded the courts in Philadelphia and New York with no fewer than 2,500 lawsuits since 2013. In one year alone it filed nearly 1,500 collection suits. A Philadelphia attorney who testified before Congress claimed the effective interest rate is sometimes so high that a struggling small business has great difficulty digging itself out of debt.
This one is at the extreme end, and we don’t expect to see this as a common story, but it has happened. Par Funding’s borrowers alleged public shaming campaigns, sudden withdrawals from personal and business accounts, and visits from muscled men making threats of violence if they did not pay. And back to the transportation business owner. He found himself double teamed in a parking lot by two men who demanded $10,000 in cash. When he refused, he said, the two men threatened to hurt him and his family. He could not imagine this had anything to do with his business loan. The funder denied the stories as false, calling them the work of disgruntled ex-customers trying to get out from under their debt. Federal regulators later sued the company, a judge froze its assets and appointed a receiver. The receiver later took steps to unfreeze one family’s bank accounts.
The contractor understood exactly what he was getting into when he signed a contract with Par Funding. He had borrowed from other merchant cash advance companies before and had successfully paid back advances. He knew the risks, the high rates and the confessions of judgment, when he took $29,000 from Par Funding. Then the pandemic hit and a state mandate halted construction. Other lenders agreed to renegotiate the terms of his loans. But Par Funding refused to recognize any hardship. Still, his other lenders show that not every funder says no.
Get Help Before the Lawsuit or Garnishment
So what do you do when payments are bouncing? Do not ignore it. Then you find your contract and check for a confession of judgment. You get help before the lawsuit or garnishment. We are a business debt settlement company that negotiates with MCA funders for less than the full balance. We do not sell another loan. We are not a law firm and refer owners to an independent attorney when litigation or bankruptcy is the right call. The first consultation is free and confidential.
If your ACH has bounced three times, you may already be treated as in default, whether or not anyone has called you yet. As the construction contractor said, ‘They look for any reason to default you.’ Do not wait for the fourth bounce or the lawsuit. The sooner you act, the more options you have. Call us.
