If your business has taken more than one merchant cash advance and you can no longer keep up with the payments, the legal repercussions can be brutal. Here’s what you need to know.
Funders call this stacking. It’s simply an industry term for obtaining multiple merchant cash advances at the same time, and it usually leaves a business with more obligations than it can meet. But you can’t ignore the fact that many small businesses can’t get bank financing, and that external factors might be beyond your control.
Some funders’ MCA agreements now contain covenants to bar stacking. Funders are also hiring staff to detect stacking. Is stacking fraud? Even the lawyers who represent funders call that debatable. Set it aside for a moment and focus instead on what happens if you can’t make a payment.
Defaulting on Several Advances at Once
With several advances in default, you can expect to get a few phone calls and letters from every one of the funders. The phone calls could be annoying, but are not likely to be a major headache. The funder tries to work with the borrower first to work things out, and may send out collection letters or make phone calls to resolve things in an amicable manner, but if that doesn’t work, the funder’s attorney files a lawsuit. By the time an outside lawyer is even talking to you, it’s more likely than not that a lawsuit is in the works. Each funder runs this process on its own, so don’t ignore the late payments. You could wind up with two or three lawsuits against you instead of just one!
The real danger in defaulting on several advances at once is how it looks from the other side. A business that stops paying every funder in the same week can look like it’s sending a clear message that it doesn’t intend to repay them. The funder might argue that getting multiple MCAs at the same time, without being transparent about it, is fraud. Funders have reason to be wary. According to the industry data provider DataMerch, merchants who failed to honor their commitments are reported by funders, and about 11,000 small businesses were listed in it. In 2017, an estimated 23% of problem clients reported to DataMerch appeared to have committed fraud, and about 85% of fraud cases involved falsified bank statements. However, there’s a big difference between not repaying on purpose versus not repaying because you can’t!
That means steering clear of the moves funders associate with fraud. Switching banks to stop the debits may feel like self-defense. But funders view this as a sign of desperation and also as a sign that you may have set out to defraud them from the start. Tricks such as changing processors, using an extra card terminal that is not set up for the split, or offering cash discounts are all seen as scams by funders. If a merchant takes the money, stops paying, closes the business and walks away, they are considered fraudulent.
Maybe you are toying with the idea of closing and reopening under a new business name. Think twice. Some funders cross-reference everyone who contacts them, even those that are never funded, because fraudsters come back in a different business name on the same bank account. The DataMerch database will show all of a business’s federal tax ID numbers, because some businesses use different tax IDs.
If a Funder Does Sue
If a funder does sue, here is what usually happens. According to a California collections attorney, defendants in those suits will show up in court only about ten percent of the time. When they don’t, the case is usually over before it begins. A default judgment, you see, is the judgment you get when you fail to show up. That means that judgments are easily won by MCA funders, and that a judgment can be a more effective tool to wring cash out of a business than a collections lawyer’s dunning letter. Once you have a judgment against you, you’re in trouble.
Attorneys hired by the funder work with sheriffs and marshals all over the country to collect judgments. They garnish wages, levy bank accounts, clear a lien before a debtor can sell or refinance property. They go after debtors in other states, sometimes for years. In California a judgment is good for 10 years and renewable for 10. Now multiply that. Imagine you have three cash advances outstanding, with funders A, B, and C. If A sues you and gets a judgment against you, B and C can do the same.
Can you go to jail for defaulting on an MCA? The police generally don’t get involved, even when funders have evidence of fraud, according to one funder executive. It’s not considered “appropriate” for law enforcement to be involved in collections, a funder attorney says. Fraud at the start of a deal, such as fake bank statements, is different. Reporting that can be appropriate, and if the police do get involved, they may go for jail time and restitution.
An Open Business Has Room to Negotiate
There is one piece of good news. Collecting becomes far more difficult if the business shuts down, but as long as the doors are open the funders can hope to collect reduced payments, and they may eventually recover the bulk or even all of what is owed. An open business has room to negotiate.
Some funders’ lawyers have complained about the debt settlement industry, saying that debt settlement companies are making it harder to collect. For a small business owner behind on several MCAs, that’s kind of the point. The worst move you can make is to just stop paying. This could be perceived as an attempt to defraud funders by failing to fulfill your obligations. Never underestimate the value of a simple phone call. If you can, inform the funder that you’re unable to make your payments, and give them the reason why. Don’t go dark, don’t try to disappear. Stay in business, stay in touch with your funders, and get help as early as possible to negotiate with all of them before the lawsuits start to pile up.
