A merchant cash advance is usually pitched as the flexible option. Instead of fixed payments on a set schedule, you hand the funder a cut of your future revenue as it comes in, pulled straight from your bank account every day. The fact that you don’t have to pay back the money in monthly installments is both attractive and frightening to business owners. Many worry that something unexpected could happen and leave them unable to fulfill their obligations. Unfortunately, that concern is well-founded.
There is no official calendar for what a funder does once a business falls behind. At Delancey Street we negotiate with MCA funders on behalf of business owners, and the court records from New York tell a different story than the rosy marketing promises. Two cases in particular show how quickly it can move.
Manhattan Health-software Startup
Weeks one through eight: the withdrawals. In the first case, the founder of a Manhattan health-software startup later sued a Brooklyn funder. The business owner brought the lawsuit after his startup received multiple MCAs with a total of just over $1 million between August and September 2021. During the subsequent weeks, the funder was withdrawing thousands of dollars from the business’ bank account every day without considering the ups and downs of the company’s cash flow. The MCA agreement gave the business owner the right to ask for a refund and to lower his daily payments if the withdrawals went above the amount of revenue, a process the industry calls reconciliation.
Around month three: the reconciliation fight. In November, the owner texted a manager at the lender and basically asked them to lower the payments because they didn’t match the business’s revenue. According to the text messages cited in the complaint, the lender treated the owner’s request as a negotiation instead of a contractually mandated process for recalculating payments based on statements.
Month four: the messages. In December, he was still arguing with the lender over how much it was allowed to pull from his bank account each day, and meanwhile, he started to receive increasingly vulgar, threatening text messages from a person at another cash advance company that had also financed the business. The owner just sat tight; he didn’t respond. But the messages only got worse. He said he was worried to go out for coffee near his house.
Late December into early January: the judgment. At the end of December, the funder filed a confession of judgment in court. The owner had signed it three months earlier. On Jan. 5, a court clerk certified a judgment that the company owed more than $800,000. The owner is now suing to have that judgment vacated.
Home Repair Contractor
The second case followed a similar path. An Orange County, New York, home repair contractor borrowed $500,000 in an MCA, and agreed to pay back $861,925 out of its future revenue, $4,750 from its bank account each day, plus a $75,000 origination fee. A few weeks after the deal, it borrowed another $150,000, in exchange for just under $250,000 in receivables.
The funder refused to honor the contract’s reconciliation clause that would have given the contractor a refund of the difference between money withdrawn and actual revenue, according to the complaint the contractor filed. So the contractor withheld payments. About a month later, a man who works at the funder’s servicer texted the contractor, then sent a photo of the contractor’s four-year-old daughter. The next day, the contractor went to the police and said he felt threatened.
After two weeks, the funder submitted a reconciliation to the contractor: it said the contractor had overpaid it over $16,000 in April, but underpaid it more than $22,000 in May. The contractor’s lawyers disputed that information, writing that the funder had not explained how it had made those calculations. The following month, the funder filed a confession of judgment. Six days after that, the county clerk entered judgment against the contractor for just over $1 million, which included about $250,000 in attorney’s fees. The contractor’s bank account had been frozen since that time.
In the contractor’s words, a filing stops your life. They can shut off access to your accounts, your customers, your business. He’s now in court, asking a judge to unfreeze his assets and vacate the judgment and arguing that his so-called “advance” was actually a criminally usurious loan.
A Frozen Account in a Matter of Weeks
Put the two cases side by side and a rough week-by-week shape appears. First you get the funding. Then, within weeks, daily withdrawals come that, the owner says, exceeded the business’s cash flow. The owner asks for a reconciliation, the funder fights the request, and the owner then falls behind or withholds payment. Threatening messages start arriving. A confession of judgment is filed. Within days - six days in one case - the clerk signs the judgment. Then the bank account is frozen.
Why can a funder go from a text message to a frozen account in a matter of weeks? It’s called a confession of judgment and it’s a clause that’s often in MCA contracts. The business signs it up front, agreeing to waive its right to a legal defense in the event of a future payment dispute. It has frequently meant that the funder can secure a judgment and empty a business’s bank accounts on its own, without the business getting to argue its side first. The New York county courts have often rubber stamped them.
In 2019, a New York law came into effect prohibiting the use of so-called confession of judgment clauses against businesses based in other states. But funders continue to use the clauses against companies that operate out of New York state. An attorney representing businesses claims they’re treating their own residents even worse than out-of-state residents. Both owners in these cases were New York businesses.
Because courts have generally not categorized merchant cash advances as loans, the industry has skirted many licensing requirements and state usury caps. Industry lawyers say most established funders will honor a request to recalculate payments if a business can prove its revenue went down. That makes the paperwork matter. If your withdrawals are running ahead of your deposits, ask for a reconciliation in writing and keep the bank statements that back it up.
If you are behind on an MCA, or can see it coming, the time to get help is before the funder files, not after. Delancey Street isn’t a law firm; it’s a debt settlement firm, and it negotiates with MCA funders on behalf of business owners to reduce the amount you owe. If you need a lawsuit or bankruptcy, it refers you to an independent attorney. First consultation is free and confidential, and it will let you know on the first phone call if there is a cheaper alternative.
