Practically every business has bills. You run a small business, and owe money to a vendor each month for an expense. So, you’ve been paying this vendor forever. One day a company you have never heard of sends you a letter that says you owe money to them because you owe the vendor, and they acquired the debt from the vendor. So instead of paying the vendor, from now on you need to pay the other company. What do you do? If you pay the vendor they say you owe them. It’s confusing.
Who is sending these letters? Often it comes from a merchant cash advance (MCA) company. The MCA gave your vendor the money and wants to be sure it will be repaid.
An MCA Is Different
An MCA helps a small or struggling business get short-term cash when they are in need. In a bank loan, you borrow money from a lender, you pay it back with interest, and it often requires collateral. The borrower usually gives the lender a lien (i.e. a security interest) on the borrower’s receivables (money owed to it). The business gets money upfront and repays the lender a monthly check for one year, for example.
An MCA is different. In theory it is not a loan, it is a sale of future receivables. The MCA buys a fixed portion of the merchant’s future receivables. The merchant remits a portion of its daily revenue (for example) to the MCA until the merchant pays them off. For example, the MCA buys $200,000 of the merchant’s future receivables for $150,000. It’s very expensive.
Courts aren’t sure if an MCA purchase is an actual purchase of future revenues or a disguised loan. That matters, because for loans you might be limited to state usury caps on interest. Legitimate purchases of future cash flows may not be subject to the caps.
No surprise here: MCA clients had nowhere else to go. They are unlikely to get a bank loan. Because of the daily payments, they often fall behind, and the MCA then tells the client’s customers that they now owe the MCA. So why is this company writing to you? The vendor apparently didn’t make its daily payments to the MCA so the MCA is going to take your payments from you instead.
Not Junk Mail
You may be tempted to shrug off such a letter. It is not junk mail. Treat it that way at your peril. Once the proper notice has been given, under the Uniform Commercial Code (UCC), you are required to pay the MCA, instead of the vendor. You can pay the vendor but you will still owe the MCA. So you could end up paying twice.
What exactly constitutes a proper notice? And how do you know if you have a good one or not?
Section 9-406 of the UCC
The rule is in section 9-406 of the UCC, which is adopted by all 50 states in some form. Say you receive a letter on letterhead of the other company with their name at the top saying you owe them money because you owe the vendor and they have purchased the debt. That is usually good enough. The MCA does not need to get the vendor to sign it.
Under section 9-406, though, you can ask the MCA to promptly show you reasonable proof that the assignment actually occurred. If the MCA can’t or won’t provide adequate proof after being asked to do so, then you are free to keep paying the vendor even after you received valid notice. So if it is a dubious letter, ask the MCA for proof before paying either the MCA or the vendor.
MCAs can be ruthless, and you can be squeezed between pushy MCAs and cash-strapped vendors. It’s a tough position to be in.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
