We frequently get asked by business owners who are behind on a merchant cash advance what the “average” MCA settlement figure is. The honest answer is that there is no number we can reliably point to. At Delancey Street we have settled more than $100 million in business debt for over 1,000 businesses. That’s a lot of money, and we won’t tell you what our average settlement percentage is. Someone else’s number says nothing about yours. What matters is what your contract says and what your funder has done since you signed it.
What a funder will accept depends on the leverage you hold, and many business owners who end up being sued by a funder default on their advance, or negotiate their way out of it without asserting any defense. By not asserting defenses or counterclaims, you are basically giving up a lot of leverage.
To see why, start with how the deal works. First, a funder - or, as it calls itself, the “buyer” - agrees to purchase a certain percentage or portion of the business’s future income, up to a certain amount. The business - or “seller” - receives the purchase price upfront in one lump sum. The funder starts debiting a certain amount out of the business’s bank account each week (or daily), and continues doing so until the previously agreed price has been paid in full. That price is often much higher than the purchase price. In practice, daily withdrawals can run well over 50% of your past average daily income. If your business has a downturn, the amount that the debit is taking can stay the same. You may find that the buyer ends up taking everything the business receives in a day or a week, and is still demanding more. Then the funder sues. The worst outcome is when you go unrepresented and the funder gets a judgment. At that point, the funder may collect the full amount it claims you owe. That’s paying everything.
Connecticut Law
A lot of this plays out in Connecticut. Fairly recently, the state seems to have become a favored jurisdiction for MCA funders. The contracts they use require Connecticut law to govern. And sometimes they require or permit the lawsuits to be filed in Connecticut state courts, which have since been overwhelmed by hundreds of cases filed by these funders. One possible reason is Connecticut’s strong prejudgment remedy. That statute allowed funders to freeze a business owner’s bank accounts without a hearing and without a court order, so long as the contract had a waiver. The law changed with Public Act 23-201. Not only did it add new financing disclosure requirements, but it also prohibits certain MCA contracts signed on or after July 1, 2024 from allowing the waiver of the right to notice and a hearing first. Most cases get done without the owner hiring a lawyer, so it will take some time to see what changes this new law brings.
That same fact cuts another way, and because the contracts can be sophisticated, opportunistic funders may attempt to take advantage of small-business owners who are unsophisticated or uninformed about their rights in a way that breaks the law. And they might get away with it. But they might not. Contract language (or what the funder does after it signs) may show that some merchant cash advances are in reality disguised loans, subject to laws that apply to loans. Some of those disguised loans may in fact be usurious loans that are not enforceable at all under Connecticut law. It doesn’t matter whether the lender seeks to collect the principal, the interest, or the principal plus the interest; Connecticut law bars an action on such a loan either way. In some cases where a funder does collect on such loans, the funder may be liable to the business owner for triple damages and attorneys’ fees.
Disguised Usurious Loans
The usury defense hasn’t been thoroughly litigated in Connecticut cases yet. Before Connecticut, the funders often chose New York. New York state and federal courts, including the Second Circuit, have held that MCAs may, in fact, constitute disguised usurious loans. The Second Circuit also found that these loans may give rise to liability under federal law, which in turn may entitle the business owner to treble damages and attorneys’ fees, separate from whatever defenses state usury law provides.
In Connecticut, as in New York, a court may look past the label the two parties chose and ask, “is the premium paid by the business really for the temporary use of the money, or is the real payment for the transfer of real risk?” If it’s for the temporary use of money, then the arrangement is subject to usury laws. Factors the court may consider include:
- whether the agreement allows reconciliation of revenue and payments;
- whether the agreement has a finite term;
- whether your bankruptcy gives the funder any recourse;
- whether the payments are determined by good-faith estimates of income;
- whether specific revenues or accounts were bought, and who is expected to collect them;
- and the terms of default (do they allow the funder to call the whole amount outstanding?).
A Number Determined by Leverage
What this means for your settlement number: the number is not an average. It is a number determined by leverage. Connecticut has been awash with one-sided MCA litigation. Whether that will remain the case after passage of Public Act 23-201 remains to be seen. If your merchant cash advance is, in fact, really a loan, you might have a valid defense (or even a counterclaim) that is not being fully leveraged against the funder. The New York courts cleared the way for this, and other courts (including Connecticut’s) may follow. Defaulting on such a deal, or negotiating it away, means losing leverage. So before you ask, “What is the average settlement?” ask, “How much leverage do I have?”
Delancey Street negotiates with funders for less than the full balance (and we don’t sell you another loan). We are not a law firm, but when litigation is the best option for you, we will connect you with a vetted independent attorney. Our first consultation is free and confidential, and if a cheaper option exists we will tell you on that first call.
