For many business owners with a merchant cash advance, the worst part is the daily debit, which comes out no matter how much business was done that day. The amount of the debit could be more than the day’s revenue on a slow day. Many business owners don’t realize that, according to every merchant cash advance contract, they are only obligated to make a payment if they actually made receipts.
A merchant cash advance is framed as a purchase of future receivables, not a loan. The funder has to respect the fact that the payback depends on receipts. Otherwise the contract could be recharacterized as a loan and be subject to usury caps and, in some states, licensing requirements.
Many MCA contracts have a reconciliation provision where payments can be adjusted according to revenue. Some contracts say the business has to wait for 30 days and then ask for a reconciliation. But if a business is closed and making no revenue, the argument can be made that the funder is not entitled to any payments, even if the business waited the 30 days. Not making payments in those circumstances should not be considered a default.
Hurricane Matthew
The risk to funders is not theoretical. Hurricane Matthew was a Category 5 storm that followed the east coast of Florida, moving into Georgia, the Carolinas, and Virginia in 2016, killing people and causing widespread destruction. On October 5, 2016, Governor Rick Scott declared a state of emergency for the whole state of Florida and ordered evacuations in some parts of the state, including Palm Beach County.
A merchant in Palm Beach County had signed an MCA just two weeks before the storm. The merchant owner said that after being ordered to evacuate and close, he called the phone number from the contract to inform the funder that he would be closing the business and would not be generating any receipts. Despite this, the funder allegedly continued to withdraw daily ACH payments. The business lost all of its perishable inventory in the hurricane and went out of business. The funder then sought a judgment by confession for money it said was owed under the contract. The court ruled that the deal was a usurious loan, even though the contract included a reconciliation provision that allowed the payments to be adjusted.
The court reasoned that had the funder accepted a real risk of loss, then it would have anticipated a hurricane and a declared emergency might hinder its right to collect anything at all. By not even considering the fact that it might not be repaid, the court said the transaction could not be anything other than a loan. All of this does not mean a struggling business simply owes nothing. At least one court has weighed in on this question, and its decision turned on the facts in front of it. But the case shows why the daily debit is not supposed to be fixed in stone when the revenue behind it disappears.
The COVID-19 Emergency
The lesson from that case was again repeated during the COVID-19 emergency, when stay-at-home orders meant that non-essential businesses were closed and business all but ground to a halt. There is little chance that an MCA contract specifically contemplates a pandemic, or any other emergency, and it was unreasonable to expect closed non-essential businesses to be generating receipts. In general, the recommendations given to funders were to hold off on ACH payments from merchants that no longer have revenue and reduce payments for merchants whose revenue has fallen, even if the contract does not specify doing so.
The regulators are also watching. The FTC has been paying attention to the MCA industry. It released a Staff Perspective about its concerns, which include all sorts of failure to service these transactions properly.
Two more points matter when government assistance is involved. Many MCA contracts prohibit the merchant from obtaining other loans, but a government loan through an economic stimulus package shouldn’t count as a default. Also, government assistance should not be counted in any revenue used to compute reconciliations or payments, even if the contract language appears broad enough to permit it, because a merchant cash advance purchases receivables, not government aid. Funders that do shady things like this risk catching the eye of regulators and being sued for unfair practices.
Ask It to Reduce or Suspend the Payments
What does this mean for an owner whose MCA payments are higher than what his or her daily sales bring in? The payment should track your receipts. The reconciliation clause in your contract is the starting point. If your business revenue has declined or stopped, then you can notify the funder and ask it to reduce or suspend the payments. A funder that continues to pull full daily payments from a business with no receipts is taking a legal risk of its own.
At Delancey Street, we’re a business debt settlement company that negotiates with merchant cash advance funders and other business creditors on behalf of business owners. Our senior advisors negotiate with funders for less than the full balance due, and we don’t sell you another loan. We’re not a law firm, so when litigation or bankruptcy is the right call, we refer business owners to an independent attorney. A first consultation is free and confidential, and if a cheaper option exists, we will tell you on the first call.
