Getting a merchant cash advance can seem like an easy way for small businesses to get quick cash. But these advances come with big risks. Companies offering merchant cash advances often use predatory tactics and charge sky-high interest rates. Many small business owners in New York City have found themselves trapped in debt and facing lawsuits from merchant cash advance companies.
Luckily, New York City has some great attorneys who can help business owners who have gotten caught up with merchant cash advance companies. This article will explain how merchant cash advances work, the common problems businesses face, and how a good attorney can help.
What is a Merchant Cash Advance?
A merchant cash advance (MCA) provides a business with a lump sum of cash in exchange for a percentage of future credit card and debit card sales. It is not technically a loan. Rather, the merchant cash advance company purchases a portion of the business’s future receivables at a discount.
Here’s a simple example of how it works:
- ABC Company needs $100,000 in cash for inventory and improvements.
- XYZ Merchant Cash Advance offers ABC Company $100,000 in exchange for 15% of ABC’s credit/debit card sales until XYZ receives $150,000.
- XYZ advances ABC the $100,000.
- Every day, 15% of ABC’s credit/debit card sales go to XYZ via automatic withdrawal from ABC’s bank account.
- Once XYZ has collected $150,000 from ABC’s card sales, the agreement ends.
This means ABC Company pays $50,000 in fees for the $100,000 advance. That works out to an annualized rate of around 60-90%, much higher than a bank loan.
Problems with Merchant Cash Advances
While merchant cash advances may seem quick and easy, they come with big risks for small businesses. Here are some common problems:
- Extremely high interest rates – The effective APR on a merchant cash advance is usually over 50% and can top 100%.
- Daily payments – The MCA company takes a cut of daily credit/debit card sales, draining cash flow.
- No flexibility – The daily payments are fixed regardless of sales volume.
- Balloon payments – If sales drop, the remaining balance can come due immediately.
- Aggressive collections – MCA companies may harass business owners or improperly access bank accounts.
- Lawsuits and judgments – MCA companies quickly sue over missed payments and obtain judgments.
Many New York City business owners have found themselves trapped in a cycle of debt with merchant cash advance companies. The high rates and fixed payments make the debt hard to pay off. And if the business struggles, the MCA company may engage in aggressive tactics like harassment, threats, accessing bank accounts without permission, or obtaining court judgments on questionable grounds.
How a Merchant Cash Advance Attorney Can Help
If you’re a New York City business owner who has gotten caught up with a predatory merchant cash advance company, a good attorney can be your best ally. Here are some ways an attorney can help:
- Review the MCA agreement and look for unlawful terms or deceptive practices.
- Negotiate with the MCA company for better repayment terms.
- Defend against improper lawsuits and fight to get judgments vacated.
- Argue that the MCA agreement is actually a usurious loan subject to New York’s interest rate cap.
- File complaints with regulators regarding unlawful collection practices.
- Explore bankruptcy or debt settlement options if needed.
- Advise on steps to improve cash flow and avoid MCAs in the future.
A good New York City MCA attorney understands both the law and the shady practices these companies use. They can aggressively defend your interests in negotiations or court. An attorney may also be able to get an improper judgment vacated or prove the agreement violates New York lending laws.
Important Laws and Legal Precedents
There are a few key laws and legal precedents New York City MCA attorneys use when defending business clients:
- New York civil usury law – Caps interest on loans under $250,000 at 16% APR. MCA agreements may qualify as loans subject to the cap.
- New York General Obligations Law – Prohibits confessions of judgment by out-of-state MCA companies.
- Dodge v. Richmond – 2020 case finding an MCA agreement was a usurious loan, not a purchase of future receivables.
- Madden v. Midland Funding – Federal case upholding state interest rate caps for non-bank entities.
Skilled attorneys use these laws and precedents to fight improper judgments and argue MCA agreements are really usurious loans in disguise. The New York Attorney General has also gone after some MCA companies for fraudulent practices.
The Pros and Cons of Merchant Cash Advances
Given the risks, should small businesses ever use merchant cash advances? There are some pros and cons to consider:
- Quick access to capital compared to traditional bank loans
- May help businesses bridge a temporary cash flow gap
- Payments come from future sales rather than a fixed schedule
- Extremely high effective interest rates
- Payments are fixed regardless of sales volume
- Risk of getting trapped in predatory agreements
- Potential for harassment, threats, lawsuits, and damaged credit if unable to pay
Business owners should think carefully before signing up for a merchant cash advance. Alternatives like business loans, lines of credit, or factoring invoices might be safer options.
Steps to Take if Facing a Merchant Cash Advance Lawsuit
What should you do if a merchant cash advance company has already sued your New York City business over missed payments?
- Don’t ignore the lawsuit – Get legal help immediately to respond properly and avoid a default judgment.
- Review the agreement – Make sure you understand all the terms and find any unlawful provisions.
- Try negotiating – Your attorney may be able to work out a settlement or new repayment schedule.
- Build your defenses – Determine if the agreement violates NY lending laws or if improper practices were used.
- Counterclaim if you have grounds – You may be able to sue for violations of lending laws.
- Get the judgment vacated if already entered – Act fast, as you typically have just 30 days to vacate a NY judgment.
With an experienced commercial litigation attorney on your side, you can hopefully beat an improper MCA lawsuit in New York City courts.
Finding the Best Merchant Cash Advance Attorney in New York City
If you need legal help with a merchant cash advance agreement, it’s important to find an attorney who regularly handles these cases. Look for someone with experience fighting MCA lawsuits and vacating judgments in New York City courts. Ask about their track record negotiating settlements or proving agreements are unlawful loans.
Some good options to consider include:
- Lebedin Kofman LLP – Seasoned commercial litigation firm with extensive MCA case experience.
- Grant Phillips Law – Boutique firm focused specifically on defending MCA cases.
- Tayne Law Group – Top NYC debt relief firm with lawyers across the U.S.
The ideal attorney will thoroughly analyze your situation, explain your options, and aggressively defend your interests. They should have a proven record of results in merchant cash advance cases.
Alternatives to Merchant Cash Advances
Rather than getting trapped with a merchant cash advance, New York City businesses have other options to secure financing, such as:
- Bank loans – Higher approval standards but much lower rates.
- SBA loans – Government-backed small business loans with favorable terms.
- Business lines of credit – Revolving credit accounts with lower costs.
- Invoice factoring – Sell unpaid invoices to a funder at a small discount.
- Angel investors – Wealthy individuals who provide startup capital.
Business owners should explore these less risky funding methods before considering merchant cash advances. An accountant or financial advisor can help identify the best options.
Improving Cash Flow to Avoid Merchant Cash Advances
The best way for businesses to avoid predatory merchant cash advances is to improve their cash flow and profitability. Some strategies include:
- Better inventory management to reduce excess stock.
- Renegotiating payment terms with suppliers.
- Invoicing promptly and improving accounts receivable.
- Cutting unnecessary expenses.
- Increasing sales through marketing and promotions.
- Raising prices or adding new high-margin products/services.
With the help of an accountant, businesses can often find ways to free up cash trapped in receivables or inventory. This makes it less likely they will need to rely on merchant cash advances.
The Bottom Line
Merchant cash advances allow business owners quick access to capital but come with a long list of risks. Sky high rates, fixed payments, and aggressive collection tactics can trap companies in a cycle of debt. But a skilled New York City attorney can help defend business owners against MCA lawsuits and abusive practices. Seeking legal counsel promptly is critical to avoid judgments and negotiate better repayment terms. And whenever possible, businesses should improve cash flow and pursue safer financing options to avoid merchant cash advances altogether.