How To Defend Merchant Cash Advance Lawsuits


How To Defend Merchant Cash Advance Lawsuits

Getting hit with a merchant cash advance lawsuit can be scary. As a small business owner, you may feel overwhelmed and unsure of what to do next. The good news? You have options. Don’t panic. With some preparation and knowledge of your rights, you can build a strong defense.

First things first: take a deep breath. Getting sued sounds really intimidating, but it doesn’t have to be the end of the world. Lots of businesses get sued by their MCA providers—you’re not alone. Here’s an overview of why MCA lawsuits happen and how you can protect yourself.

Why Do MCA Lawsuits Happen?

Merchant cash advance (MCA) providers give businesses upfront cash in exchange for a percentage of future sales. This can be a lifeline when cash flow is tight. But problems arise when sales drop unexpectedly. The business can’t keep up with daily payments, which triggers default.

Default means the MCA provider can sue to recoup their investment. They may claim breach of contract and demand the remainder of the advance plus fees. Yikes!

But not so fast. These lawsuits aren’t slam dunks. MCA contracts have been successfully challenged in court (more on that later). You have defenses.

4 Key Defenses Against MCA Lawsuits

If you get hit with an MCA lawsuit, stay calm and review these potential defenses:

1. Unconscionability

Some courts have ruled certain MCA terms “unconscionable.” This means parts of the contract are so unfair they shouldn’t be enforced. Things like:

  • Excessively high interest rates
  • Waiving the right to a jury trial
  • Requiring disputes be resolved in a certain state

If a judge agrees your contract contains unconscionable terms, those provisions could be thrown out. This weakens the MCA company’s case.

2. Usury

Usury laws cap the maximum interest rate lenders can charge. Rates above the limit are illegal. MCA contracts often have effective rates over 100%!

Usury limits vary by state. In New York, it’s 16% for companies with less than $2.5 million in net worth. Check your state usury laws here. If the rate exceeds the cap, you may have a usury defense.

3. Deceptive Practices

Some MCA companies use deceptive tactics like:

  • Hiding the true cost of capital
  • Obscuring repayment terms
  • Failing to disclose risks

This could violate state consumer protection laws. If you can show the MCA company misled you, the contract may not be enforceable.

4. Improper Account Debits

MCA companies access your bank account daily to collect payments. Sometimes they debit accounts improperly, taking more than entitled. This is breach of contract on their end. You can use it as a defense and counterclaim for damages.

Building Your Defense Strategy

Now that you know potential defenses, here are some tips for crafting your legal strategy:

  • Get a lawyer ASAP. These cases can get complex.
  • Calculate the effective interest rate. Is it usurious?
  • Review the contract terms. Are any clearly unfair or deceptive?
  • Gather evidence like bank records. Look for improper debits.
  • Try negotiating first. Offer a settlement plan you can afford.
  • If negotiating fails, build your case. Your lawyer can help identify defenses.

With the right legal strategy, you can beat an MCA lawsuit. It may seem hopeless now, but you have options. Knowledge is power. Arm yourself with information and don’t be afraid to push back.

And remember—you’re not in this alone. Lots of business owners have prevailed against MCA companies in court. Cases like Green Capital Funding v. Annabelle Foods and K9 Bytes v. Arch Capital Funding have set helpful precedents.

With perseverance and a strong defense strategy, you can protect your business. Don’t let predatory MCA contracts take you down without a fight.

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Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

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