If you’re reading this, it’s because the math equation has already broken you. You have 1,2, 3,4, or more stacked MCA’s and your daily debits are taking thousand’s of dollars per day, out of your operating account, before the payroll even comes out. You’re rotating cash between banks to keep your doors open, you’re using personal funds, using lines of credit, whatever you can. The funder’s collection desk has your cell number on call, they might have even sent a default letter already, maybe there’s letters being sent to your clients already. That’s why you’re on this page, either already happened, or you suspect it’s going to happen.
You’re here because you’ve got daily debits which are eating your revenue, and someone told you that business debt settlement is the way out. You’re here because now you Google’d it, and you’ve seen the numbers, and you know that having a stack of 3-5 daily MCA debits is unsustainable. You’re here trying to figure out whether calling a funder, and trying to settle, will actually work. It doesn’t, not like that. Before you even think about engaging in business debt settlement, you need to understand what business debt settlement is, what you’re signing up for, and if you’re even a candidate.
Business debt settlement is the process of negotiating those balances down to an amount you can actually afford to pay. The goal is to get a release of your financial obligations, get a release on the UCC liens, etc. The goal is to get into a better situation - where the funder is agreeing to stop collection, drop litigation, and not enforce a COJ. Settlement amounts usually land at a % of the original total owed balance, with punitive fees waived. Unfortunately, business debt settlement can also come with consequences.
What Settlement Actually Means
Settlement means a negotiated agreement. For example, say you owe $487,000 across many MCA’s, and you can’t pay $487,000 then the funders can’t get that either. You can’t pay money you don’t have. They know it, you know it, and once the conversation gets started, they admit it and start realizing that. The settlement is a number where everyone can walk away, safely. For example, the number can be $182,000 over 18 months. It could be a $145,000 in a single lump sum payment. Settlement isn’t a consolidation. In contrast, consolidation is taking on a new loan, larger loan, to pay off the old one, usually at a new APR or factor rate, with the same personal guarantee, and the same daily/weekly payment structure. If you’re already drowning under multiple MCA’s, a fourth one, which is branded as a reverse consolidation, will only drown you further. Many of our clients are here in the first place because of that.
What settlement is not: it’s not bankruptcy. Bankruptcy is a federal process, for example Chapter 7 for liquidation, Chapter 11 for reorganization. Settlement usually happens out of court, between you and creditors, without a trustee, without a public bankruptcy filing for your personal record. For some businesses, bankruptcy is the ideal answer.
What settlement is not: it is not credit repair. Settlement deals with resolving the debt itself. Your personal credit can take a hit, because of how SOME MCA lenders report judgements, tax filings, etc. Bottom line MCA debt is its own animal.
Why MCA Debt Is It’s Own Animal
Most business debt settlement frameworks were built around traditional bank loans, lines of credits, etc. Then MCA’s happened, and rules have changed. MCA is not a loan, it’s a purchase of future receivables. The funders is buying, the right to a % of your future sales at a discount .The structure is specifically setup to sidestep usury laws. It’s a purchase, and not a loan. There’s no interest rate cap. We’ve seen effective APR’s in the range of 100-300% APR. There’s a few things that make an MCA debt, different from a traditional debt. For example, there’s the daily ACH debit. THe funder is going into your account every day, and pulling a fixed amount. When the revenue slips down, the debit doesn’t. That’s something that’s important and where many MCA lenders make a mistake, because it results in a recharacterization of the MCA into a traditional loan.
Another aspect that makes an MCA different, is the UCC-1 filing. The lender records a financing statement with the State, against your business assets, often within 24 hours of the funding call being done. If you have 3-4 MCA’s, then that’s 3-4 UCC-1’s on the same collateral, with seniority to whoever filed first. Another aspect that makes it different is the COJ.
You know what an MCA is. You know settlement = paying less than owed. You know the daily debits are killing you.
Now here’s what actually determines outcomes, and what generic SEO articles won’t tell you.
Settlement Leverage is a multivariable math equation
Everyone talks about negotiation tactics, the hardship letter, the sob story, the payroll. Wrong. Your settlement number is not emotional, it’s a math equation. It’s determined by leverage, negotiation, principal, factor, etc. The actual mechanics really do matter here. MCA funders often borrow money from other lenders, at a syndicated cost basis, on an APR scale - so 10% APR. They then lend it out, at a factor rate of 1.10 to 1.49. The goal of the lender is to pull net IRR in the mid-40’s per transaction. Factor rates of 1.3 to 1.5 produce effective APR’s that run well into the triple digits! They are using institutional debt, in order to get money, and then lend it back out. They’re not often playing with their own money.
Another factor to consider when thinking about business debt settlement is that the recovery rate often drops below 30%, of face value, after 6 months in default. Settlement offers at 30-40% exceed the statistical recovery expectation rate many lenders have. One more thing, most lenders will prefer to get recovered capital because they can re-lend it at a 1.50 factor rate, which allows them to compound gains at that level. Every dollar they are getting back today, is a dollar they can redeploy at a factor rate of 1.50, every 6 months. Time isn’t necessarily on their side either, so they’re motivated to settle in order to get capital back which can be lent out again.
Translation: if you’re negotiating, it’s important to know that the longer it takes the lender to get them oney back, the more money directly, and indirectly, they’re losing. They know what they can, and can’t accept.
Stacking MCA’s creates a multivariable issue for you
Multiple MCA positions on one business can create a prisoner’s dilemna. The funders are very aware of this, and most merchants aren’t. The 4th position funder knows they are a 4th position funder. THey priced that risk in, when they lent you money. When it comes to UCC liens, usually the first to file, equals senior UCC lien holder. 2nd position gets whatever is left, after the first position lender was made whole. The 4th position lender knows they are going to get virtually nothing. Their liens are almost worthless from an enforcement standpoint, because they’re 4th in line. As a result, late position lenders are often eager to settle, if they know they won’t get any money directly. Their settlement appetite can be higher than position 1, due to the fact they don’t expect full compensation due to their junior position in line. The mistake most merchants make is trying to settle position 1 first, because it’s the largest. Position 1 has the cleanest UCC, which means they have the strongest claim on the bank account.
COJ’s are a variable to consider
The 2019 NY amendment ended COJ’s against Non-NY debtors, that are filed in NY courts. The reform was crucial. What didn’t stop is funders who are now rewriting choice of law and venue clauses to PA, Ohio, and Delaware. The reform didn’t kill them, itj ust relocated them. If your contract has a PA venue clause, and a confession executed at signing, the funder can still domesticate the COJ in your home state.
The Letter That Goes to Your Customers (UCC 9-406 Notices)
Every funder plays game theory when it comes to you defaulting on your MCA, and them trying to get the funds back. Their theory is simple: because of the UCC filed on your business, they own your receivables. As a result, they are legally allowed to notify your clients directly and instruct them to redirect payments to the funder instead of you. Under UCC laws, your client who receives this notice is legally required to pay the funder instead. They send a letter, because they know it’s got the full force of the law behind it. The real damage isn’t the fact that the cash gets redirected, it’s the relationship between you and the client which is now impacted. A GC, or a hospital system, etc, which gets a letter that says “your vendor is in default,” will start finding a replacement vendor that very week. Where this notice overreaches, is because the funder purchased a % of your receivables. Not all of them. The notice they send usually demands a 100% redirection, not a partial redirection. In addition, the notice also frequently are sent prematurely, as a pre-default remedy. You might not yet be in complete default, but just 1 missed payment - and they start firing off UCC lien notices. One of the solutions you have, is to dispute the default in writing. You can notify all of your affected clients that the claim is contested; perhaps an attorney can send this in a reassuring manner. Funders will usually send these letters as a negotiation escalation tactic, not a recovery strategy. They know the letters are going to destroy the revenue of the very company obligated to continue paying them, but they don’t care. They take a “scorched earth,” approach because they care about maximizing their immediate return. Even if that means leaving money on the table. At this point, they’ve lost in your desire, or ability, to repay the MCA you took, and their goal is to simply recapture what they can. Even if it’s scraps, compared to the total amount. Often, they will use this tactic as a negotiation tactic.
One Possible Defense Strategy: Is your MCA Even an MCA?
NY courts use a 3 factor test to decide whether a purchase of receivables is actually a disguised loan. Factor one, and it’s something we look at too, is there a reconciliation clause? Is it mandatory, or discretionary. A funder who refuses to adjust the daily debit when your revenue drops isn’t buying receivables - what they’ve done is issued you a loan, with fixed true installments. Factor two: does the funder have recourse, even if you go bankrupt, or the business fails. A buyer of receivables usually bears the risk if the receivables fail to materialize. Recourse means they transferred no risk, which means it’s a loan. This is important because an MCA at 1.45, which is successfully recharacterized, is essentially a triple digit interest loan. For example, New York state caps criminal usury at 25%. If you can establish this was a loan, and not a sale of receivables, that means the agreement is voided, there’s no enforceable UCC lien, and no enforceable guarantee. Post 2019, most MCA agreements now contain a reconciliation provision, precisely because the funder’s lawyers read the case law, and adjusted their agreements to make sure they aren’t voided for this reason. Almost no merchants invoke it, but the courts certainly look for it. This clause let’s you demand the daily debit be adjusted to match the actual purchased % of your revenue. If your revenue goes down 20%, then the debit should go down 20%. But does this happen in practice? Often, not. Often, lenders will never even disclose this on the opening call. Or discuss it ever as an option. There are two outcomes if you ask for reconciliation: they grant it, and your daily cash burn goes down. Or, they stonewall it, and you’ve just built the foundation for the argument that the reconciliation clause in your agreement is illusory. Often, when contemplating business debt settlement, this is the first move in almost every file, before anyone says anything.
What Actually Happens When You Stop Paying
On Day Zero: the debit bounces. Most agreements contemplate this happening, and make a single rejected ACH - an event of default. This triggers default fees, and even the acceleration of the full balance. During the first week, the collection team will call you, your cell, spouse, office manager, anyone and everyone. They’ll threaten with COJ’s, UCC letters, lawsuits, it’s mostly scripted, but one day they will enact it. Week 2-6, this is where escalation happens. UCC lien notices are sent to your clients, lawsuits are sent, workout letters are contemplated, it all depends on the funders policy and your balance size. The issue in NY, if your business is in NY, and the lender is in NY too, is that many MCA agreements make the payment obligation enforceable with a COJ. There’s no discovery phase. The judgement is overnight. After the judgement is granted, restraining notices are sent to freeze your bank accounts, marshal levy’s are applied, and subpoenas are sent to see where your assets are.
When it comes to the ACH block question, many people wonder if blocking the ACH is a default. Yes, blocking the debit itself is usually considered a default under the agreement. Sometimes it’s the right move, you have to do what’s right for your business - but it’s something that comes with consequences. Anyone ignoring them is doing you a disservice. It’s a decision you have to make with yourself, as part of a sequenced strategy, not out of panic. Switching accounts without a plan is the same decision as blocking the ACH. It reads as concealment, results in a bounced ACH payment, and it breaches the agreement you signed.
What Your Personal Guarantee Covers
Most MCA guarantees are performance guarantees, not payment guarantees. The distinction is important, because it decides whether your house and personal assets are part of the conversation. The performacne guarantee is typically breached due to prohibited conduct, like blocking the ACH, switching bank accounts, misrepresenting revenue, or diverting receivables. It’s usually not considered a breach by the business simply failing despite your honest attempts at performance. If your business legitimately declined, and you did nothing prohibited, then the funders path to your personal assets is much narrower. Obviously, nothing we say here should be taken as legal advice, your agreements need to be reviewed before any assumptions are made. You have to read the guarantee, before you do anything else. Business debt settlement is a complicated process, but it covers reviewing issues like this, because every strategic decision downstream depends on what you signed.
Can Busienss Debt Settlement Actually Work For You
There’s a viability test. You strip out all of the debt service, is your business profitable with zero MCA payments? If yes, settlement can work - your business has a path forward, and you just need some relief. If no, you’re buying time for a corpse, and every dollar spent settling is wasted. Sometimes, you just need to have an honest conversation about whether your business is really viable or not. The ratio test really is total MCA balances against monthly gross revenue. Under 1x, you might be able to negotiate modifications, and trade out your existing business debt without formal settlement. Between 1x and 3x, business debt settlement is the core use. North of 3x, with declining revenue, then bankruptcy is the really honest conversation to have. Here’s the real test whether settlement, or restructuring will work for you: settlements require money. Lump sums often get you the steepest discount, structured deals over 12-24 months will get you the lowest discount. Often, lenders are afraid you’ll re-default over those 12-24 months. If you have no money, or revenue coming in, then there’s no realistic source of funds for settlement, and there’s no settlement. There are situations though where Subchapter V Chapter 11 will beat settlement. If you multiple positions, active litigation on multiple fronts, but a fundamentally viable business, then Subchapter V could be appropriate. The automatic stay stops every debit, and every lawsuit, on day one. There are times though, where winding down beats both. For example, if your business model is dead, then settling debt on a company with no future revenue just delays the ending. Anyone who enrolls you, without running this analysis, is selling you a program, not giving you a solution.
What Belongs in the Business Debt Settlement Agreement
Typically, we recommend a mutual general release, for the business and personal guarantors both, which gover the agreement, and everything arising from it. A one-way release is not a settlement. Typically, we look for things like a UCC-3 termination, with a deadline, which is verified by looking at the state’s public website where you can search. Funders often forget to release the UCC lien. If a COJ was filed, or judgement interred, then we’re looking for a vacatur, or a filed satisfaction of judgement. In addition, we look for a written retraction of UCC lien notices with copies to every client who received one. Another item we look at is the re-default clause, because often most structured business debt settlements reinstate the full original balance, minus payments made, plus fees, even if you just miss one payment. We recommend negotiating a cure period, because without it, a settlement where you miss a payment is just a trap. Another item to consider is a confidentiality, and non-disparagement running both ways.
Make Them Prove They Own The Debt
MCA positions are routinely syndicated, participated out, or sold. There are situations where the entity calling you isn’t the entity with the right to collect. Before you negotiate even a single dollar, demand the original agreement, the payment history, and the assignment chain. If the receivables were sold to a participant, or the funder collapsed and is assigning the book, then standing gets murky. This is standard practice in consumerdebt defense, and almost nobody imports it into the MCA context.
Business Debt Settlement Can Come with a Tax Bill
One of the things no one mentions is that settling the debt for less can be considered a taxable event. Forgiveness debt is generally cancellation of debt, income. Settle $480k for $190k, and the IRS’s position is that $290k became income to the business. This is something to consider when handling this. You could expect to get a 1099-C from some funders.
