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Merchant Cash Advance In Collections: What To Do

So your small business took out a merchant cash advance (MCA) to help cover expenses and inject some cash into your operations. These financing arrangements can seem like an easy way to access capital quickly, with minimal paperwork and approvals coming in as little as 24 hours in some cases.But maybe your sales slowed down or an unexpected expense came up, and now you’re struggling to make the daily or weekly payments. Uh oh – your account may have gone into collections. Now what?First, don’t panic. You have options here and can take steps to resolve this situation without completely tanking your business. Let’s walk through what happens when a merchant cash advance goes into collections, your rights as a borrower, and some strategies for getting back on track financially.

How Merchant Cash Advances Work

Before we dive into the collections side of things, let’s make sure we’re all on the same page about how merchant cash advances work in the first place.An MCA is not a loan – it’s the purchase of your future sales and receivables. You get a lump sum upfront, which you can use for any business need like buying inventory or equipment, hiring staff, marketing costs, etc.In exchange, the MCA company takes a percentage of your daily credit card and debit card sales until the advance is repaid in full. Typically this is done automatically via deductions from your merchant processing account.The amount they collect is determined by something called the factor rate. Let’s say you got a $50,000 advance with a factor rate of 1.2. That means you’ll repay a total of $60,000 – the $50,000 principal plus $10,000 in fees.These fees can translate to equivalent annual interest rates of 30-60% or more in some cases. So MCAs are an expensive form of financing, which is important to understand upfront.

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What Happens When You Default on an MCA

So back to our situation – your business took out an MCA but is now struggling to keep up with the daily payments. Here’s a quick rundown of what may happen if you default:

  • Collections calls and letters – The MCA company will start aggressively calling and writing to demand repayment. Third-party collectors may get involved.
  • Lawsuits and judgments – The MCA provider can sue you to recover the remaining balance. Many include “confessions of judgement” in their contracts, allowing them to obtain a judgement faster.
  • Asset seizures – Your business and even personal assets could be at risk, including bank accounts, equipment, property, etc.
  • Hurt credit – Like any other defaulted debt, an MCA default can seriously damage your business and personal credit scores.
  • Higher costs – Interest, fees, and legal costs will continue accumulating, making the debt even harder to repay.

As you can see, defaulting on an MCA can spiral out of control quickly. So it’s crucial to act fast if you’re starting to fall behind on payments.

Know Your Rights as a Borrower

The MCA industry is largely unregulated compared to traditional lenders. But that doesn’t mean you don’t have rights as a borrower.Some key things to keep in mind:

  • Review your contract – Make sure you understand all the terms, especially related to payments, fees, and defaults. Don’t sign anything you’re unsure about.
  • Dispute errors – You have the right to dispute any errors or unfair practices. This includes inaccurate daily deductions or other billing issues.
  • Seek legal help – Consult an attorney experienced with MCAs. They can review your case and help negotiate, settle debts, and assert any legal defenses.
  • File complaints – If you believe the MCA company acted illegally or deceptively, file complaints with agencies like the FTC, state attorneys general, and the CFPB.
  • Consider bankruptcy – Filing for bankruptcy may help eliminate or restructure your MCA debt, along with other business debts.

While MCA companies don’t face the same regulations as banks, taking advantage of borrowers or engaging in outright fraud is still illegal. Don’t hesitate to stand up for your rights.

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Strategies for Resolving MCA Debt

Okay, so you defaulted, the collections calls are pouring in, and you could be facing a lawsuit soon. What should you do?Here are some tips to resolve your merchant cash advance debt:

Seek Legal Help

Your first call should be to an attorney experienced with defending against MCA cases. They can provide specific advice for your situation and represent you in any legal proceedings.A good lawyer can often get lawsuits dismissed or judgments vacated. They may also be able to negotiate settlements with the MCA company, especially if there are questions about the validity of the contract or potential violations.

Negotiate a Settlement

If you can’t get the case dismissed, try to negotiate a lump-sum settlement for less than the full balance. Often MCA companies will accept 70 cents on the dollar or so to avoid further legal costs.Come to the table with a reasonable offer based on what you can afford. Ask for a settlement agreement in writing so they can’t continue collections efforts after you pay.

File for Bankruptcy

For some small business owners, filing for bankruptcy may be the most viable option. This immediately stops any collections lawsuits in their tracks.Chapter 7 bankruptcy liquidates your business assets to pay creditors. Chapter 11 involves restructuring debts and developing a repayment plan over time. Chapter 13 is personal bankruptcy.Bankruptcy has serious long-term consequences though. Be sure to consult your attorney and accountant to discuss the pros and cons for your specific situation.

Consolidate Debts

If bankruptcy is off the table, debt consolidation could help. This rolls multiple debts, including your MCA, into a single new loan with lower monthly payments.Borrowers with poor credit turn to consolidation loans from online lenders, credit unions, or non-profit credit counseling agencies. The goal is to create more manageable cash flow.

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Boost Sales

Ultimately, the best way to resolve an MCA is by generating more sales revenue. Easier said than done, of course, but there are tactics you can try:

  • Run promotions to bring in new business
  • Reduce expenses to free up cashflow
  • Offer discounts or incentives to boost customer loyalty
  • Sell unused equipment or other assets
  • Bring on investors or business partners

If you can increase sales, even marginally, it will help keep up with the daily deductions and pay down your advance faster.

Finding the Right Help

As you navigate merchant cash advance collections, make sure to work with experienced professionals. Here’s what to look for:

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Attorneys

  • Specialize in debt relief, especially MCAs
  • Offers free consultations
  • Will review your case and contract for potential violations
  • Has experience negotiating settlements with MCA companies
  • Can defend you in legal proceedings if necessary

Credit Counselors

  • Non-profit agencies like NFCC members
  • Offer free credit counseling and debt management plans
  • Can consolidate debts into one payment
  • Helps negotiate lower interest rates
  • Provides financial education and budgeting help

Accountants

  • Review your finances to understand cash flow
  • Look for ways to cut expenses and save money
  • Provide guidance on bankruptcy pros and cons
  • Help organizing finances if you do file for bankruptcy

Don’t be afraid to ask questions and make sure any advisor you choose has expertise in merchant cash advances specifically. This is not an area you want a novice handling.

Moving Forward

Dealing with an MCA in collections is stressful, no doubt about it. But take a deep breath and focus on resolving the situation one step at a time.Review your rights as a borrower. Seek legal help to understand all your options. Negotiate settlements whenever possible. And don’t be afraid to stand up for yourself throughout the process.With the right help and sensible strategies, you can get your business back on track financially. The most important thing is acting quickly and making smart decisions that protect your business’s future. You’ve got this!

Delancey Street is here for you

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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$500,000 MCA Restructured Over 3 Years
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$350,000 MCA Restructured Over 2 Years

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