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Montana Merchant Cash Advance Attorney

If you own a small business in Montana, chances are you’ve been approached about a merchant cash advance (MCA). MCAs can seem like an attractive option when you need cash quickly and can’t get a traditional bank loan. But before signing on the dotted line, it’s important to understand what you’re getting into.

In this article, we’ll break down everything you need to know about merchant cash advances in Montana. We’ll look at how they work, pros and cons, legal considerations, and defense strategies if you get into trouble.

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What is a Merchant Cash Advance?

A merchant cash advance provides an upfront lump sum of cash to a business in exchange for a percentage of future credit/debit card sales. It is not technically considered a loan, but rather an advance on future revenue[1].

Here’s how it works:

  • You apply and the MCA company evaluates your credit/debit card sales history
  • If approved, you receive a lump sum upfront, usually between $10,000 – $500,000
  • In exchange, you agree to pay back the advance through daily payments which amount to a fixed percentage of your credit/debit card sales
  • The payback period is usually 4-12 months
  • The MCA company withdraws the daily payments directly from your bank account

Because it’s not a loan, MCAs are largely unregulated. This allows providers to charge very high effective interest rates. It’s common to see rates of 30-300% when annualized[2].

Pros of Merchant Cash Advances

There are some potential benefits to merchant cash advances:

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  • Fast funding – You can get an advance in as little as a few days, while a bank loan can take weeks or months.
  • Easy to qualify – MCA underwriting is relatively simple compared to a bank. They mainly look at your credit/debit card history.
  • Flexible payback terms – Your payback amount fluctuates based on your credit card sales. So if you have a slow month, you pay less.
  • Unrestricted use of funds – You can use the lump sum for any business purpose, unlike a bank loan.

For businesses with an immediate need for cash, the quick funding and flexible terms of an MCA can seem very appealing. This makes them an attractive option for businesses that don’t qualify for traditional financing.

Cons of Merchant Cash Advances

However, there are also major downsides to merchant cash advances that must be considered:

  • Extremely high cost – When you calculate the equivalent annual interest rate, it often exceeds 100%.
  • Daily repayments – Having a percentage of each day’s credit card sales withdrawn can severely impact cash flow.
  • Risk of debt spiral – If the lump sum doesn’t increase your revenues enough, the daily withdrawals can put you in a debt spiral.
  • Confession of judgment – Many MCA contracts contain a confession of judgment clause, which we’ll examine shortly.
  • Personal guarantee – Providers often require a personal guarantee from the business owner, meaning your personal assets are at risk if you default.

While the quick funding is appealing, the repayment process can be devastating for small businesses. It’s critical to run the numbers and have a solid plan for how you’ll increase revenues enough to cover the daily withdrawals.

MCAs vs Business Loans

How do merchant cash advances compare to traditional small business loans?

Merchant Cash Advance Small Business Loan
– Approval in days – Approval takes weeks/months
– Minimal underwriting – Extensive underwriting
– Very high cost – Lower interest rates
– Daily repayments – Monthly payments
– Unrestricted use of funds – Restricted use of funds
– Harder to pay off early – Option to pay off early

As you can see, MCAs offer much quicker access to cash but at a significantly higher long-term cost. Their unrestricted use of funds and daily repayment model also make them riskier.

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MCA Legal Considerations in Montana

If you do move forward with an MCA in Montana, there are some important legal considerations to keep in mind.

Confession of Judgment

One of the most controversial aspects of MCAs is the confession of judgment (COJ) clause commonly found in contracts. This allows the MCA provider to obtain a court judgment against your business if you default on payments[3].

With a confession of judgment:

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  • The MCA company can go to court without notifying you
  • They can obtain a judgment for the full outstanding amount
  • This allows them to seize assets and garnish wages to satisfy the debt

COJ clauses are banned in some states because they deny borrowers due process. However, they remain fully legal in Montana[4].

This means if you default on an MCA in Montana, the provider can immediately obtain a judgment and start seizing your business and personal assets. It’s extremely risky.

Usury Laws

Montana also has usury laws that limit interest rates on loans. The maximum allowable rate depends on the prime rate but generally falls around 15-30%[5].

Some courts have ruled that MCAs are actually loans, not cash advances. If so, their rates often vastly exceed Montana’s usury limits.

Violating usury laws can lead to harsh penalties. One Montana company was ordered to repay a merchant cash advance provider double the amount of excessive interest charged[6].

However, usury laws only help if a court first determines the MCA is a loan. Relying on this defense is risky.

MCA Defense Strategies in Montana

If you run into trouble repaying an MCA in Montana, here are some potential defense strategies:

  • File for bankruptcy – This will pause collection efforts and discharge qualifying debts.
  • Dispute the default – Challenge whether you actually missed payments or defaulted.
  • Claim deception – Argue you were misled about terms, interest rates, etc.
  • Assert usury law violations – Claim the rates exceed Montana’s limits if the MCA is deemed a loan.
  • Seek damages for unfair practices – Montana’s unfair trade practices law may provide remedies.

The most effective strategy depends on the specifics of your situation. Consult an experienced Montana business attorney as soon as possible if facing collections.

Alternatives to Merchant Cash Advances in Montana

Before resorting to an MCA, be sure to explore alternatives like:

  • Traditional bank loans
  • SBA loans
  • Invoice factoring
  • Equipment financing
  • 401(k) business financing
  • Angel investors or venture capital
  • Crowdfunding
  • Business credit cards
  • Asking vendors for better terms
  • Payment plans with the IRS or other creditors

While you may not qualify for some options like bank loans, it’s important to thoroughly evaluate all alternatives before turning to MCAs.

The Bottom Line

Merchant cash advances allow easy access to capital but come with major risks like confession of judgment clauses. They should only be used as an absolute last resort.

If you do pursue an MCA in Montana, proceed with extreme caution. Consult an attorney to review the contract and understand your rights. And be sure you have a solid plan to boost revenues enough to afford the daily repayments.

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