Utah Merchant Cash Advance Legal Nightmare? Here’s What to Do
Intro – The Wild West of Alternative Business Financing
Merchant cash advances – they seemed like such a good idea at the time, right? A quick influx of capital to help grow your business, with easy qualification and none of the hassles of a traditional bank loan. But now those daily or weekly automated clearinghouse (ACH) debits are crippling your cash flow; and the terms and fees have you wondering if you got in over your head.Welcome to the wild west of alternative business financing, my friend. The merchant cash advance (MCA) industry has been booming over the past decade – but it’s still the frontier when it comes to regulation and consumer protections. Many business owners are finding themselves wishing they‘d read those MCA contracts a bit more carefully.As a business law attorney who’s seen the good, bad and ugly of the merchant cash advance world, I’m here with some straight talk. We’ll look at the reality of the MCA landscape, your options for dealing with those relentless debits, and how to protect yourself from getting hosed again in the future. Strap in, this is going to be a bumpy ride.
The MCA Reality Check – Why It’s the Wild West
First off, let’s address the elephant in the room – merchant cash advances aren’t technically “loans” in the legal sense. They‘re lump sum purchases of a business‘s future receivables at a discounted rate. That little loophole means MCAs fall through the cracks of regulations governing loans and interest rates.
-“The merchant cash advance industry has been able to skirt usury laws and truth-in-lending regulations that apply to conventional loans.” – Governing.com
So while a bank loan might cap out at 10-20% APR, I’ve seen some egregious MCA deals with annualized interest rates over 100% – even 350% in some cases! And the confusing factor rate pricing makes it really tough for business owners to understand the true costs.It’s the classic bait-and-switch – MCAs get advertised as simple, affordable working capital. But those daily/weekly debits quickly turn into a financial stranglehold, especially if sales slow down. I’ve had clients who ended up repaying 2-3 times the original advance amount before getting out from under the crushing debt.
Dealing with Unaffordable MCA Payments – Know Your Options
So what can you do if those MCA payments have become unsustainable for your business? The bad news is, MCA companies are extremely aggressive about collecting what they’re owed. They often use sketchy tactics like excessive fees, threatening calls, withholding funds, and even trying to seize assets.The good news? You do have some options and legal protections, even with an MCA “purchase” agreement rather than a loan. Here are a few paths we can explore:
1) Renegotiate the Deal
First stop is trying to renegotiate the advance terms with the MCA company. This gives them a chance to work with you and avoid the legal fees of a bigger battle. We’ll make the case that continuing on the current track leads to default and bankruptcy – which gets them nothing.A reasonable MCA provider should be willing to:
- Temporarily reduce or pause payments
- Extend the repayment period
- Restructure the payback amount
- Switch from ACH debits to manual payments
Of course, they‘ll likely want something in return like paying off a portion of the remaining balance. But it’s better than the alternative of losing everything to default.
2) Debt Settlement
If renegotiation fails, our next option is settling the debt for a lump sum that’s less than what’s owed. This makes sense for the MCA company since they avoid costly legal battles and collect at least a partial payoff.Debt settlement works best if you can show an inability to repay the full amount – like proof of financial hardship, declining sales, etc. Having that leverage puts us in a stronger negotiating position.We’ll start settlement offers on the lower end, like 25-40 cents on the dollar. The MCA provider will definitely push back hard. But with perseverance (and documentation of your financial situation), we can usually negotiate a settlement of 50-70% of the remaining balance.
3) Bankruptcy as a Last Resort
For some business owners, neither renegotiation nor settlement is viable – leaving bankruptcy as the only option to get out from under unaffordable MCA debts. This is absolutely a last resort since it’ll nuke your credit and could potentially put personal assets at risk.The good news? An MCA is considered a business debt, so it may be dischargeable in bankruptcy without impacting personal liability (depending on contract terms and whether you provided a personal guarantee).Bankruptcy lets you wipe the slate clean from those MCA debits and make a fresh start. But it’s a huge legal hassle and a major hit to your business‘s credibility moving forward. We’ll only go this route if all else fails.
4) Lawsuit for Violations (The “Scorched Earth” Option)
In some cases, the MCA company may have violated state or federal lending laws through deceptive practices, usury, fraud and the like. If we can prove wrongdoing, that opens the door for a potential lawsuit seeking financial damages.This “scorched earth” approach is extremely high-risk since it‘ll likely trigger an avalanche of aggressive legal retaliation from the MCA provider‘s attorneys. Only consider this if you have an airtight case and are prepared for a protracted, expensive legal war.I generally don’t recommend this route unless the MCA violations are overwhelmingly clear and the potential damages make it worthwhile. Even then, a settlement is usually preferable to avoid a Pyrrhic victory.
Avoiding Future MCA Traps – Protect Your Business
Once we’ve resolved your current MCA situation, it’s crucial that you implement safeguards to avoid similar predicaments down the road. The MCA industry is still a minefield with many bad actors and shady practices.Here are some tips for vetting any type of alternative business financing going forward:
1) Understand the True Cost of Capital
This is where most business owners get tripped up with MCAs. Those factor rate prices are incredibly deceptive in obscuring the actual annualized interest rates and total payback amounts.Before signing anything, run the numbers yourself or have an accountant calculate the dollar cost of the advance, fees, and projected repayment schedule. If the annualized interest rate equivalent is over 40%, that’s a huge red flag that the MCA is probably predatory.
2) Read the Fine Print, Seriously
I know no one likes poring over pages of legalese. But with alternative financing products, the devil is absolutely in the details of the contract terms. Pay very close attention to things like:
- Personal guarantees putting your assets at risk
- Excessive fees and penalty charges
- Whether the funder can increase your payments
- If there are any circumstances allowing confessions of judgment
- Requirements for updating financial info and receivables reports
- Termination fees and payoff provisions
If there are any sketchy provisions or things you don’t fully understand, don’t sign until you’ve had a lawyer review the contract. It’s better to be safe than sorry.
3) Check Online Reviews and Complaints
In today’s world, most reputable MCA providers and online lenders should have a decent digital trail of customer reviews, complaints, legal actions and regulatory scrutiny that you can research.Check sites like:
- Reddit r/merchantcashadvance
- Trustpilot
- Better Business Bureau
- Consumer Financial Protection Bureau Complaints
If you see a pattern of shady practices, excessive lawsuits, regulatory actions or a trail of ripped-off merchants, that’s a huge red flag to avoid that MCA provider at all costs.
4) Consider More Reputable Funding Alternatives
The reality is, even the best merchant cash advance deals are still pretty terrible from a cost perspective compared to other financing options. If your business qualifies, you’ll almost always be better off with:
- SBA loans or other government-backed lending
- Bank lines of credit or term loans
- Revenue-based financing from fintechs
- Raising equity capital from investors
These tend to be much more transparent, lower cost, and have more legal protections than the MCA wild west. Only use an MCA as an absolute last resort if you’ve exhausted all other financing avenues.
Final Thoughts – Navigating the MCA Minefield
Look, I get it – when your business is desperate for capital to survive or grow, those merchant cash advance offers can seem pretty tempting. But the reality is, this industry is still very much a minefield filled with shady operators and risky terms.My role as your advocate is to help you navigate that minefield as safely as possible. Whether that’s renegotiating or settling an existing MCA debt, or protecting you from getting trapped again, I’ve got your back.At the end of the day, merchant cash advances should be an absolute last resort for any business owner. If you do choose to go that route, make sure you have experienced legal counsel who understands all the intricacies and can protect your interests.