Is Merchant Cash Advance Default a Potential Reality? Critical Steps to Consider During a Business Slowdown
Merchant cash advances can prove tempting to small business owners in need of fast cash, especially for those businesses that earn much of their money through credit card transactions. If you have found yourself with too much debt from merchant cash advances, it is a healthy response to be concerned.
However, if you understand the methods to minimize your risk and/or to protect yourself from hyper aggressive collection tactics, you can successfully mitigate your risk.
You may be at risk of defaulting on your Merchant Cash Advance (MCA) agreement with one or more lenders if your business has been declining (for instance due to COVID-19). This is true even if you were able to maintain your daily or weekly payments before the decline.
If you have recently been unable to make your daily or weekly MCA debt payments or you feel that your default may be imminent or likely to occur in the foreseeable future, you should be aware of all of your options and the steps you should consider to protect your business from the consequences that could result by defaulting on your MCA debt.
Step 1: Call Your MCA Company and Request Hardship Relief
The first measure we suggest to all of our clients, if they feel they are likely to default on their merchant cash advance payments, is to call their merchant cash advance funder and explain the situation to them.
Inform the funder that you are having a difficult time and ask if they can modify your payment structure, or possibly allow a forbearance period of temporarily suspended payments, while you work through your current difficult period.
Many lenders will understand and are likely to offer some type of temporarily revised payments terms.
Look over your MCA agreement and see if you have a reconciliation clause. In order to not be considered a usurious loan, many MCA agreements have clauses which allow borrowers to request a readjustment of their payment amounts if their receivables or business revenue declines.
While some lenders will offer to assist you, others may not. If your efforts to work out more affordable repayments terms with your MCA lender are not successful, move on to Step 2 below.
Step 2: Attempt to Refinance Your MCA Debt with Traditional Business Financing
Replacing your merchant cash advance debt with a Term Loan is one way to refinance your merchant cash advance debt. Term loans are a good option for business debt consolidation because these loans carry much more favorable terms than MCAs. Specifically, they have lower interest rates, longer repayment periods and monthly, not daily loan payments.
You could also attempt a refinance of your MCA debt by pursuing an Asset-Backed Loan. An asset-backed loan is guaranteed by your business’s assets, which means that if you do not pay back the loan, the bank or lender can collect your assets to recoup the debt.
There are many different kinds of collateral for an asset-backed loan, including property, inventory and personal guarantees. Collateralized loans are less risky to lenders since they have a built-in safety net. Asset-backed loans also offer lower interest rates and longer repayment terms than merchant cash advances.
Step 3: If Default is Unavoidable, Don’t Panic
Defaulting on merchant cash advance payments is a frightening position for any business owner to find themselves in, but having multiple creditors attempting to collect on the same assets of your business can be a significant advantage.
To understand this advantage, you must better understand how collateral like your business assets are secured by an MCA lender.
To secure a loan against business assets, a creditor may obtain a security agreement which is perfected through what is referred to as a UCC-1 (Uniform Commercial Code) filing. Much like a lien filing on the deed of real estate property (mortgage), UCC-1 filings are used to determine who has a priority security interest in your business assets.
In a situation where more than one creditor has placed UCC-1 filings against the assets of a single business entity, which is common for business debtors with more than one debt outstanding, the UCC filings are given priority chronologically.
First to file is the governing rule. If the first position creditor does not receive 100% repayment of their loan balance, the second position creditor receives no payment, making the recoverable value of your assets beyond what is owed the priority creditor worthless. Therefore, if your business assets are worth $50,000 and you owe your first position creditor $100,000, then there is no equity in your assets for anyone else beyond the first lien holder.
This reduces the motivation of non-priority lien holders to pursue you for damages because there is no equity in your business assets. This places you in a better negotiating position. This strategy can be utilized to prioritize negotiation with the 1st lien holder and later, to negotiate settlement arrangements with junior creditors knowing full well they are in the weaker position.
Step 4: Protect Yourself
One indicator that your business is tracking towards a default is if you discover that the receivables used to calculate your daily payments are lower than the amount agreed upon for the advance but the MCA lender continues to withdraw the same amount each day.
Even if you have been paying on the advance for some time without issue, if your business declines and there are not enough receivables in your account, then a high daily payment will quickly become unsustainable.
If your numbers show you that you are about to default because you cannot continue to pay in accordance with your repayment schedule, there are several critical factors to consider and steps to understand in order to give yourself the best chance of survival.
Please remember that when you signed your MCA agreement, you also signed a security agreement allowing the MCA lender to impose a UCC-1 lien filing against your business. Specifically, this is a lien against your future receivables. Also, please remember that you have given bank account access to your MCA lender(s). That means they do not need your authority to withdraw funds from your accounts.
With that in mind, you need to consider that if you default:
The MCA Funder May Attempt to Withdraw All Funds from Your Bank Account
The MCA lender has access to your business bank account and if you default, one of the first steps the lender may take is to access your account and, by ACH withdrawal, attempt to take out all of the money that is in that account at that particular time. While this may be a breach of your MCA agreement, it is done quite consistently by many MCA lenders.
You Will Want Multiple Merchant Processors
Using the UCC-1 lien filing signed as part of your advance agreement, the MCA Lender may attempt to send notice to the merchant processing company that runs your daily credit card transactions demanding that payments be made directly to the lender. Alternatively, they may demand that the processing company stop processing transactions for your business altogether.
Consequently, one of the first steps that any business owner must consider if a default is possible, is to make sure that they have more than one merchant processor or credit card processor in the event that the one that you’re working with decides not to continue to do business with you due to a demand notice from an MCA lender.
Re-Examine Your Business Banking Relationship
If your business bank account has been compromised as noted above, it is necessary to re-examine your business banking relationship. You may wish to consider establishing a possible secondary bank account concerning the operation of your business.
If your lender does, in fact, attempt to take more funds or successfully takes more funds from your account than what was agreed to in your MCA agreement, then you certainly have to question allowing your future revenues to be deposited into that same compromised account.
Examine the Ownership of Personal Assets
Another measure for a business owner to consider very seriously, if they are in default or possible imminent default, is to examine the ownership of their personal assets.
In most instances, the principal business owner must sign a personal guarantee to obtain the Merchant Cash Advance. That potentially means that bank accounts and assets that are in the name of the personal guarantor are, in fact, compromised.
While this is not something that could result in seizure of assets or levy of personal bank accounts immediately upon default, it is something that must be considered in the event that there are continuing long-term problems involving the resolution of the MCA debt(s
If you have questions or concerns about this, you should consult with a qualified attorney who can provide you with a thorough asset protection analysis.
Consider Your Ongoing Business Relationships
A further issue to consider is the nature of your ongoing business relationships. If you are the type of company that knows your customers and your vendors on a relatively personal level, then this may not be an issue. However, if you do not have close relationships with customers and vendors, your business could be further disrupted by a default.
For example, if you’re an inter-state trucker and you receive many of your trip orders from a national inter-state transportation brokerage, that brokerage may receive notice from your MCA lender regarding your default, including notice of the UCC1 lien. That particular business broker may wish to stop doing business with you until the matter is resolved.
Your customers and/or vendors may get nervous if your MCA lender starts trying to apply pressure upon them.
If you feel that there may be concern on the part of vendors or customers if they are contacted directly by the overly aggressive MCA lender, you need to get ahead of it by contacting those key customers and/or vendors and explaining that there exists a dispute with the MCA lender. You need to inform them that the matter is being addressed and a resolution is being negotiated.
Getting ahead of the potential negative notice of default or UCC1 lien notice being delivered to your customers or vendors is the best way to maintain your existing healthy business relationships.
The next critical step, if not already done, is to consult with a qualified and experienced attorney.
Step 5: Hire a Qualified Lawyer to Defend Lawsuits and to Negotiate on Your Behalf
A lawyer specializing in merchant cash advance issues may effectively aid you to defend MCA lawsuits that will most likely be filed against your company and you personally, as a guarantor of the merchant cash advance(s).
A lawyer will also assist you to eventually resolve your merchant advance delinquencies. Most often, qualified legal representation is going to cost a business owner much less than the amount that business owner was paying to the MCA creditors.
At this stage in your process after having exhausted your attempts to resolve your MCA debts on your own, retaining a qualified and experienced attorney is an intelligent decision. However, you need to choose an attorney carefully.
Business Debt Law Group and its attorneys have been practicing in the creditor/debtor area of the law for more than 25 years. Collectively, our core team of lawyers possesses more than 60 years of experience in this area of the law. We are also asset protection, bankruptcy practitioners, and commercial transaction lawyers.
This means that not only are we highly effective defending our clients against the aggressive collection and litigation tactics of the MCA lenders but also, we advise our clients regarding the protection of their hard-earned assets. We assist our clients to analyze the structure of their ongoing business enterprises and provide them with comprehensive legal counsel regarding the best practices for their organizations to follow going forward so that they may avoid future commercial debt issues.
Step 6: File for Bankruptcy
If all of your negotiation attempts have been unsuccessful and, based upon the advice of your legal counsel, it appears that you will not reach a financial position to successfully settle your debts, you might consider filing for bankruptcy protection.
Bankruptcy should be considered as a last possible resort, but it also can mean the difference between saving your business and losing your business.
Yes, bankruptcy will negatively affect your credit report, but it also might keep your business from completely going under. There are three options when filing for business bankruptcy: Chapter 11, 7, or 13. Which chapter of bankruptcy you file will depend on your ownership structure, your assets, if any, and what you wish to happen with your business going forward.
If you have reached this stage in the process and you have not already retained legal counsel to assist you with your problematic MCA debt, you must now seek qualified consultation from experienced bankruptcy counsel.
The lawyers at Business Debt Law Group offer complimentary consultations to anyone seeking further information including, comprehensive bankruptcy consultations. If you need help with your Merchant Cash Advance and worry you may soon default, call us at 888-407-7460 or fill out our contact form. We’re here to help.